Originally posted by Trace Trajano:
Building code violations can be a profitable way to make money but you have to do it right. Here are the steps (oversimplified it for now and will happy to discuss the details with anyone interested):
1. Find it
2. Acquire it with no risk
3. Sell it quickly
Find It
Getting the list of houses with code violations is not straight forward and can be downright frustrating. Most investors stop here when they don't get the list easily. You have to approach the Building Department of your city and the Health Department. Depending on the size of your city, you can be referred to the county. You need to do the legwork and understand that you can be passed on from one department to the next and from the city to the county.
Once you get the list of sellers with building/health code violations, you can send them a postcard or letter. My postcard has a response rate ranging from 10% to as high as 30% because there are very few investors sending letters to owners with code violations.
Acquire it With No Risk
How do you do this? Put it under a Purchase contract with an inspection contingency with as long a period that you can get to inspect the property. Part of your inspection is checking with the city the code violations and the fines and penalties that need to get paid. These fines and penalties must be factored in your purchase price - in other words, buy the property even cheaper than you normally would!
Sell it Quickly
One tip I tell people - and this is a tip you don't hear from the so-called real estate gurus - is calling landlords from the list of approved Section 8 properties. Of course you need to pre-screen them to find out who among the landlords (specially in the inner cities where properties with code violations tend to be) are still buying right now and who among them are cash buyers. If you buy the property right, selling it is the easiest part of the process.
Hope this helps. Code violations is a great niche to "mine" because there is very little competition, the sellers are desperate to sell (and very easy to work with) and they have multiple properties (repeat business!).
Trace
Trace, you are correct it can be very frustrating at first. We direct mail to code violation lists in over 20 markets here in Texas. The trick with these in our experience is understanding the legal "jargon" of these cities, knowing the deadlines, laws, and getting friendly with the city workers just like you often have to when dealing with any government agency as a real estate investor.
What I mean by the legal jargon is this....if you are not VERY specific with exactly what kind of properties you want included on this list, then you will not get what you are seeking. In almost all cases an Open Records request will be mandatory. On the lower end of the spectrum you have a house with some overgrown weeds and the grass is 3 feet high. In many cities these are considered GREEN tagged properties. Usually these properties are corrected immediately by the owners and it is no longer an issue.
Once you start getting into illegal conversions, abandoned properties, mold infestation, dilapidated structures etc those are the good ones. Commonly referred to by many cities as RED TAGGED structures.
There are various timelines factored in too, which are decided at the cities discretion. State law in Texas gives each city a wide range of options as far as penalizing the property owner. For example, city code compliance departments have the right to after xx amount of days of non-compliance by the owner.....They have the legal right to fine the owner on a DAILY basis no less than $50 and no more than $1,000. It can get ugly too, as Trace mentioned, some cities will actually threaten owners with mentioning "jail time" or misdemeanor charges etc. It is different in every single city. Some leads are online, some aren't. Some are supplied by the city in Excel format, some in paper format.
Eventually what happens if the problem is not fixed within a certain timeframe ((which is determined by a Building & Standards Commission in TX)) The commission can issue a demo permit and literally LEVEL the entire structure down to the dirt. If you can acquire these properties for less than the land value, there really isn't a downside. Especially if it's a situation which we are in now...... There is a dilapidated structure sitting on a large & valuable residential lot in an urban high traffic location near a downtown area.
It is set to have a demo permit issued soon, we go in and basically tell the city "Hey, here's our contract with the owner, we are pulling permits to fix it, we want this neighborhood to stay nice just like you do and keep the tax dollars flowing in." Once you execute the P& S agreement, close, pull permits etc it's then going to be a matter of us going in and getting the land rezoned for a higher density use, and I expect that we will do quite well on it.
I have an investor friend in Tampa, FL who does code violated properties as well. He recently told me about a deal where he basically got the lien discounted by over 80% off the balance. When the city files an abatement lien they put up the money it cost to fix the problem and attach a lien to get the money back if and when title is transferred. The filing of a lien hinges upon the cities budget. If they have the cash to fix the house up they usually will. If their budget is small, they will be even more inclined to give you a list so you can go in and buy the place and fix it up. Hope some of that helps some of you! Make it happen! :cool:
