In the realm of real estate investing, fire damaged properties are often over-looked as investment opportunities. The average investor looks at ugly houses but is comfortable with the amount of repairs needed to rehab and resell the property. Burned houses and multi-family properties represent huge profit potential if investors have or can focus on buyers who are already doing this type of property.
There are three very important aspects of doing smoke or fire damaged homes:
1. The After Repaired Value (ARV) of the property if it is fully rehabbed. This is very important for rehabbing and getting as close to full market value as possible, whether for yourself or a buyer you find.
2. The cost of repairs which while critical, is not all that important unless the property has to be torn down. If a contractor doesn’t do smoke damage repairs on a regular basis, you will likely get estimates twice or three times as high as from someone who does these repairs on a regular basis. We have seen estimates of $100,000 for a rehab that actually cost $22,000!
3. What exit strategy you will use to sell the property. Your exit strategies are limited to repair or not to repair. If you just want to make quick cash then wholesale the property and never touch it. All you need do is take pictures and send them to your email list. In this case the fewer the better because the more pictures you post the fewer people will come. Professional rehabbers will be interested, all others will run scared.
If you are going to do the repairs yourself, your options are to retail the property to an end-buyer who gets conventional financing. This end-buyer could live in the property or he may have bought it as a rental unit, either way, your profit margin could be substantial if you control your costs and do the rehab professionally. A conventional lender will need the permits that should be pulled for the work and a copy of the Certificate of Occupancy (CO) required by most counties to be able to live in the property again.
Therefore, the investment value of a fire damaged property depends on the extent of the repairs and the rehabber who does the re-construction. For the average investor, it is suggested that they find these properties by watching the nightly news, the newspaper, checking with county fire stations, and driving for dollars in their farm areas.
Next, get these properties under contract and wholesale them to other investors who can take on the challenges. Build your buyers list with contractors and investors who have done these types of rehabs previously. It is often simple to double the price you paid for the property if you remember to only pay for the property’s land value, or even less if possible. If the structure on the property must be demolished, reduce your offer to ½ or less of the land value.