Thread: The Crack House

Sitting here with an RE friend of mine as I read this. She says her opinion is to slowly rehab the house in a 2-3 year period if you have the funds to hold onto to the property and rehab it. You will then get a premium for selling it in the up market (when it returns). You will have the opportunity to pull equity out and buy more property while renting it, or just sell it for a tidy profit. She prefers to rent and pull equity on a personal mark.

Alternatively, if you are strapped for cash, buy it and hold onto it as long as funds allow. Be very careful of cracked foundation issues. The city can come in and cause havoc, through permits and other regs. Hope this helps you weigh your opps JScott.

Thanks for the response, servicefly...

Cash isn't an issue (at the price I'm paying, I could hold it forever without it being a problem), but I'm curious why your friend recommends rehabbing it slowing over time, as opposed to just sitting on it for a couple years and then doing the rehab all at once?

Btw, if it makes any difference, I have contractors do all my renovation work, so it's not like I'd be doing it myself (in which case it would obviously be easier to do it over a long period of time). So, in my case, it's actually cheaper and easier to do all the work at one time right before I decide to rent/sell it.

Just curious if there was another rationale for doing the rehab slowly?

Caught her on the way out the door, he he. She says over such a long period (waiting for the upmarket return) trends tend to change especially with major changes in society. Slowly rehabbing property allows kinks to be ironed out nicer and trends to be considered. Right before the crash, bathrooms & kitchens were prime rehab areas for ROI. When the upmarket returns maybe living rooms will carry much more value because people began to entertain more in the slow economy rather than meet friends at restaurants. Just an example of her mindset. She says buy & good luck. The "good luck" was a stab at me because she knows I believe we make our own luck, which she has already done.

Originally Posted by JScott

• Flip the house to another investor immediately for a small profit (I’m fairly certain I’d be able to do this)
• Get some structural engineers out to the property and determine if it can be repaired…if so, rehab and sell.
• If the property can’t be salvaged, demo it now and build a new home to sell.
• Determine if there is some short-term reinforcement that can be done to ensure the safety of the structure and then rent the house for the next couple years.
• Board the house up for a couple years until the market turns, and then sell the house as-is to another investor willing to pay a premium over what I paid.
• Board the house up for a couple years until the market turns, and then knock it down and sell the land.
• Board the house up for a couple years until the market turns, and then knock it down and build a new house.

"Determine if there is some short-term reinforcement that can be done to ensure the safety of the structure and then rent the house for the next couple years."
"Get some structural engineers out to the property and determine if it can be repaired…if so, rehab and sell."

I would think one of the two above would be the best way to go. Of course that doesn't mean I am right .

"Flip the house to another investor immediately for a small profit (I’m fairly certain I’d be able to do this)"

That would be another way to look into, but it looks like none of the investors there want to touch it.


As for boarding it up and doing nothing with it...
I'd think you would need to see if the home can be salvaged or not. If it needs to be torn down, wouldn't it make more sense to just tear it down now? You would be paying less in taxes and insurance and also have one less thing to worry about.

If it can be repaired and rented out, I would do that(sooner than later)...have you kept any rentals yet or are they all flips so far? Sounds like it could be a nice first rental.

Would boarding the property open you to other risks?

Drug house, vagrants, etc.

Not to mention if the house is unsafe and someone breaks in and is hurt, you can be liable. A boarded house may be asking for a unwanted headache. I state this from a family members bad experience. (They had a boarded up house that became a drug house)

A vacant rental across the street just had a vagrant try to break in last week. Thankfully we chased him off. Not sure how much this is an issue in Atlanta, but in the colder months of Colorado this becomes something to think about.

You got to me what seemed like a very good deal on the last foundation issue. Perhaps if you get the same news, you may have just made one heck of a deal.

I hope it works out. I admire the work you have done by taking eyesores and making them model homes for a community.

Can you really board up a house for a couple of years and not maintain the property at all and not get code violations from the City and sued by the neighbors? I dunno if that would work out.

I'd probably just sink in the minimum money to turn it into a rental, and rent it out indefinitely with good cashflow until the market turns and you can flip out of it. How much money would it take to make it rent-able? Could be a long term gold mine.

- Hakrjak

Originally Posted by hakrjak

Can you really board up a house for a couple of years and not maintain the property at all and not get code violations from the City and sued by the neighbors? I dunno if that would work out.

According to my agent (who deals with a lot of these types of properties), the county is just fine with either boarding up the house or leaving it as-is, assuming all the windows, doors, and other entryways are secure and intact. In fact, if you look at this house from the outside, you wouldn't even know anything was wrong with it.

