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Remodeling tradeoffs to flip foreclosures?

mathiasx | Posted in General Questions on

Hi all,

I see a lot of city-owned foreclosures for sale around 10-15k USD in my area of Wisconsin. It’s a fairly dense neighborhood with a lot of single family and duplexes from around 1900-1920. Those foreclosed houses sit unoccupied with green board over the windows until someone buys and remodels them. My thinking is this:

– Without worrying about getting to net-zero or solar-powered, they could be remodeled to be energy efficient
– I can made tradeoffs to choose durable materials and energy efficiency while keeping costs down.
– Buyers or renters aren’t going to prioritize energy efficiency, but if I bake it in to a remodeled house, I keep the neighborhood affordable (not gentrifying it) and I help lower-income families have more comfortable homes in our harsh winters. (When I was in college, a lot of my classmates shared stories of going through winters without heat due to bills, or without heat/hot water because of bad landlords — this is a story I’d like to reduce in my city.)

I’ve been talking it over with my wife, and I think we want to attempt one house like this at a time, in the next year or so. I’m not really doing it to earn a huge profit; and I have good working relationships with a local insulation contractor and HVAC contractors.

So the question becomes, if you had the above, and you were taking out a decent loan for remodeling on each property with intention to sell it around market value for a similar sized home (Let’s say I was aiming for selling in a neighborhood where duplexes are going for 220k and single families 160-250k), what materials would you choose? Given this is remodeling, what would you do to insulate?

here’s the rough tradeoffs I’ve made in my mind:

– Gut with as much with personal labor as I can accomplish myself. (Note: I work full time, so this won’t scale. But depending on how long my timeline is, this could help the cost.) A lot of these houses are a combination of plasterboard and drywall inside, so I’d want to take that all down to expose the wall cavities.
– Choose cellulose for attic and wall insulation.
– Go with basic house wrap on the outside, repair any wood that appears damaged. We’re not getting fancy here, and for most of these houses, it is probably that exterior rigid foam is overkill.
– One of the tradeoffs for rigid foam cost and building out walls would be instead to put in new windows. These won’t have the energy efficiency payoff, but since I’m not occupying, it comes down to: Are the windows open-able so they can let in a cool breeze? Do they look nice? Are they properly flashed? Old windows are great (my house has them still with storms) but there’d be a lot of labor cost in rebuilding old double-hungs.
– Go electric for kitchen appliances. Reduce the chance of fires and CO issues. People don’t like to cook on electric as much as gas, but I think getting some decent (but not high-end) Energy Star basic appliances is a good bet. Or don’t even bother with the kitchen appliances, depending on whether this is going to be a rental or not at the end.
– Vented gas furnace and gas water heater — yes, they’re still burning fuel. But these can be very efficient now, installer subcontractors are very familiar with them and running the vents, and gas cost is reasonable in Wisconsin compared to electric. The house envelope isn’t going to be super-insulated, but will be much better than before, so in a lot of cases, with a more efficient furnace, I’ll be able to downsize BTUs like I did on my own home. These houses will have old ducts, often falling apart, so they’ll get a full cleaning and mastic.
– Vent fans for bathrooms and ovens, but probably not an HRV/ERV. I don’t think we’ll be getting in to that level of air tightness with cellulose + house wrap. Broan makes very good stuff locally.
– Cheap but durable exterior finishes: vinyl siding and asphalt shingles. As much as I’d love to give everyone cement board siding and steel roof shingles, that’d probably be too expensive. The tradeoff here might be to make all trim and sills out of cement board / James Hardie board. These neighborhoods see a range of re-sided houses: everything from the original wood siding to vinyl and aluminum siding, to stucco and asbestos siding. I’d avoid the asbestos sided houses, but also I may choose houses that already have old/beat up vinyl siding in this scheme. The whole point is, a house with vinyl siding isn’t going to look out of place in these neighborhoods.

