All Forum Posts by: Christopher Phillips

@Greg Todrank

It happens. Especially if there are a lot of moving numbers regarding who paid what taxes and sewer and such already.

@Jimmy Lieu

Hi Jimmy.

Conventional and FHA financing have condition of property appraisal specifications.

So, a house without working plumbing, without working heat, or a leaking roof, won't pass appraisal standards. In those cases, you have to use a rehab loan product or go for hard or private money or cash.

Many rehab products will depend on if you plan to occupy the property or not ( like living in a unit in a 2-4 family home and renting the rest of the units). If you don't plan to occupy it, then you'll have to do cash, private, or hard money or a rehab product that doesn't require occupancy. It really depends on the situation.

Adding $10k to a property doesn't add substantial value. Maybe 20-40% return on your money depending on the value add. If you have a leaky roof, people can't get traditional financing and most people will discount the value on the home more than the actual cost of the repair.

The power of BRRRR is that you're buying a distressed property at a substantial discount.

With that last point in mind, if you see a house for $100k with substantial issues that can only be purchased with cash or a rehab loan, that allows you to negotiate a deeper discount.

Let's assuming they take $80k for all cash and a quick close. Then you make the necessary repairs and cosmetic enhancements for $25k. Now you're $105k all in (plus closing costs) and a potential ARV of $150k. So, after renting it out and when you go to the bank and get 75% ARV cash out, 75% of $150k would be $112.5k. Depending on the closing costs (they can be different for each state/county/town) you can now go out and buy another distressed property.

many investors want to buy a property with no headaches. You can't get a property like that without paying near retail. That means no discount.

So, you have to pick your comfort level for repairs and perform all the calculations to see if the property is worth the investment.

@Jack Norris

The point of BRRRR is to lower your risks by purchasing at a bigger discount due to the distressed nature of the property. In general...

1. That means you won't be able to use a conventional loan. Will have to be cash, hard-money loan, or private loan.

2. Cash-out is usually 65% to 75% of after repair value (ARV). So, you're leaving equity in the property, which means no downpayment. But there will be closing costs.

3. You generally aren't looking to be free-and-clear. That means your money is tied up in the asset instead of using it for more purchases or repairs to existing properties.

To do the proper analysis, you have to consider the ARV cash flow once the property is repaired and rented out to make sure it will have positive cash flow after rents, mortgage, and reserves.

@Cary Keith

You are likely stuck with the rents until the lease expires. These types of things are supposed to be cleared up before you close. As an example, if you wanted the units vacant by closing, that would need to be stipulated in the offer agreement. You'll have to check the rules of your state, but in most cases, the buyer has to honor the previous lease agreements.

@Bryce Fairburn

The logic is that if there $50K in work needed, the average person might expect to get a return of 1.4 times the cost, or $70K in this case.

If the house is $275-$300k with no issues, then with adjusting for $70K you're looking at a $205-$230K value.

As an example, if a house is in great shape and really just needs a new roof, then a buyer might estimate the cost of a new roof or get bids. With a clear expectation of what needs to be done, most people would just adjust the offer price by $10K, give or take depending on the size of the roof.

However, with a fuzzy picture of what really might need to be repaired, most buyers are going to pad their estimates to account for unknown issues. Even if the seller is being honest, there still could be unknown problems found once construction begins.

What I’m getting at is that it sounds like the seller is telling you half  The story.

title insurance covers discrepancies in the title itself, like unexpected clouds on title, not physical discrepancies.

Home insurance ‘might’ be able to cover some of the issues. 

“If” the previous owner knew about the problems then it might be worth a law suit.

But for the most part, it’s buyer beware when purchasing a home.

Of course, you’re in Canada, so the options might be different there.

@Bryce Fairburn

Maybe you can clarify something. When did the owner buy the house? When it was new 10 years ago? Or recently?

What exactly is wrong with the house? Is it too cold in the winter?

@Gregory Williams

You won't be able to use a 203K loan if you don't live in one of the units. Those FHA products are for owner occupied, 1-4 family homes.

You'll have to look for other types of rehab products since this is an investment building.

@S Buhidma Caudill

Prices on the high side can range from $150 to $200 per foot to replace a sewer line. Some of it depends on the area you live in, how deep the lines are, the types of lines (cast iron, clay, pvc, etc), and the soil types and such.

For a job like that, you should get three quotes and have them try and break the quotes down by labor, parts, permits, and such. Sometimes they won't be able to give you much detail because it's just based on averages that they've charged in the past for similar work.

It doesn't take much to run sewer pipe. Most of the work is in digging the trench. There might also be some environmental issues due to the persistent leak.

There might be other options like inserting a lining in the old pipe, which won't involve as much digging.