A lesson in the dangers of distressed property purchases…

A friend of mine contacted me the other day about a property investment opportunity that her brother-in-law (BIL) was placing in front of her and her husband. The property in question is located in the city and state where the BIL lives – and it’s far from the Seattle area at roughly halfway across the country. The house reportedly, and confirmed in the report I read, has a major mold issue that has attacked even the underlayment of the floors. (if you want to see some gross mold photos, check out this site) The buyer’s agent and BIL (who agent represents) are attempting to state that the water damage was caused by the former owner having a drug problem and not cleaning up after himself or perhaps because of a water leak in the bathrooms and from a leaking dishwasher. Hmmmmm…..

The house is supposedly being offered off-market at a lowball price of $400k for this tony neighborhood where $550k-800k is the common price points for various sized homes. Even the listing agent is nervous about selling the house with the mold issue but the owner is now deceased and the family can’t afford the home or to fix the home. This tells me that there is likely no insurance money to fix the problem especially if the insurance company deemed it to be failure of the owner to maintain the property. BTW – did most of you know that this is a common disclaimer in most insurance policies? If an insurer can point to an owner’s failure to maintain (ie. ignoring a leak) they can deny coverage. Also, as I’m learning, this particular state has had a rash of insurance companies choosing to deny the option of mold coverage in their policies at all… period because of prior mold problems that required huge insurance payouts.

Now, the price point initially sounds good but my personal concerns surround the mold issue, the fact that it has not been specifically identified in the mold specialist/inspection results, and the amount of work that actually needs to be done to get this house back in to the condition that this neighborhood typically expects. We are getting conflicting reports about the source of the mold and no one has sent my friend photos of the subject property to review. Also, there is the stigma associated with trying to sell a house that has HAD mold – and note I say “HAD” mold because frequently the average consumer can’t get past… well, the past. Agents are required to disclose known material defects, and so are homeowners (at least in WA State), so you’d have to tell a prospective buyer about the issue, even if it was fixed.

The BIL is a contractor and thinks he can replace the floors for about $20k and the only other item he thinks he needs to fix is a broken bathtub. Again, hmmmmmm……. Somehow I don’t think that this will be all that needs to be done.

His (BIL) expectation is that someone else will come in with the money to buy the property and he’ll do the labor and then they’ll split profits. I’m telling my friend/client that there is a lot more that needs to be sorted out and specified in a contract between the parties of the financial investor and the contractor (BIL). Thankfully, she agrees. On top of this issue there are questions of whether or not the house can be purchased with financing (likely not), what type of financing (preferably a renovation loan) is available, can it get insured, will it require oversight (it seems so based on the mold report) and by which entities (city, inspector, insurance, bank? most likely all of the above) and what it will cost to have re-testing done (what if it doesn’t pass?).

After even more phone calls today to the agent I have now learned that the listing agent is actually his secretary who has just gotten her license 2 months ago and that this is her first deal – ever. On top of this news, I also ferret out that the house is in foreclosure so we’re in a short sale position IF the $400k is even accepted. Wait, let’s recount the issues in a quick rundown….

1. mold problems that may or may not have had the water issue fixed.

2. foreclosure with short sale with proposed sale price at 80% of owed amount.

3. estate sale with unknown additional liens, taxes, etc. owed or owing. If the guy was truly a cocaine addict as desribed to us then there could be a lot more outstanding. Also unknown is who is actually selling the house: the widow, the attorney, the lender? Since it’s not yet foreclosed it’s likely the widow or attorney.

4. listing agent that works for the guy trying to be the buyer’s agent (MAJOR conflict of interest and not initially disclosed)

5. 1st time listing agent that has no other sales or negotiating experience working with a guy who has little, if no, experience in short sales.

6. unknown actual costs of repairs

7. no current photos available for review by prospective buyer (yet)

8. unknown lending environment for a distressed and damaged property

9. unknown insurance liability and potential to be an uninsurable property

I know what I think about this deal (a potential disaster) but I’d be curious to hear from others. What are your opinions? Would you go for it, and why? If you wouldn’t touch it, I’d love to hear your comments too.

Light Fixers – Before and After

As a follow up to Ardell’s post about finding those homes where the owners just didn’t take the time, or have the money/energy to bring the home to retail condition, I’d like to share a few before and after photos. These two sets of photo are from light fixers my wife and I rehabbed last year (our first two, actually). We put about $15K total into each property, and each sold within a week of listing.


This first set of photos shows the before and after condition of the kitchen in a small rambler up in northeast Marysville. We used the existing cabinets, adding new pulls and hinges for a simple update. New paint, vinyl flooring, appliances and fixtures rounded out the upgrade.

This second set of photos shows how a little paint (and some nice staging) can go a long ways. This home is in Shoreline.



If we had chosen to do the work ourselves, we could have cut down total rehab costs to close to $10K. Now, on the other hand, as a preview for a future post on major rehabs, here’s a final before and after (total costs for this job in the $120K range). This one is on the market right now, but in the spirit of neutrality, I’m going to hold off on discussing this in detail until after it’s sold.



What makes a house a “tear down”

[photopress:tear_down.jpg,thumb,alignright] Here in Kirkland, a lot of people complain that the builders are tearing down homes and putting up “McMansions” in their place.

I can walk up and down the streets of Kirkland and “label” each and every house I pass. “Remodel project”, “tear down”, “fixer”, “builder’s dream come true”, will sell “as is”, etc… The number one reason a house becomes a tear down is due to years and years of deferred maintenance. Often these homes are owned by people who inherited them or who purchased them many, many years ago when they were dirt cheap. The increase in taxes over the years suck up any money the owners might have had to make improvements. They have just enough money to get by and the moss overtakes the roof, the wood rot overtakes the fascia boards and siding, the trees get bigger and bigger and crack the foundation, birds make nests in the rotted fascia boards. It’s like a used car that finds its way to the scrap heap, once the cost to repair exceeds the book value.

“Book Value” of a house equals the value of the lot. The value of the lot is based on it’s “highest and best use” and based on its “potential”. If the lot would have a view IF it were a two story house, than the highest and best use of that lot is to put a two story house on it. If that gives the lot a value of $650,000, then that is the value of the dirt. People have a tendency to value a property by what is on the lot and say, “Oh I wouldn’t pay more than $350,0000″ for that house!”. If the lot is worth $650,000, then the house can’t sell for $350,000, no matter how awful it is.

Take the house in the photo above. Would you spend $650,000 to LIVE IN IT? If you would pay $125,000 to live in it, and a builder will pay $650,000 to tear it down…well then I guess everyone has to agree that it is a “tear down”. But they don’t all agree that it is a tear down. People never all agree on anything, do they?

They don’t agree because they like having a little tiny house next to them that doesn’t block their view. They don’t agree because they don’t want the noise of the builders putting up a new home next door from morning until night, day after day, so they can never take a nap in the afternoon again until the new home is finished.

They might all agree that it should be torn down, but they want it to become a new park or playground…as long as no one every comes to play in it and make noise 🙂 They never ALL agree that it should be torn down and become a “McMansion”, especially if they live in the cute little bungalow next door.