Some other thoughts about popular remodeling options I see here:
– No additions / etc. Maintain/rebuild existing porches to code. (Far more porches than decks in these dense neighborhoods.)
– Garages probably won’t get much love other than to match the house’s exterior finishes — most of them are detached on an alley.
– Depending on how old and inefficient the doors are, I’d probably go with cheap and efficient-enough Mastercraft steel doors, painted to match the house.
– Electrical, water and gas lines all brought up to code but nothing fancy and ideally, not ripping out everything if it can be avoided. If these houses are anything like mine, there might be galvanized water line that needs to be fully replaced by copper or PEX.
– These houses almost all have lead water pipes from the street to the water meter. My own house has this, and the cost to replace it is steep. So that’s one place I feel like I could be helping to create a healthier neighborhood but probably can’t, in the budget.

Anything I’m missing? How would you plan something like this?

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Replies

  1. mathiasx | | #1

    I also forgot to mention that, where feasible, I'd bring down any furnace chimneys to inside the building envelope (knock down until it is inside the attic, then put roofing over the hole. (I did this on my house, and it is a nice way to eliminate that big heat sink / condensation sink.) The furnace and water heaters won't need it anyways.

    Not sure on whether I'd knock down fireplace chimneys, though. I know real, working fireplaces add to a home's value, but I think that the age of fireplaces being feasible has passed. Something like a tiny sealed wood stove is definitely better from a health perspective -- fireplaces can leak too easily. And removing that big brick heatsink that runs from inner to outer wall would probably help with efficiency, too. I haven't priced out how much taking out a whole 2 story chimney from exterior is, though, in general. It seems like a bit too much work to tackle myself, as well.

  2. Andrew_C | | #2

    Contamination concerns -
    I'd be concerned that everything you touch (carpets, windows, walls, etc) will be loaded with lead. Lead abatement will have to be high on your list. If you try to redo the windows, lead will be an issue for sure. I suspect decent double panes will be a better option.
    You're looking at gut rehabs, removing all the walls, plumbing, electrical, cabinets, etc. That's a big ask. I like most of your choices if you decide to try one, but exterior insulation seems to be the one constant in recommendations here for durable energy efficient construction. If you're thinking of doing more in the future, I'd learn to be proficient at exterior insulation and the required flashing techniques.
    One good thing is that the houses you're describing are probably simple in shape and have decent overhangs, which is a large plus.

  3. irene3 | | #3

    Sounds like an awesome project, but the lead pipes worry me (replacing those is really the kind of thing that ought to be a public works project and not piecemeal). Could you put in a water filtration system?

  4. walta100 | | #4

    Please be very careful!
    Do not put more money into this project than you can afford to lose!

    I love you idea but fact is you will be selling you homes to people that are unlikely the value the same things you do. Your house will have to sell in the open market competing against homes remodeled with other goals.

    If you spend money on insulating the walls and attic that the buyers cannot see and does not care about your competition will install a custom kitchen.

    If you install electric range 25% of potential buyers will refuse to even visit your house.

    You spent extra for energy star appliances your competition spent that money on granite counter tops.

    You spent money in the basement with a fancy furnace and tight ductwork your competition spent that money on a tile shower in the master bath.

    When most buyers walk thru yours and the competitions home with the same price tag what home will they pick? The one with 10K hidden in the walls, attic and basement or the one with all the upgrades they will see and touch every day?

    Walta

  5. GBA Editor
    Martin Holladay | | #5

    Matt,
    One risk that no one has mentioned yet: In a neighborhood where it's possible to buy a house for $10,000 to $15,000, it can be very difficult to find a buyer willing to pay $160,000 to $250,000 for a house.

  6. user-6184358 | | #6

    How much does it cost to replace the lead water service?

  7. user-4053553 | | #7

    @Steve that is very good advice and an unfortunate truth.

    In my opinion this idea has a lot of risk attached, unless you have lots of experience and good luck and good tests you may end up with lead pipes, lead paint, asbestos, vermiculite, knob and tube wiring and other money sucking problems, but you can sometimes get a house cheap that may not cost a lot to bring up to specs. This takes experience, testing and more then some luck as a business model.
    While lots of experience can reduce the risks a fair amount you can't get the experience easily until you do it (chicken or the egg problem) but there is a lot of cash on the line here. You may also want to consider only modest insulation upgrades and air sealing (and an HRV). In many cases attic insulation is cost effective to install and empty stud bays can do with dense pack cellulose in most cases. Basements made of concrete can be insulated on the interior before finishing (though personally i am wary of any finished basement).

