Investment property fire before closing questions

[Joshua Lurz]

So, I’m in a bit of a tricky situation and wanted to get some advice on what my options are or what I could possibly do to salvage this deal. 

I live in Colorado and have been under contract to buy an investment property for around 2 months now. I am going through a hard money lender and they have continued to drag the closing process out far longer than expected. To help get a better picture of the situation here is a summary of what has happened in the last few weeks along with details of the property. 

I have plans to put over 100k dollars into this property and fix things up and have it rezoned legally as a triplex so I could rent it out. Essentially a BRRR type approach. I am getting the property for pretty cheap- 86k purchase price and 104k renovations- the lender is covering 70 percent of purchase and 80 percent of rehab costs. It appraised for 111k before the fire in its current condition and the ARV was around 300k. I was set to be able to rehab the property and refinance after to pull out around 50-70k after paying the lender back and would make around 1k a month in cash flow.

To start: the property is currently legally zoned as a single family residence. However, it has been being used illegally as a triplex since 2018. It is a 2 story home built in 1913 with 3 bedrooms downstairs and 2 bedrooms upstairs. Additionally there is a 2 car garage in the back that was converted to a 1 bedroom 1 bathroom unit a few years ago. Each unit has its own entrance and it was occupied until September 26th when it was condemned by the city.

I took over as the property manager back in late July. The tenants were all clients of a non-profit entity called the Volunteers of America (VOA) the VOA helps people with felonies, income issues, sexual offenders, and other types of people that often have difficulty finding housing. They help with utility bills, rent, moving assistance, deposits, and more.

As I stated all 3 units had VOA tenants and the landlord had been collecting rent directly from the VOA . In addition they were paying their utilities and paid their deposits as well. I gave all the tenants notice of non-renewal back in late July when I took over stating that they had until the end of August (31st) to vacate the property. Of course none of these people moved out when August 31st rolled around. Come to find out the VOA also didn’t pay the full amount for the utilities so over the last year they racked up around 2-3k in unpaid bills. Which fell on the landlord to pay.

So against my advice he had the utilities shut off on September 1st and all the tenants started complaining they didn’t have power and finally started “trying” to move out. After a week or two I went by to check on them and found they had jumped the electric box and turned the power and water back on themselves. I told him he needed to file civil action against them so they would be forced to leave but he didn’t want to pay the fees to do so. I kept encouraging them to leave and the landlord called the utility company to have them come back out to shut then water off again. As the situation got worse code enforcement was called and they saw tenants with no water living in the property and condemned it. This was on September 26th, and they forced everyone to vacate the property within 24 hours.

So finally the tenants were gone. However the local riff-raff decided this was going to be their new hang out spot. Literally within 2 days there were 2 women squatting in the upstairs unit and people were coming by at night and sleeping there and using it as a place to do drugs. So I went and boarded the property up- putting plywood over the doors and windows to try and keep anyone from getting inside. These people were like cockroaches and kept coming around regardless. I even told the code enforcement officer and the police they needed to increase patrols at the property because it was going to be an ongoing issue. But with limited manpower that didn’t happen. 

About a week before the fire I went to clean up some trash and saw someone had removed the plywood on the garage unit window and was inside attempting to squat there. I kicked them out and re-boarded the window with plywood and extra screws to try and make sure they couldn’t get back in.

Sure enough they got back in again somehow and early in the morning there was a fire and it completely burned the entire inside of the garage basically ruining everything and is a total loss. 

The guy who owned the place is a complete “piece of work” to put it nicely. He does nothing to maintain his properties, he doesn’t care about his tenants or anything except collecting his rent money. He always makes excuses and plays the victim card or pretends he didn’t know- whatever the situation may be. Another one of his properties got condemned the same day this one did and one of his tenants there was taking him to court for negligence. 

Anyways- I took out an insurance policy on the property about 2-3 weeks ago to satisfy the requirements of my lender so we could close on the property. The policy was set at the ARV price (300k) and covers the vacant property against fire and other damages.

However, I haven’t paid for the policy yet- as it is supposed to be paid for at closing via escrow- but I called my agent today and they said the policy was actually in effect since 2-3 weeks ago. I also asked the owner to give me a copy of his insurance policy he currently has on the property and it looks like his coverage limit on the garage unit was only 50k which isn’t nearly enough to rebuild the garage. 

The fire just happened yesterday and he hasn’t filed a claim yet. I am wondering if I can file a claim using my insurance policy instead of his to pay for the repairs needed to fix the garage. My policy would cover the actual total costs of the repairs and then some- as I made sure to that I was totally covered- the code enforcement officer warned me this type of stuff happens all the time (junkies breaking in and starting fires) and that it would be smart to get a good policy. So with all of this being said- does anyone know if there is a way I can still close on the property and file a claim with my insurance? Would I need to go ahead and just pay for my policy now since it’s already in effect, then file a claim? Will they cover it if it’s still not in my name, or would the pay out go to the owner? Even if it does he will make sure I get that money to do the necessary repairs. I have the money to pay the deductible (5k).

Also- I own a residential remodeling company- that is what I do for a living and would be able to work up an estimate and do all the repairs myself with my crews. It would cost us most likely 75-80k to repair the unit back to its original condition and the payout would be close to 100k so I could use the remaining money to put towards fixing the main unit up instead of having to take more from the rehab budget via the lender. If I can get insurance to pay out it would actually make it worth buying still and I’d actually benefit from all of this. But if I am stuck with his insurance paying out for the claim it wouldn’t be enough to cover the repairs needed and I’m not going to buy the property if that is the case. Any advice is greatly appreciated- as I’m trying to figure out what I need to do moving forwards and whether or not it’s even worth going through with this. 

I’m planning on reaching out to a real estate attorney Monday to mull over my options and see what can be done. But I wanted to bring this up to you guys as it’s a unique situation and to possibly help anyone else that might run into something similar in the future.