1906 Craftsman Restoration 3bed/2bath - San Francisco Bay Area

Rehabbing & House Flipping
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1906 Craftsman Restoration 3bed/2bath - San Francisco Bay Area

Amanda Coggins
Member since 2019 · 2 posts · 0 votes

I want to buy this house but I don't know how to do it with the complications that are involved, or if they outweigh the benefits.  Any advice is appreciated!

BACKGROUND:

I live in the East Bay (Oakland - Grand Lake) area of San Francisco and I've become friendly with my elderly neighbor this past year who is willing to sell his 3bed/2bath 2,500sqft 1906 craftsman, to me.  The house was purchased in the 1970's and used as an artist studio since that time, with a house-sitter living it in as an un-approved subletter.  It has no yard and no parking.  The artist's business went under due to the pandemic and the house-sitter had to move out.  Now, the house sits vacant and needs a lot of renovations to be rentable again in today's market. The house is almost entirely original (electrical, plumbing, wallpaper, windows, etc.) with the exception of a new roof put on last month and it has natural gas forced air for heating.

OWNERS POSITION:

The owner lives far away and is elderly, so trying to find and manage contractors to fix it up during this pandemic has been challenging.  He doesn't want to sell it outright and pay capital gains taxes, and would rather have his daughter inherit the property and then sell it, thereby changing the cost basis and taxes that would be owed.  Currently, the house is in his trust.  It may end up sitting vacant for months/years so he is willing to be very flexible and creative with solutions for me, including seller-financing, rent-to-own, etc.

MY POSITION:

I don't want to waste money on rent.  I would like to buy this house because it has always been a dream of mine to remodel a home.  However, I'm having a hard time figuring out how much the house is worth and how to structure the deal to meet his tax needs.  He consulted with a local real estate agent and they told him there are no comps so they can't estimate the value.  Houses in this neighborhood are typically kept very nice and worth $1M+.  The Zillow estimate is ~$1.3M but that *probably* doesn't take into account the condition of the house, lack of parking, and lack of yard.  He threw out a sales price number of $1M, but I think it might need several hundred thousand dollars of work to be worth that for all I know.  Since this is probably an HGTV flipper's dream opportunity... if there are any comps out there, they were probably sold off-market, so I can't see them online.  I think he would be reasonable and negotiable if I can find the right evidence to support a lower offer.

One reason I need to get the house for less is that I need to be able to rent out some of the rooms to be able to afford the mortgage.  Rent has gone down during covid and single-family home prices have gone up.

QUESTIONS:

How do I figure out what a fair offer is?  

Should I hire an agent to research and see if there are any comps like this out there?  

Should I pay for an appraisal and an inspection to try and estimate the cost of renovations?  Will I end up with 3 totally different numbers?  

Is this a huge waste of my time and money?  

Can I buy this property from him while he is still alive and still allow him to achieve his tax-avoidance goals?


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Todd Rasmussen
Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
5y

@Amanda Coggins

Lock down the basics with the seller and his daughter (or whoever is going to be handling the estate after his passing). "If I agree to buy this from your estate for $1,000,000 after your passing, can I have control of it starting now?" After that, pay for some time with a CPA and an attorney to figure out the best way to make that happen (that accomplishes both of your goals) Guessing it's along the lines of a master lease agreement and an option to buy contract. Also, make sure you have the capacity to perform to whatever you commit to.

If you are doing this because it's a dream of yours, stop. Objectively follow math to determine if and what opportunities you should be pursuing. That being said, this could be an amazing opportunity or a disaster. Make sure it's the former before you decide it's for you.

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  • Todd Rasmussen
    Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Amanda Coggins

    Lock down the basics with the seller and his daughter (or whoever is going to be handling the estate after his passing). "If I agree to buy this from your estate for $1,000,000 after your passing, can I have control of it starting now?" After that, pay for some time with a CPA and an attorney to figure out the best way to make that happen (that accomplishes both of your goals) Guessing it's along the lines of a master lease agreement and an option to buy contract. Also, make sure you have the capacity to perform to whatever you commit to.

    If you are doing this because it's a dream of yours, stop. Objectively follow math to determine if and what opportunities you should be pursuing. That being said, this could be an amazing opportunity or a disaster. Make sure it's the former before you decide it's for you.