    I'm not sure if i can recommend this as an avenue you should pursue or not because its a trial by fire with lots of cash on the line

  8. user-2310254 | | #8

    Matt,

    Many older homes have asbestos. Be sure to factor that removal cost into your effort (and take steps to ensure you and are helpers are not put at risk).

    Also...

    I recently sold my Earthcraft Platinum certified house. During the sales process, it became abundantly clear that potential buyers were not particularly interested in the home's efficiency or "healthy" building characteristics. I noticed similar attitudes a few years previous when a local builder was trying to sell his "green" show house. He ended up having to reduce the asking price by $100,000 after more than two years on the market.

    To make your project work, I think you have to be very careful about how you spend your rehab budget. You might want to have a few conversations with organizations that focus on delivering affordable housing in your community. Tap into their experience and lessons-learned before you commit your own resources.

  9. Robert Opaluch | | #9

    Kudos for you for doing something prosocial, risking your own money no less. Hopefully you make a few bucks on this for your time and any future work you do.

    A few ideas…just suggestions to consider. If I were doing this (but I’m not):
    1. If the home’s siding needs replacement, and the interior finish on the walls is okay: Exterior insulation reduces thermal bridging, makes it easier to install more insulation, air-sealing, and allows you to avoid gutting the interior wall finish. Buying used polyiso, EPS or XPS is pretty cheap compared to new, as Dana and others have mentioned in various threads. (But you or contractors may not be comfortable trying a new construction technique.)
    2. If the home’s siding doesn’t need replacement: Rather than gut the existing interior of the walls, I’d look at a few existing stud bays, and depending upon what you find, maybe leave walls intact, or fill them with cellulose. Then, maybe use your labor time to construct an additional interior wall (to make it a double stud wall) or horizontal 2x3s or 2x4s (on the flat) to increase the depth of insulation and reduce bridging in the existing walls. The main cost increase (vs. gutting) would be more cellulose, a good investment IMHO. I’d certainly first talk with your cellulose installer, if you aren’t doing that work. You don’t have to do this to ALL the walls, habitable rooms that need to be kept warmer could get priority.
    3. Select a home that faces south and isn’t shaded by nearby buildings etc. The solar gain will provide some “free” solar heat gain in winter, and minimal solar gain in June and July. A home with the street to the south, or a deep lot without large trees, usually would work well, especially if it has more or larger windows on that south side. If replacing windows, consider enlarging windows facing south.
    4. Double-hung windows are popular in the US, but leakier than casement, awning and fixed. I’d consider some of these alternatives for some windows, especially for your cold climate.
    5. You might consider a cheaper HRV or ERV, or consider just providing fresh air to some of the spaces that are easy to do. Lunos e2 pair is relatively easy to install and not pricey ($1,000+). Especially important if you have gas appliances or heating, or a wood stove. People won’t ventilate if they want to minimize their heating bill and don’t know any better.
    6. Compute your expected heat load before making final decisions on renovations!
    7. Installing fiberglass batts or cellulose in garage walls and adding drywall, is pretty cheap…and improves comfort whether your car is parked inside or it’s used as a workshop.

    As others stated…check into the history and carefully inspect any building you buy for renovation. Don’t want a history of illegal drug manufacturing that has poisoned the interior materials, early 1900’s knob and tube wiring that requires replacement, asbestos, etc.

    Also, if interest rates spike or you have trouble getting your desired sales price, would you consider making it a rental, or even living there yourself?

    I appreciate that care that you are offering less fortunate strangers that will benefit from your work. Best of luck, whatever you decide to do!

  10. Expert Member
    Dana Dorsett | | #10

    Putting ANY money into this type of project/neighborhood is very risky- see if there isn't some way to lower that risk for yourself.

    If there are state & local subsidies for any of the weatherization work, that would be worth pursuing first. Sometime cities & towns are willing to put up zero interest financing or other perks to save neighborhoods and bring properties back onto the tax rolls too.

