Going Under Contract While Seller is Renovating

[Nick Louie]

Hi BP Community,

I just offered on a property in Brooklyn, New York that is in the process of going through a full gut renovation and being flipped. The property is a two-family.  It is off-market, so there is no competition. The seller is the renovator, and he is handling the flip personally. We estimate the flip is about 40-60% completed. The seller estimates he will be done in 2-3 months. The property looks promising, but there is still a lot of work to be done. 

I would like to move forward and go under contract soon to lock the property down before other buyers enter the picture. But I also need to manage risk because my understanding is if I go under contract at this point, I would be buying the property "as is." 

One way to manage risk is to create a comprehensive punch list to annex onto the contract, which provides for an itemized list of all renovations to be done. I would think that the seller would have some type of plan or blueprint, but my agent said this type of plan in writing isn't available. To make sure our punch list is comprehensive, we are thinking of organizing two inspections, one before going under contract and another inspection after all renovations are done. Then, in the contract, we would make closing subject to the inspection not uncovering any "material" defects in the house (not sure whether this clause is customary?).  

So my question is: In this situation, what is the best way to manage risk in going under contract on a property that is in the middle of a full gut renovation? 

I want to make sure that if I go under contract while only 50-60% of the renovations are completed that I ultimately get a finished product without any major defects. I also want to limit the seller from cutting corners on the renovation. 

Thoughts? 

[Tim Stuart]

Nick,

Before completely eliminating this as a possible investment, consider this: you could enter an options contract for a nominal amount negotiated between you and the seller giving you the OPTION to purchase it once it is completely renovated. This is a unilateral contract meaning the seller is obligated to sell but you are not obligated to buy. This gives you the potential for the asymmetrical upside if it is the great deal you suspect, with a defined downside risk. Record the option contract at your local county recorder to make it enforceable.

Another way to mitigate the risk is to research what, if any, permits the contractor has pulled already. Reviewing the permits will give you insight into what the scope of rehab planned for the project. 

As many above have already commented, if you don't detail out exactly what you want, you are almost guaranteed to get exactly what you don't want, which will cost you more money in the end.

Hope this helps, Good luck!

Tim