REO's - How Do You Know If Mechanicals Work If There's No Electricity?

Question

Hi everyone,

I am going to preface this by saying I have never done a rehab before. Currently looking at a multi-family REO that needs a fair amount of work. The house has no electricity and/or heat turned on. I found that somewhat odd that the bank would do a cash for keys (from the original owners) and just kept the heat off (temps here in NJ get below freezing). I would think the pipes freezing would be a major issue. But then again maybe they had someone come in and empty all the pipes out? I don't know if that is even possible. But in the basement I did notice that a section of pipe was missing. It somewhat looked like some sort of water connection device to the city could have been in place.

So how does one know if the mechanical's (the heat, boilers etc) are functioning if there is no electricity in the house? Currently no one is living in the house and it does not have a certificate of occupancy.

This week I plan to head into the town hall to see if the city has some sort of list of violations the house has that is had been deemed uninhabitable.

J Scott · Answer

A couple things to think about: - As Jon pointed out, the bank will turn on the utilities if you ask them. They'll typically charge you for it, and personally, I just call the utility companies myself and turn them on in my name. I've never had a bank have a probably with it, but I've also always gone through with the deal after doing this. Regardless, you *should* be able to get the utilities on one way or the other. - Always assume worst-case when putting together a rehab budget. Maybe you'll get lucky and everything will work, but if that's the case, you'll just pad your profit a bit. - Get to know the average life expectancy for various mechanical systems. For example, in my area, most A/C compressors will last about 15-20 years, most residential gas furnaces will last 20-25 years, and most water heaters will last 6-10 years. When you examine the mechanical systems, see how old they are (check the tag with the serial numbers on it or check for an inspection sticker), and that should give you an idea of whether they will still be working properly.

Jon Holdman · Answer

You need to look for a different HML. Most REOs need some amount of work that makes them difficult to buy with conventional financing. You either need your own cash, or go the hard money route. That dewinterization fee is pretty consistent with what they charge around here. Its a crock, IMHO, compared to the amount of work involved. But I guess the deal is the company doing it is responsible if there's a problem.

Dan NA · Answer

Hi everyone, Thought I would update on the topic. Ok so I asked about testing the mechanicals and the realtor said they would be willing to turn it on but I would have to pay for the de-winterization. It was going to cost like 350 bucks. Well things aren't going to work out for me on this property regardless so I am not going to going any further. My mortgage guy told me he could get me the mortgage but it was contingent on the house having working mechanicals. Eventhough I have money on hand to get the boiler installed the bank won't give me the cash to get the deal down. Real shame because the few REO's I have seen all have some sort of mechanicals issue. Awhile back I spoke with a hard money lender and they weren't interested in small deals.

Just Don · Answer

ONE way is to put air pressure in the pipes and see if it holds pressure. You can do that IF you have a few items to do it. Portable a/c and fitting made for like the washer hose bib or outside hose bib. with a presure gauge to see if it holds. ALL foreclosures here are shown with the pressure gauge at zero,,,,wonder if they turned off the faucets?? You can usually hear where the air is gushing out unless its a basket case and leaking 10-20 places. Be SURE the house isnt vandalized and half the required copper pipes removed by theives in the nite.

Jon Holdman · Answer

I would assume its OK unless there's something obviously wrong. Then, if the walls start gushing when they turn on the water, ask for a price reduction based on the non-obvious defect. If they refuse to turn them on, I'd then assume the worst.

Dan NA · Answer

Jon based on that factor should I assume the worse when making my offer on the place or should I just assume everything works?

Jon Holdman · Answer

If you get an agreed-upon contract with the bank, they will turn the power on for you to do an inspection.

Dan NA · Answer

Hey Jon thanks for the reply. I think I actually saw a "winterized" sticker on the water heater units now that I think about it. Reason I asked originally was that I was looking at a home a few months ago and had an inspection done. The inspection guy said there was no way to turn on the power if the owners didn't have power and/or the heating units turned on. So he did at that time a visual inspection but without a running working scenario there is no way to make a real inspection. In this case the bank owns the house and doesn't have power running at all either. As an investor, not being able to test the mechanicals is a real number changer no?

Jon Holdman · Answer

They will winterize the property. Doesn't guarantee they're aren't problems, though. You can have an inspection, and they will turn on the utilities. Around here, they typically charge about $300 to dewinterize it and the rewinterize it. Plus your inspection. More than that, probably, for a multi-unit.