So, if I decide to go the "hold it" route, I'd probably just not touch it, accept to clean out the cob-webs and mow the lawn.

I'd probably just sink in the minimum money to turn it into a rental, and rent it out indefinitely with good cashflow until the market turns and you can flip out of it. How much money would it take to make it rent-able? Could be a long term gold mine.

I love that idea, but certainly wouldn't rent it unless I was positive that it wasn't a safety issue, and I have a feeling that some work would have to be done before it was considered safe enough to be occupied.

Originally Posted by Bilgefisher

Would boarding the property open you to other risks?

Drug house, vagrants, etc.

Luckily, this one is in a very good neighborhood, so I wouldn't expect those things to be an issue. Also, from the outside, you really can't tell that there is anything wrong with the house. My biggest risk is probably someone stealing the air-conditioning...

Originally Posted by I85

"Flip the house to another investor immediately for a small profit (I’m fairly certain I’d be able to do this)"

That would be another way to look into, but it looks like none of the investors there want to touch it.

This has been under contract twice before by investors, both of whom backed out because the numbers didn't work out for them.

But if I get this property, it will be for about $30-40K less than either of the other two investors had offered (from what I've heard)...

I'm thinking there is probably some wiggle room between what I'd be getting this for and what other investors would pay for it, so I could likely make $10K or so just flipping this to another investor. In other words, I have a feeling that if the bank listed this property for $35K ($10K more than I offered and $25K less than it's currently listed for), they'd probably get a lot of offers.

Of course, while a quick $10K would be nice, that's a relatively small payday compared to what I could potentially make through the other scenarios...so it's the least exciting scenario to me right now...

As for boarding it up and doing nothing with it...
I'd think you would need to see if the home can be salvaged or not. If it needs to be torn down, wouldn't it make more sense to just tear it down now? You would be paying less in taxes and insurance and also have one less thing to worry about.

That's a great point! The real question is how much would it cost to demo it, and would that cost outweigh the "holding costs" of keeping it upright for the time being...that's something I would definitely have to investigate...

By the way, thanks to everyone who offered thoughts and suggestions! I really appreciate the feedback, and if I happen to get this property, I'll post more thoughts using specific numbers, at which point this conversation will be a little bit less theoretical...

Speed++ to each of you...

It would cost me just under $125k to build a new 3 bed 3 bath raised ranch on that lot. Two car garage, fire place, hardwood floors, built in AC, alarm, deck, forced air heat, etc. So lets say $170k with demo+lot costs. If you could get say $280k for that it could be a half way decent deal.

IMHO I'd get some foundation guys out their and see if it can be fixed for a few grand. If so than I would rent it and wait for the market to turn. After it turns knock it down and build a new house. If it cannot be fixed I'd knock it down right away and leave it as an empty lot. I'd do that for two reasons. One its more valuable if someone comes along and wants to buy it. Two I don't want to piss the neighbors off, suffer WTF calls from my RE agent friends, and get a bad reputation for owning an ugly property.

My 2 cents.

Originally Posted by hatterasguy

It would cost me just under $125k to build a new 3 bed 3 bath raised ranch on that lot. Two car garage, fire place, hardwood floors, built in AC, alarm, deck, forced air heat, etc. So lets say $170k with demo+lot costs. If you could get say $280k for that it could be a half way decent deal.

Those are pretty much the numbers I'm looking at...

I had one of my GCs (who is also a new home builder when the economy is not in the toilet) out there today, and we estimated about $55 per square foot for a raised ranch or two-story traditional, which is what most of the houses in this neighborhood are.

If you figure 2000 sq. ft. + demo costs + purchase costs, I'm at about $170K (same numbers you got). And I think I could conservatively sell a new home on this lot for about $250K, and if the market returns even to where it was 6 years ago, it's closer to $290K.

So, if the foundation can't be repaired, I'll probably wait a year or two or three and go that route...

How much damage has been done to the house as a result of the foundation problem? Here in Dallas, almost every house has foundation problems at one time or another. If you catch and fix them before the walls and ceilings are all cracked up, then you can usually get it fixed by a reputable foundation repair company for $10-15K.

So that's what I would do. Get it fixed (which includes a warranty, of course), patch up any cosmetic issues (cracked interior walls, cracked mortar in the bricks, etc) then rent it out. You will effectively pay for the cost of repairs with a years worth of rental income. Then sell it when the market firms up a bit.

