Buy a Fire/smoke damaged properties?

Question

Good evening BPers,

Help/ Advise needed :)
Today we have run across a fire/ smoke damaged property, it's off market, the owner has got paid by insurance company, he is asking ~195K, the ARV ~400K. it's a very nice 2 stories SF a bit over 3000sgft, great location. the fire happened few month ago, it was contained to the basement, but there was a smoke condition throughout the house. it was caused by a lightning though huge tree/ septic pipe to the basement, Septic, HVAC, electric & plumbing in basement, needs to be replaced . there are quite bit of soot on the ceiling of the basement, not sure if the structure is ok or not( it appears not too bad, minor burnt), basement is dry,. the main floor and up stairs looks not too bad, main thing is to clear out the smoke, no water damaged. There a 2 car garage and very nice in-law studio above, they are far away from the source of fire and looks intact. Roofs are 1 yrs new, the exterior looks good. major work will be the interior .

we are not quite sure how much will be the rehab cost, if hire GC/ Fire restoration specialist , My wild guess is it easily cost 200k at least? if not at least 150k. If using the simple rule of 75% of ARV- Rehab cost, it doesn't seem work? I don't think there will lots of flipers interested in this property, as too much work and too expensive, We don't mind to get our hands dirty but we are fairly new, we only purchased one rental properties last year. we like the idea of in-law and it looks great potential for rehab and live as our primary house, renting out the in-law ( could be easily $1000 rental), then hold or sell it couple years late, BRRR it? ;)

Here are some concerns /questions: 1) The total rehab cost, will try to get GC/ Fire restoration specialist, not sure if the owner allows, if not will put in the offer if we do decide to put one.

2) Clear the smoke on the main floor and 2nd floor,  what is the best way to remove the smoke? from surface it looks great, do we have to open each drywall, replace the fiberglass and put a new drywall?

3) Beside the smoke, there is also concerns about chemical, the fire was through the septic pipes, wires, plumbing in the basement were melt in the hot spot, so it’s really costly to remove all the chemical consider?

4) Insurance, it will be really hard to get insurance during the rehab process and it cost a lot… maybe i will check with few insurance companies..

5) For resale in the future, needs to disclosure fire damage and it might reduce resale value compare to market value.

6) what is the benefit for seller if offers for seller financing ? as they do get compensated by insurance company, and now the property is free and clear.

Sorry for so many questions, We are trying to analysis see what we can offer and what is best way to approach if we do put offer, Looking forward to hearing from BPers :)

Thanks in advance for any inputs!

Honglian

Jeremy VanDelinder · Answer

@Scott Krone has some good advice above--let me jump off and add a few things to that.

I flip fire-damaged properties and own a fire damage restoration company. It can be a big undertaking, although there can be profit in it IF the numbers are right and IF you have done your homework to know what you are getting into (both big “IFs”). Unless you are rather experienced with this type of damage, it may be hard for your to tell the extent of damage. The place to start is by asking the seller what the insurance company decision is—if they will share that info, that might tell you some of what you need to know.

The challenge with fire damaged properties is that there is more than meets the eye. For example, often fire damage is water damage--they put the red stuff out with wet stuff. Unmitigated water damage becomes mold damage and and there is the potential of extensive smoke damage in the same airspace. So even elements that don’t appear damaged can be contaminated. Also, ODOR is a huge issue. If the odor is not properly mitigated that will cause ongoing problems.

I would recommend you find a fire restoration company/contractor to walk the property with you and give you a good understanding as to what needs to be done. There are many things that could be overlooked as part of the renovation on fire-damaged properties.

You will need to disclose previous fire damage (at least in the states I'm familiar with).

I'm happy to look at pictures/videos and answer any specific questions you have. Let me know if I can be of help.

John Mocker · Answer

Honglian,

From an insurance perspective, you should not have any problem getting coverage for the rehab.  The policy would be a Renovation Builders Risk.  The policy would have a limit for the existing structure and a second limit for the renovations.  The policy may or may not cover Liability.  If not, you can get a separate policy to cover your Liability exposure as the property owner.

Belfor Property Restoration may be a good contact for you.  They could give  you a quote on the cleanup of the soot and whether or not there is any chemical cleanup needed. Based on what their report you may see areas you can do and other areas that you would need a professional.

I am an insurance agent in CT so I have the local contact info for Belfor if you need it.  Just PM me.

Whitney Hutten · Answer

@Honglian Wu I see the allure here. However, these types of properties can go wrong in a hurry as there oftentimes structural issues that aren't uncovered until later. Also, the issue will be with the resale of the property (especially in such a short time frame). That claim will be there for a while and affect insurance costs. And you will have to disclose this, so this could affect pricing for a bit.

I'm interested to hear what others say.  If I did this, I would plan for my exit to be a hold, and stress test all of my ARVs to come in under and budgets to go over. Personally though, I'd pass, or at the very least partner with an investor who has done this type of rehab before and knows what to look out for.

Scott Krone · Answer

@Honglian Wu  We have either purchased or worked on homes damaged by fire.  More times than not we tore them down as the value of the property was worth more than the structure.  That being said, fire restoration companies can address your concerns regarding smoke, chemicals etc.  Not every home damaged by fire is a tear down.

The owner should have/would have received compensation from the insurance company for restoring all the services.  We would take that number and deduct it from the FMV of the home.  We then figure out what it will cost to renovate the balance of the home to get it to market value.  That is how we determined what we could afford to pay.

If the fire was in the basement, the first floor, floor joists could be impacted.   First step is to remove any damaged drywall to inspect joists.  The fire restoration companies typically remove any drywall that absorbed smoke.  Keep in mind, if you open a wall, you are typically subject to bringing that portion of the building up to code as well.

Work the numbers and see if it is a deal.  It is possible to restore a damaged home.  In our state, I do not believe there is not a disclosure for fire, just flooding.   If the basement had water or still has water in it, there may be mold, and that is typically disclosed.

Buy a Fire/smoke damaged properties?

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