Access Before Closing
I heard of one strategy where an investor would go under contract, closing in two months. The contract would have a clause something to the effect of, "buyer shall have access to property before closing for repairs". In month one the investor does some work, bringing up the value for appraisal. Once the higher appraisal comes in, less, or no money down is needed for the deal. Can this fly? I would think the seller would be worried about workers gettting hurt on the job.
I would think the buyer would be worried about rehabbing another persons property for free.
Being under contract and owning a property are not the same.
Lots of problems but some folks do what you are suggesting (more or less).
1. The lender will likely only lend on the purchase price or the value, what ever is lower. Hence the improved value makes not difference. The exception would be a HML deal but I am guessing you are not talking about HML.
2. The buyer has the risk the deal will not settle and therefore the improvements will be lost. You are working on someone else's property and if the buyer does not get title they can not come back and take back the materials and labor.
3. There are risks to the seller if they deal does not complete that they have changes that might not have been done correctly and to code.
4. There are the liability issues as noted.
John
[addsig]
If I were the seller, I would be concerned about repairs being done and subcontractors not being paid, making my property liable for a mechanics lien to pay for work requested by someone else on my property.
Hey,
I have put houses under contract and started "working" on them the next day. But the work done was general garbage clean up, and some very, very minor demo.
I think the basic plan of having the house increase in value, so that it becomes a "no money down", is flawed. As has already been pointed out, the bank will loan based on purchase price. Second, the work need to increase the value of the house is going to cost money . Third, if you significantly increased the value of the house, you run the risk that the seller will find a way to NOT sell the house to you.
Other then possibly doing work for free as Rehab state, there are also liability / insurance issues that need to be addressed.
It is common knowledge that many rehabbers use workers that do not have W/C or General Liability Coverage......and even if they do then unless you are under contract to fix the property in question.....what happens if something goes wrong........who is liable.......ultimatley the property owner is.
From a seller standpoint I would never allow one to come onto my property and start making changes without such issues being addressed.
You may want to work out a separate contract that allows you to fix the property up whiie the loan is going through with the understanding that if it falls through then there would be an agreed compensation on your part for improving said property.
NC
Good point Yank from the other side of the coin.
Nib - who is the latest guru of the moment coming up with this get rich quick strategy?
Hey Nib,
I have fixed up "alot" of homes the day after they were put under contract. I mean full blown rehabs. The trick was to always leave the boards on the windows. From the closing table we would call over to the fix up crew and give them the green light to take the boards off for good and clean the front yard. Within a few hours after the closing, the boards would be off, the house would be completely done, and we would move in a section 8 tenant that day.
DOWNSIDE
- Yes there was always the risk of the deal falling through. IT NEVER HAPPENED.
- Of basically being caught on the property. ALL THE BANKS WERE OUT OF STATE. If anyone ever did a drive by, you couldnt tell any work had been done anyway.
POSITIVES
- You got a free month to a month and a half of rent before your first mortgage payment.
- Your ready for your next deal instantly.
Thanks for all the replies. When I heard the strategy quickily rattled off it did sound like alot more could be involved. -- The guru was a guest in a taped conversation with Robert Kiyosaki.
my first property I purchased this year I requested possession immediately upon signing of the contract. the seller agreed. I had to sign a hold harmless agreement. My lawyer wsn't happy with me. What can go wrong did go wrong. I was told the guy owned the property free and clear. In reality, he owed his parents a mortgage and he also owed the IRS more than I was paying for the house. It took my lawyer 3 months to get me to the settlement table. By the time the liens were found (soooomebooody was slow with the title search) I had the plumber redo almost all the plumbing in the house, I had it painted and carpeted, my son had spent countless hours doing general clean up/dump runs. I had put myself in the position of not being able to walk when the liens were found. I didn't want to walk, I wanted this property for several reasons and having to wait didn't change anything, but, that option was taken away from me due to my investment in the property.
Lessons learned - I did my own title searches on the other propeties I bought before making an offer (and then had the lawyer do it again).
Don't be so anxious to get the work done so you can get a tenant in quicker. In the long run, it's probably better to go a month or two without a tenant than to be tied into a potentially dead deal.
One problem I didn't run into that I might have was by cleaning up the property and the little bit of work I did, the appraiser appraised the house at 20% more than I was paying. Don't know what would have happened if the seller would have changed his mind. But, I do know I would have fought an uphill battle to the end for fraud for him allowing me to spend my money, knowing he had all these liens on the property.
In my case, all worked out in the end but I did learn a lot. and now I' ve got a property that's the last residential property on a very busy street in a commercial district. A basically vacant shopping center across the street and a property I can easily convert to commercial when I want to either rent it commercially or should I expand enough (maybe some day) and want my own office. the property also can easily be converted to office/apartment and I've got a rather large garage also.