Originally Posted by Jill

How much damage has been done to the house as a result of the foundation problem? Here in Dallas, almost every house has foundation problems at one time or another. If you catch and fix them before the walls and ceilings are all cracked up, then you can usually get it fixed by a reputable foundation repair company for $10-15K.

So that's what I would do. Get it fixed (which includes a warranty, of course), patch up any cosmetic issues (cracked interior walls, cracked mortar in the bricks, etc) then rent it out. You will effectively pay for the cost of repairs with a years worth of rental income. Then sell it when the market firms up a bit.

I'm not sure how fixable it is (maybe completely) and I'm not sure how expensive it would be, but there is some major damage already done. The exterior wall sitting on the cinderblock foundation closest to the crack is severely bowed into the house, and each of the two levels of the house above the garage are sloped to the point where a tennis ball will roll to the center of the room from any corner.

Additionally, there is a lot of sheetrock damage in the living room (first level above garage) from the movement of the exterior framing.

So, while I'm definitely not an expert on foundation issues, I know that there would be several thousand dollars worth of rehab costs just to fix the cosmetic issues associated with the damage.

If I get the house, I'll post pictures...

I realize this is apples-to-oranges, but there is a home in my neighborhood that had a foundation problem. It took the owner (who I think was a flipper) 6 months to fix it (my neighborhood is atop of a hill/mountain) and from what my contractor told me, 6 figures+ to fix. The home has been on the market now for close to a year at $1.3 million when all the other houses are $2M+. The house across the street is $2.6m. When I looked at it during an open house, the Realtor told me about the foundation problem as he had to disclose it and indicate that it was warrantied for 10 years for further problems.

The point is, this issue has scared away many buyers, even when the home is already way under valued.

So the question is ... if you fix it, is it something you need to mention to new buyers?

Since you got it for so cheap, and it sounds like the existing house is so bad, I'd be inclined to teer it down and start again.

Originally Posted by PhxMJ

So the question is ... if you fix it, is it something you need to mention to new buyers?

Funny you should ask that...my wife just passed her real estate agent exam, and we were talking about this question...

The short answer is that an agent is NOT ALLOWED to volunteer this information to the potential buyers. There are two reasons for this:

1. The problem no longer exists, and agents are under no obligation to volunteer information about problems that USED to exist but no longer do;

2. The listing agent has an responsibility to protect the seller's interests, and volunteering negative information that doesn't need to be disclosed is not protecting the seller's interest.

So, if the agent down the street was volunteering this information about that home, he/she was violating ethical rules.

That said, if a buyer asks the question, the agent must disclose the previous problem (and should say that the problem is fixed and has a 10-year warranty). Additionally, the seller must disclose this information on the seller disclosure form, which usually is presented later in the process, and therefore is less likely to impact the sale.

As for the practical issue of whether a foundation problem will hurt a resale, here are my thoughts given my discussions with agents:

- Certainly, fixing a foundation problem isn't going to *help* you get a sale, but if you get a lifetime warranty on the repair work (not 10 years, but LIFETIME), it often won't hurt the likelihood of a sale or the selling price;

- In fact, a good agent can spin these repairs into a good thing, as you'll never find a new house with a lifetime warranty on the foundation...

- I'm doing some foundation repair work on one of my houses (The Yellow Stain House), and while there will be obvious signs of the repair as soon as the work is completed (big anchors in the foundation wall), I'm planning to finish the basement in this house which will completely cover any evidence that the work was done. By the buyer not actually seeing any evidence of the issue/repair, I'm hoping that it's not even considered a big deal (though of course I will disclose it in the Disclosure Statement).

I'm not nearly as fearful of rehabbing houses with foundation issues anymore, given a couple key items:

- I ensure I understand the scope of the problem and find a reputable company that can give me a binding quote on the work;

- I ensure I can (and do) get a lifetime warranty on the repair work, and ensure that warranty is transferable to future buyers;

- I ensure that there is little evidence of the work after the repair, so as not to remind buyers that it was done;

- I add some extra cushion in my numbers to ensure that if there is a major concern by buyers, I can sell it for less and still hit my margin targets.

Originally Posted by servicefly

...She says buy & good luck. The "good luck" was a stab at me because she knows I believe we make our own luck, which she has already done.

I agree with you!

Originally Posted by Bilgefisher

Would boarding the property open you to other risks?

Even in a good neighborhood, kids and animals can cause big problems in vacant property. That's why there's a job for caretakers. I would think long and hard about keeping a property without a tenant for any length of time. They represent a security presence -- maybe not to gangs, but to the casual opportunistic vandal.