    2Reply
  • David Lao
    Real Estate Agent · Oakland, CA · Member since 2017 · 60 posts · 25 votes
    5y

    It may take years before his daughter owns it. If you'd like to try to buy it now, then here's what I'd do:

    1. Pay an appraiser ~$500 to determine an opinion of value. Ask the appraiser how he or she accounts for physical condition. You can get two opinions and take the average of the two. It'd take the guess work out of it. You can use that number to negotiate with the seller.

    2. The seller seems to already understand that what he keeps is more important than what he grosses in the sale. Remind him that he'd save 5% off the sales price by selling directly to you and bypassing brokerage fees.  

    3. Go the next step and try to work out a seller-financing agreement that works for both of you (check with an attorney). For him, he'd spread out his capital gains over multiple years and would probably pay less taxes (check with a CPA). You can explain how it can be like supplemental retirement income that he'd get by the month. For you, you can use the 30-year conventional mortgage interest rates of ~2.75% as a benchmark for what the interest rates should be for the seller financing agreement. You can also explain that you're open to refinancing out of it with a conventional bank loan if he wants the income sooner for any reason.

    I've never done seller financing before and am neither an attorney or tax accountant. I'm just a local in Oakland (30+ years) and am an active agent and investor (rentals and flips). These are my two cents for what it's worth.  

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  • Calvin Kwan
    Oakland, CA · Member since 2015 · 246 posts · 127 votes
    5y

    Find a reliable contractor and get him to go over the house. Biggest costs that come to mind are foundation, electrical, and plumbing. 


    I purchased an 1898 Victorian in your area last year and renovated. It won’t be cheap to fix up. Make sure you have the time, capital, and resources to tackle this.

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  • Calvin Kwan
    Oakland, CA · Member since 2015 · 246 posts · 127 votes
    5y

    Also, you should be able to run your own comps. All the resources are there online. 1M in Grand Lake is not of the question, but not if it’s a gut job fixer. 

    SFH market is still strong, especially with the low interest rates.

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  • Ori SklootPro Member
    Investor · Berkeley, CA · Member since 2016 · 242 posts · 304 votes
    5y

    @Amanda Coggins I think this could be an amazing opportunity and you should definitely see if you can find a win-win solution.  I have been down this rabbit hole and just want to convey to you my own experience.  It's a cautionary tale, but your results may be very different so just go in with eyes wide open.  

    Long-story made short: I found a property that had been sitting abandoned for many years in an extremely desirable part of Rockridge, Oakland.  I called up the owner, a very sweet elderly man, and met with him.   We hit if off and he expressed interest in selling the property, however he did not want to pay the cap gains taxes and thought he should wait until he passed so his beneficiaries would receive it tax-free.  I proposed a lease with an option to buy agreement and explained to him all the benefits.  I would contractually control the property but the sale wouldn't go through until after his death.   He liked the idea a lot and we met several times to discuss the house, his life, my goals, etc.  I genuinely enjoyed the connection, until I met his life-partner who clearly didn't trust me and my whole "scheme".  Nonetheless, the owner was the one on title and the one who would make the decision and he assured me that his partner would come around.  I went ahead and hired a lawyer and paid about $5000 to have her draft an Option To Buy Agreement, Purchase Agreement and Lease (3 separate documents that all would be signed together).   With this in hand, the many delays and many excuses by the seller start.  His partner consulted a realtor friend who claimed that the sales price was way under-market and that I was probably one of those flippers that takes advantage of people and is looking for a quick buck (his actual words).  The owner finally called me and sadly told me that he felt it was out of his hands because he didn't want to go against his partner's wishes.   Again, I'm making a long drawn-out story very short, as this was over a period of about 10 months in which I put in a ton of time and cash.

    In the end, I let it go and chalked it up to a learning experience.  I still think the solution was a win-win and the contract that the lawyer drew-up for me was very clear and fair.   Guess what happened in the end?  Several months after my last call with the owner I saw that the house was on the market and that realtor who called me an evil filler was the listing agent.  The final sales price, after considering the 6% for agent fees, was a little LESS than what I had offered the owner.  Not to mention that now he would pay cap gains tax on the sale.  

    Moral of the story?  I really loved this property and the location and I ignored the red flags each time they popped up.  I believed that I could plow forward and win over the owner with my charm and reasoning.  But I did not pay enough attention to who was pulling the decision strings in the background and I didn't demand to sit down with his partner and convince him to get on board.  

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