Digging for Gold – Investing in Condemned Properties

September 28, 2012

in Investment Property | Tagged , , , , , , , ,

Fotolia 342878 XS 300x255 Digging for Gold – Investing in Condemned PropertiesTo some people, broken windows, dilapidated roofs or collapsing porches mean trouble. People like Kenny Rushing, a Tampa, Florida-based real estate investor, see dollar signs.

“More than 60 percent of the houses I have bought in Tampa were condemned properties,” says Rushing. “I have yet to lose money on those.”

How Properties get Condemned

Local authorities condemn buildings for a variety of reasons. In some cases, the government wants to build something in its place and will condemn the property as part of an eminent domain proceeding. Or, it could be a construction, maintenance, or pest issue that makes the structure unusable for its original purpose. In some cases, the repair or maintenance needed is relatively straightforward, but the owner does not always have the resources or know-how to make the repairs or renovations.

In these cases, the owner is almost always a motivated seller. Selling the property may help the owner get at least something for the asset, as opposed to having to let the property sit fallow for months or years. Owners of such homes are frequently willing to sell at substantial discounts. That could mean opportunity for you, the investor.

Finding Condemned Properties

There are a couple of ways to find condemned properties. You can drive around neighborhoods, though it can be hard to tell if a property is condemned just by driving by. For example, some buildings are condemned for nothing more than a non-functioning fire alarm or sprinkler system. If the owner can’t make a repair, the structure could look fine from the outside.

You could also enlist your local intelligence network within your favorite neighborhoods. These are neighbors, real estate agents, contractors and other people who can tip you off about a possible purchase opportunity. This is a great way to go, because it gives you an advantage over other bidders for that particular property.

Finally, you could check your local government’s list of condemned properties, generally available through its website or by visiting City Hall. In some areas this is less advantageous because the same information is available to all real estate investors at the same time; you may have more bidders on any given property by relying entirely on public records. Nevertheless, opportunities still exist with any of these techniques.

Identify Liens, Encumbrances and Other Issues

Don’t go into a deal blind, warns Rushing. Before you sign off on a deal, contact your local government’s Department of Condemnation. Rushing asks several questions:

  • What, precisely, are the violations that caused the property to be condemned?
  • Are there liens on the property?
  • Will the government agree to a settlement?

This last factor alone can be tremendous: One of Rushing’s deals had a $20,000 lien attached to the title. But when Rushing showed he had the resources to make the needed repairs, the government agreed to waive all but $500 of the encumbrance. All Rushing had to do was show a bank statement as proof of funds, proof that he was authorized to take over the property and the seller agreed to sell the property to him, and a personal letter demonstrating that Rushing knew what the code issues were and had a plan to bring the property back up to snuff.

Financing Condemned Property

Unless you have a track record, or plan on living in the home, finding financing for condemned properties in need of extensive repairs can be a little tough. You may have to settle for a lower loan-to-value ratio. If you have a track record of success, however, and if you can show the lender that after buying the property, you still have the necessary resources to restore the property, you will have better luck.

Meth Labs – Special Considerations

Chrystal methamphetamine is bad news in a lot of different ways. From the point of view of a real estate investor, you need to be extremely careful when investing in these condemned properties. Remember that even after you get the place cleaned up, you must still disclose to prospective buyers that the property was, in fact, used as a meth lab.

Because of the extreme toxicity and persistence in some of the chemicals frequently used in methamphetamine production, the city will generally condemn any property used as a lab pending an extensive clean-up. Depending on the environment, this can be an extensive and pricey HAZMAT project: All absorbent materials will have to be replaced. Not just carpets and furnishings, but also things like drywall, topsoil, ventilation, plumbing and septic systems. You may need to use a qualified HAZMAT contractor. Costs can potentially reach six figures and higher for extensive cleanups. You would need to have a very deep discount indeed to make this a profitable endeavor. For more information on cleaning up a former meth lab, see this publication by the State of Oklahoma.

Who Should Consider Investing in Condemned Properties?

This isn’t for rookies. However, if you have solid experience in the ins and outs of real estate investing, along with skills at estimating repair costs, adequate reserves, and the ability to go without a renter for as long as it takes to make the repairs, buying a condemned property could be a tremendous opportunity.

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