Creative options for fire damaged duplex?

Question

I've got a bead on a duplex in an area I like that has significant fire damage.  Back unit is a full gut due to extensive fire damage (kitchen fire); front unit requires minor rehab.  There is significant damage in the attic which would require replacement of the roof and about a third of the rafters.

Seller is willing to sell as-is, however, I'm not sure I can make this work.  ARV is ~130k, rough estimate of repairs is greater than that.  I don't mind having some of my own cash in this, but we're probably looking at 140-160k worth of rehab.

I would hold this, not flip it.  Any way I can make this work?  Have seller sign over insurance settlement?  Seller is out of town and seems motivated to be done with it.

Jeremy VanDelinder · Answer

I flip fire-damaged properties and own a fire damage restoration company. It can be a big undertaking, but there can be good profits in it IF the numbers are right and you have done your homework to know what you are getting into.

There is a way to do it, but it's a bit complicated and you have to know the insurance game rather well--I'll try to summarize. In many states (sadly, my state is not one of them) you can do an "Assignment of Benefits" at closing and the owner can sign over insurance proceeds--I don't know if NY allows AOB or not. The owner would get what is called a "depreciated settlement" or ACV (Actual Cash Value), but would not get the remainder until the property is restored. If you can work with the owner to get your numbers where they need to be, then you can get the depreciation after the restoration is done.

Also, how sure are you of the rehab numbers? Was it a restoration expert that came up with that or just a regular contractor. There can be more than meets the eye with fire damage.

Let me know what questions you have? Happy to help.

Jon Reed · Answer

If i needs up to 10-30K more in rehab than the property is worth then you need to keep on walking past this deal.

Maybe if bought it for just the cost of the land... then demo'd the burned out half and just renovated the minor damaged side then you might be able to make it work. But then you get into some weird structural changes maybe that would need an engineer's input on.

Yeah.. I talked myself out of it. Pass on this burned out duplex.

Emanuel Manien · Answer

I just ran into a fire-damaged townhouse myself as a first investment and the other units look like they will be needing rehab also. Just wanted to from an experienced investor, am I able to work with a restoration company and pay them directly, or is insurance required?

Will Barnard · Answer

I d9nt know the market conditions of the subject area but my educated guess would be that it does not produce high levels of appreciation like So Cal would so I don’t think that is a play for this deal. But again, I’m not familiar with those market conditions as of today.

Charles Seager · Answer

@Will Barnard So I’m wondering if there are Kobayashi Maru (the un-winnable scenario from Star Trek) properties.  Aside from someone taking a risk and going negative, banking on aggressive appreciation, is this one of those situations?

Will Barnard · Answer

I’m not sure why you are anyone would want to go into a deal with negative equity, buy and hold or not. In my experience, you need to buy right to have proper cash flow and negative equity is likely not going to get you there. Just food for thought, why not find a better deal WITH equity and better cash flow?

Andrew Syrios · Answer

If the repairs are more than the ARV then this deal isn't worth it and you should move on to the next one.

Mark W. · Answer

@Jeremy VanDelinder Very interesting angle.  It looks like AOB is legal in New York.  What would a deal look like?  I'm not sure of how insurance payouts work.  He could take the money and run, so to speak, but then he is left with a building the city would force him to knock down, to the tune of 20-30k.  Or he could have the property rehabbed, keep it, or sell it.  To me.  But it sounds like he doesn't want any of that hassle.  My original thought is I would offer him closing costs and take it off his hands.  Could I offer that and have him assign benefits to me?

@Will Barnard I would be ok with some negative equity, since this would be a buy and hold, but not much.  At the end of the day, if I had a fully rehabbed duplex and had to sink 10-15k of my own cash into it, I could live with it.  Any more than that and I'd be better off finding other deals.

Will Barnard · Answer

Based on your numbers, you don’t have a deal unless you consider negative equity at purchase a deal! Not sure about state laws for the insurance payout angle but if possible, you can always try and get a contract to purchase for much lower and close after seller receives insurance proceeds, then you can potentially have equity and a deal.

But based on your existing numbers, taking it down as you stated would not be a good deal in my opinion and based solely off the info you have provided thus far.

Creative options for fire damaged duplex?

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