    Getting groups of like-minded investors/speculators willing to rehab a whole block or a whole neighborhood can lower the risk to the individual investor too. Making a really great house in a really crummy neighborhood doesn't usually break even, but making fiver really great houses in close proximity upgrades the whole neighborhood, lowering the risk.

    All else being equal, energy use reduction measures bang for buck, in descending order is usually roughly:

    1: blower door & IR directed air sealing.

    2: attic & wall cavity insulation

    3: Tight low-E storm windows (assuming the pre-existing windows are still in reasonable shape, and don't need to be replaced.)

    4: higher efficiency mechanical systems

    5: basement / foundation insulation

    There are many houses where the positions might change, and many subsidy options that will swizzle them as well.

  11. JC72 | | #11

    $15k homes are begging to be demolished, wiped off the face of the earth as if they never existed. Knock down two next to eachother and build a 2-4 unit condo project.

  12. Expert Member
    Dana Dorsett | | #12

    John Clark: That works in some neighborhoods, not in others. Multi-home dwellings may need a zoning variance, but can also be tough to re-sell in a neighborhood dotted with multiple $15K semi-wrecks.

    There are no simple one-size-fits-all answers in the residential real estate redevelopment biz.

  13. JC72 | | #13

    @Dana

    Oh of course, but someone has to start somewhere.

    OP has to decide if he wants to put lipstick on the pig or make BBQ.

  14. irene3 | | #14

    From "Those foreclosed houses sit unoccupied with green board over the windows until someone buys and remodels them," I assumed that Matt had already seen some of these houses actually be remodeled and get sold (rather than knocked down and replaced). Is that in fact the case, Matt? Because if people are already doing this kind of thing with some success, and you're just doing it a bit differently, that's a different risk level, seems to me.

  15. mathiasx | | #15

    Yes, I see them get remodeled by others. A lot of the existing homes that are already occupied (particularly the duplexes) are also getting a lot of attention for cathedral ceilings in the upper units (which could be a real mess but that isntheirnissue), new AC and furnaces, new siding and roofs, and so on. The prices come from the what I’ve seen with all the occupied-and-fixed-up houses going for, around me. You should understand that when the city ends up owning a house and listing it for $10k, it probably has serious problems — I’ve already dealt with the asbestos on my own house in this area, and I added a lot of things I listed and Dana listed. I’ll try to avoid any with asbestos, knob and tube or particularly bad foundations. Those aren’t worth my time.

    And to Martin’s point: they arent all 10k wrecks. There’s plenty of bank foreclosures that are less than $100k too, in various states of disrepair. I was focusing on the most hopeless cases, that also leave the largest remodeling budget (but may, as indicated elsewhere, have other serious problems.)

    It’s hard to articulate, but I both don’t want to raise cost of housing. I want to see these houses occupied and families able to afford them, rather than empty shells. I’m doing it less for profit and more for my community. And I fully understand energy efficient is not a selling point — but I do feel like I can make trade offs to choose healthy, sustainable and durable (in weather etc) over interior finishes, which seems to be a big cost sink. (I’ve also been told by someone down the street the that houses with *un*remodeled kitchens are in more demand than with recently-remodeled kitchens. I guess people would rather get it done the way they like. Something for me to think about.)

  16. user-2310254 | | #16

    Matt:

    Have you considered volunteering with a local affordable housing organization. I think you could learn a lot about the rehab process without putting your finances at risk.

  17. user-6623302 | | #17

    Watch the 2017 This Old House shows about Detroit rehabs.

  18. GBA Editor
    Martin Holladay | | #18

    Matt,
    For three years, I worked as a project manager for a nonprofit developer of housing for low-income families. We rehabbed older multi-family houses in northern Vermont.

    Doing a good job from an energy perspective was expensive. Our group invested more money in these units (using community development block grants, low-income tax credits, etc.) than could be justified had we been trying to sell these units to low-income families.

    Good work costs a lot of money. Your competitors will be slapping lipstick on a pig for a fast profit.

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