How do I decide if a property with structural issues is worth purchasing?
April 25, 2012 7:10 AM   Subscribe

Property investment filter: How do I decide if a property with structural issues is worth purchasing?

This is for a 50-70 year old home, that is selling for about 15% above the land value. Has been on the market for about 6 weeks (local average is 5 weeks).

The interior of the house is fine aesthetically and can be rented out immediately.

The issue is the foundation has 'shifted' resulting in piers holding the house to have either sunk or become slanted. Mostly because the land is on a slope of a hill, and years of rain water flowing under the house has 'deformed' the earth. The building inspector said it is roughly $3k-$15k job to fix, which mainly involves adding extra support to the piers.

This has resulted in other structural damage: cracked floor of carport, slightly dipping roof, uneven floor, brick cracking at front and rear of house.

Overall the inspector said the foundation-related problems are on the mild side of the spectrum. While important, the house is not going to fall over tomorrow.

Well informed opinions from colleagues are along the lines of: stay away from houses with structural issues, why buy a problem?, don't fall in love with the property, look at the dollars and cents, it hasn't sold for a reason. It all makes sense, but I suppose I have a personal deadline to get my first property within the next 3 months. Been to several auctions in the area and getting tired of seeing them get sold above my bids or potential bids.

Taking into consideration of purchase and maintenance/renovation cost estimates, everything looks fine on my excel sheet, my cashflow would be approaching close to positive in about 1 year. But being a newbie to property, not to mention structural renovation or even development, I am confused about how I can make the right decision.

Please help!
posted by gttommy to Work & Money (9 answers total) 1 user marked this as a favorite
Based on your use of the word "cashflow", I'm assuming that your purchase will be partially or wholly rented.

>Taking into consideration of purchase and maintenance/renovation cost estimates, everything looks fine on my excel sheet, my cashflow would be approaching close to positive in about 1 year.

Um, you seem to have run the numbers, but are you sure about this? Keep in mind that your cashflow will be in the negative column during the potentially long renovation and repair period after you buy the property. Then you'll have to complete your punchlist, and also spruce up the unit for showing to potential tenants.

When you're at your calculator or spreadsheet, just for shits and giggles, run a "worst-case scenario." Most likely, it will be something like "$15,000 repair job, plus $2,500 repair budget overrun, plus three month vacancy during the repair period (or longer), plus one month vacancy after repairs are complete." This will give you a baseline for comparing more favorable or reasonable cashflow possibilities.
posted by Gordion Knott at 7:23 AM on April 25, 2012 [1 favorite]

You need to consult a structural engineer. In fact, you probably need to consult several and get written estimates as to how much it would cost to fix. You also need to know how long it would take. Once you know for sure, you can add that cost to the cost of the house, plus the loss of rental income for having the house unoccupied during the repairs.

If you choose to move forward, make sure the sales contract allows access to the house before closing so that your contractors can get in and look at everything they need to so that planning and permitting, if needed, are done before closing. Then work can start right away upon closing.

You do stand to lose some money if you pay people to get ready to work, but then fail to close for some reason, but that is the risk of doing business.
posted by procrastination at 7:23 AM on April 25, 2012 [3 favorites]

I bought a house with structural issues and had no problems. If you haven't already get a structural engineer, not just a housing inspector, out to view the property they do this kind of thing all the time. They will present you with a report of exactly what needs to be done. In our case he even gave us detailed diagrams with all measurements etc.

Remember this is a negotiating point and the owners might not even be aware it is a problem. If it's only a few grand to fix (at the low end of your estimates) depending on the property price you might be able to negotiate for them to fix it or to adjust the cost of the property accordingly. If you have preapproval for loans etc going in you might be in a good position to offset some of the cost of repairs in your price negotiations.
posted by wwax at 7:35 AM on April 25, 2012 [1 favorite]

In my experience, building inspectors, while well-meaning, don't really know how much it is going to cost to fix the problems they discover. They also don't always discover the true cause of a problem. They're only human.

A structural-engineering report will give you a sort of idealized case for fixing the house. It might not be what a foundation-repair company would do if you call them up to have them level the house. This is not to say you shouldn't get an engineering report, just that it may be more ambitious than what most homeowners would actually get done.

You'll need to get a quote from a foundation-repair company. Then you'll need to get a quote from a sheetrocker, because a lot of your sheetrock is going to crack, with the cracked halves winding up skew to each other. And you may need to have some doorways (and possibly windows) rehung. So put that in your budget too.

