Buying a failed rehab - good or bad idea?

Question

Still looking for my first deal as I learn the ropes, but have a question.

First a little background - I'm in the Baltimore market looking at 80 year old, 1300 sq/ft, 3/2/1 brick townhouses in an area where ARVs range from $150k - $200k. It seems that rehabbers are purchasing typically around $55k +/- $10k.

So in my search I've come across several homes "below $55k" (the reserve price is $10k) that are going to be auctioned and these houses are ones that someone has already started rehabbing. New HVAC/ducting, drywall, windows, walls removed, etc. I've also noticed that in several of these examples, there seems to be water damage in the basement from leaky walls - lower sections of drywall are removed, puddles, moldy insulation, etc...(this is typical for this area and I know many homes, including mine, have sump pumps and french drains to resolve the issues)

Are situations like these good buying opportunities, or ones to be avoided, and what would cause someone to walk away from a rehab - lack of funds? unexpected costs?

Ned Carey · Answer

Tim Youse  Good investors often get their best deals from bad investors.

I would count on what has been done to be wrong. i wouldn't worry about the water, just figure the cost of a french drain and sump pump.  Of course I would look carefully to see if it is a more serious problem.

Many water issues are easy to fix. Some times it is as simple as a gutter issue.

Ritch Bonisa · Answer

Some of these situations might be great buying opportunities.  I would say the catch is to understand what caused the damage.  Drainage issue, foundation issues?  Is the electrical now shot?  How much mold is there, what are Maryland mold laws?  Once you know what caused the damage you can now put together a scope of work and rehab costs.  But you have to fix the underlying issue that caused the damage in the first place or you may hold liability.

Why would someone walk away from a rehab?  Lack of funds and unexpected costs are likely choices.  I work in project management with remote flippers, a lot of foreign and out of state investors.  I also have a lot of experience with water, fire, and mold damage.

I sometimes see investors wanting to make a deal work without fully understanding what the likely rehab costs are.  I don't think you should ever - try to make a deal work because you think you're getting a great purchase price. Rehab costs can really sink your ROI and put you in a bad position.

Finding out the questions I mentioned above will cost you.  The answers will also cost you.  The answers may cost you on the back end of this too.  Will the market force you to sell at a lower price because of the history of this home?

All of those costs must be understood and dropped into your ROI equation.  If it doesn't fit, then walk away.  You need to understand these costs and have a good scope of work (SOW) to help you understand costs.  Don't get the scope from the seller.  You also need to know that you have contractors willing to work on this property.

Unexpected costs - shouldn't be so unexpected - you have to do your homework going in.  Lack of funds many times means - investor didn't have a good scope, believed the seller's opinion, or doesn't understand real construction costs.  Many other times it means investor tried to make the unworkable work.

The amount of time you would spend in answering all of those questions might probably be better spent looking for a deal with lower risk.  It will cost you money up front to find out what the issues are and what it will cost to fix them.  It is also likely that during the rehab there will be other issues brought to light that make this a more expensive project than anticipated.

Normally, I hear investors should have 10-15% of rehab cost available for any unforeseen issues or cost overruns.  You don't ever want to be running such a slim margin that you get burnt - this can force a person to walk away from a rehab.

I hope my perspective did not sound condescending.  It wasn't intended that way.  I talk to investors all over the world and these things come up whenever people tell their investment horror stories. Many times outcomes are predictable given the initial circumstances.

James A. · Answer

Tim Youse  Congrats on getting started on looking.  I had looked for three months, not official number, but probably about 100 properties before I found a great deal.  I had people telling me left and right just take this deal just take that deal.  I am a numbers guy so I stick to the numbers and I landed a deal that will gross about 90K+ fix n flip, so keep grinding.  It can be frustrating so stick with it.  As for your situation with a rehab someone has already started.  Another idea is trying to contact the person who dumped it.  I know for them it might be a sore subject but you never know they might tell you alot of valuable information.  If you they don't want to talk well u really lost nothing.  Another solid idea that i heard in one the pod cast is when you are first starting it is worth getting an inspection done.  They will be able to tell you alot good information and if the numbers work that you think it is worth going after then at least that inspection give you some security if something really is messed up that you did not id.  I hope some of that info was helpful.  I am out of Baltimore as well so feel free to reach out and am always happy to help any way that I can.

JD Martin · Answer

Personally, I like buying into those situations, but I know what I'm looking at and looking for. In my own head I often think people like this are crazy, because they are snatching defeat from the jaws of victory. You get people that get in over their head or just have had their fill of the project, and they let it go in a fire sale.

If you don't know what you are looking at and looking for you can set yourself on fire. I know of a partial failed rehab that has had two go-rounds and two abandons because there's a huge sinkhole developing directly under part of the garage and the supporting exterior wall of the house. I suspect that both "attemptees" figured it was just some sunken pavement.

Sebastian Taylor · Answer

This is an AJBillig auction, correct? Reserve price of $10,000 does not mean anything. There will be 50 investors bidding on each one. Worth it to go and learn how auctions work, though.

Buying a failed rehab - good or bad idea?

Most Popular Reply