Flips that need major foundation and structural repairs. Cons?

Question

So far, the few flips that I've done have been what I'd call sugarcoat: paint, carpet, minor updates/upgrades, appliances.

I'm looking at a house now, however, that will need some serious work done to the foundation. Probably half of my $80,000 renovation budget will be allocated to these structural repairs.

Naturally, this will all have to be disclosed to any potential retail buyer.

Assume that, when finished, the house is perfectly renovated by any standard. Will the fact that it needed all of these structural repairs (which would be fully warranted to the new owner by the contractor) be a problem for potential buyers?

I would price the house very aggressively to sell it quickly. It would be a steal for the buyer.

What say you, BP Nation?

J Scott · Answer

My general rule of thumb on major foundation work:

If the work is visibly obvious to the buyer, it will impact your ability to sell at market price.  If the work is not visibly obvious to the buyer, it shouldn't have a big impact on your ability to sell at market price.

Here is one example of foundation work (that I did on a property):

http://www.123flip.com/house-4-rehab-offer (scroll down for pics)

The fact that we didn't finish that basement with sheetrock made it a bit more difficult to sell -- we had a couple buyers who would see the plates and get very concerned.

We did something similar in a house where we finished the basement, and the buyers didn't even flinch when they read the seller's disclosure (it was clearly disclosed, but we didn't make a big deal of it).

What type of work are you planning to do?

J Scott · Answer

Wow, that house was about 350 flips ago!

They are called "plate anchors," and there are steel plates on the other side of the wall as well (several feet past the wall).  Each interior plates is connected with a steel cord to an exterior plate, and it keeps the wall from shifting/bowing any further.  Depending on what part of the country you're in, different fixes are used for these types of issues.  The floor to ceiling steel braces are more common.

Todd Whiddon · Answer

Paul-

I've been asking myself the same question. This house is in the same neighborhood as a renovation we just completed "right off hwy-140 you should check it out"

Not sure the extent of damage for the deal you are looking at but this one is about to split down the middle!

When I run the numbers on this deal, there are just too many other deals out there I can make the same amount of money on that are less risky and less of a headache for me to pull the trigger on this one.

For your deal if you've got 160k into it your probably looking at about 40ish K profit? If the foundation repair went over budget 10-20k "which I hear they do quite frequently"  is a 20k profit worth the time / risk or is there other "Low Hanging Fruit" you could invest in for the same return?

Will Barnard · Answer

Paul, Not sure why this agent or anyone else believes that somehow buyers are scared away from legit, licensed, insured, and warrantied work on a foundation. If it is all hidden as you stated and you fully disclose in the manner suggested by @J Scott, you will be fine.

As to your numbers, if those numbers are spot on, you have a decent deal on your hands assuming you can get in and out inside of 6 months. I find that homes with out of the ordinary repairs needed are some of the best deals created as they "scare away" many lipstick flippers and open the doors for higher spreads for those investors willing and able to tackle them.

Chris Dickey · Answer

Thanks, J!  Greatly appreciate the response and information.

Chris Dickey · Answer

J,  this is the first I have seen plates like the ones in your pictures.  Would you mind explaining how those work?  I am looking at a property that needs foundation work and I was only aware of the vertical braces.

Paul B. · Answer

This all foots with my thoughts on the subject. It got me thinking, though, because the listing agent was so negative sounding about the place. She's the one who planted the seed in my head about, "And of course, you're going to have to disclose all the work once you get it done..."

(To which I thought, "So what?")

Maybe she has another client/friend who has an eye on the property, or maybe (no disrespect intended here) she's like the majority of Realtors who know little about really "selling" a house  (beyond slapping it on MLS) and even less about investing profitably in real estate.

Thank you, all.

J Scott · Answer

The fact that the buyer will only know of the structural issues/repairs by reading your seller's disclosure is a good thing.

Again, your disclosure could be as simple as checking one (or a few) "YES" boxes in Section 4 of the Seller's Disclosure (the one you'll use here in Georgia), and then adding a quick one sentence of detail to substantiate the work done.

If you include a sentence about, "All work was completed by a licensed and bonded foundation repair company and all work is warrantied for the life of the structure," I would think that most (though probably not all) buyers would be okay with it.

The other key is that you're planning to sell below market (and I assume the interior will be renovated as well).  A lot of buyers want to live in that area because of the good schools, and being able to get into a nice house for about $200K is a major selling point.

Don't take my word for it though...that's just based on my very limited experience with foundation repairs...

Paul B. · Answer

This will be work that is not visible to any buyer upon completion.

I do not have the particulars on precisely what is needed; I am going to the house tomorrow for a better look.

Someone whose opinion I trust -- and who has seen the house -- said I should prepare myself to spend $30K to $40K making this right.

Assuming that I feel comfortable that $40K is the cap, the house should be a slam-dunk. It's a 4/3 here in Alpharetta which I hope to get for $60K. When completely remodeled, it should sell for $220K extremely fast. I could probably price it at $249K if I wanted to wring out every penny. In fact, that is probably where I'd price it as it's just under the psychologically important $250K mark.

So, assuming $40K for the foundation work, then another $60K (tops) to renovate (that number is a work in progress), I would hope to have no more than $160K in a house that should sell *very* quickly for $220K net of closing help and other seller concessions.

These numbers are still very fluid, however.

Brendan J. · Answer

Certainly a renovation of this magnitude and scope is typically viewed in a negative light by most investors. It is my understanding however that it isn't really because of the difficulty in finding a buyer, but rather in estimating the costs correctly. A $40k foundation job could easily become a $60k job if the unexpected arises. Making sure you don't get cash-strapped is the major problem, not necessarily finding someone to take it off your hands when you are finished.

Flips that need major foundation and structural repairs. Cons?

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