The area where I live is notorious for shifting soil, and shifting foundations are just a fact of life. Find out whether you're facing something like that, otherwise your foundation repairs will be undone in a few years anyhow.
posted by adamrice at 7:39 AM on April 25, 2012 [1 favorite]

on my excel sheet, my cashflow would be approaching close to positive in about 1 year.

Setting aside the fact that positive cashflow is not profit, itt sounds like an awful lot hinges on the spreadsheet's being close to right. Since you have no experience in this stuff, it's probably pretty far off. You may be leaving out all sorts of expenses, renovation cost estimates may be wrong, etc. Have some smart people critique your model.
posted by jon1270 at 7:40 AM on April 25, 2012

Another way to think about it: Do you have a good idea of what the house would be worth if there were NO structural issues? If so, then get a good estimate from a structural engineer, and deduct the expected cost of fixing it, plus a good chunk for the extra work you will have to do and the risk of higher actual repair cost that you will have to assume.
posted by Mr.Know-it-some at 7:48 AM on April 25, 2012

Why would you want to buy any property with a bunch of issues that have not been fully assessed to meet a spurious deadline?

In the course of fixing these problems others may come to light that are not in your spreadsheet. Who's going to project manage this to ensure costs are not spiralling out of control? Think carefully about what you're doing here and why you're considering taking on this property - your deadline is not a good enough reason.

If this is an investment property and not somewhere you're ever likely to live your only considerations should be profitability. Therefore there would have to be a significant financial upside (after adding a good cushion to the proper cost estimate that you are going to seek for the work that is required from a structural engineer, not from the building inspector) for this to be a valid proposition. And even then it'd be a hell of a learning curve.
posted by koahiatamadl at 9:18 AM on April 25, 2012

Putting my landlord hat on: I absolutely would not make my first rental one that needed this level of work. Until you've done it for a while you really have no idea how it's going to work out for you. From experience, the worst thing to possibly be is an undercapitalized landlord, and this could really do a number on you if you're unlucky. Being inexperienced, shall we say, decreases your luck.

There is definitely a reason nobody has snapped this one up; investors generally know that work estimates have a way of ballooning and they want cashflow.

I have a personal deadline to get my first property within the next 3 months. Been to several auctions in the area and getting tired of seeing them get sold above my bids or potential bids.

This indicates to me that you really do not know your market, and being desperate is a poor position to be in as a buyer, something salesmen in many fields have long understood. Don't be someone's mark. If you had a background in renovating houses you could look at this one and know almost instantly if it were in your capability. Since you don't, even with the help of a structural engineer, you stand the risk of buying a money pit.

I would suggest thinking of the money you would spend on structural rehab here as something that you should instead apply toward increasing the amount you can bid on these (presumably foreclosure) auctions. This whole area is heating up because there are well-heeled investors jumping into the market and their money means prices will go up. They can handle it (at least they think so) because they have the capital and especially the cash (since a lot of banks are still nervous about the RE market). They have the flexibility to hit a lot of auctions in a lot of metros looking for just the properties they can use. If you want to beat them to the punch, you're going to have to find a way to compete financially, or have the patience to wait for that first opportunity to open up. But buying a pig in a poke is really a bad way to get started. Heck, you're likely to overpay on your first few properties just on general principle. Make that money you're overpaying go toward something much closer to your turnkey ideal.

Once you get some experience under your belt, then you'll have a much better idea what sort of pitfalls await you with an unknown property, and relationships with contractors who you trust, and cashflow/assets on hand to be able to cover any extra costs or rental losses.

my cashflow would be approaching close to positive

Cashflow is only ONE aspect of landlord finances. A lot of investors actually use them as a way to create tax losses and offset, for example, business or royalty income. I would suggest looking at your entire financial picture and think less about this as a means of easy money, which it really isn't, and more about how this investment fits into your overall financial picture.

It does sound like you're talking to people in the business, but maybe talk to them some more.
posted by dhartung at 9:18 AM on April 25, 2012 [1 favorite]

Yeah, without getting bids from engineers, who knows what the real cost to you would be? There's clearly a hydrology issue, it may be that fixing the foundation would be 15,000, but fixing the ongoing problem with the water could be much, much more. If brick is cracking at the front and rear, that's not a cheap fix either. You need to get some bids on the various problems before you really know what the repairs will be, and then add 30% to all the bids to cover contingencies, and then double the time it will take to finish repairs. Are you still good to go?
posted by oneirodynia at 12:44 PM on April 25, 2012

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