On the other hand, the old rusty access hatch to the outside
needed to be replaced. However, so far, so good. A few more notes were
scribbled on my notebook, and we were
on our way to the second level.
Sure enough, there was fire damage in the front bedroom corner. A fireman's axe had revealed a six-by-six-foot space on all planes. Two of the joists supporting the third level had been nearly wholly burnt. The header on both sides of the corner had been badly burned. Yet had enough structural integrity to remain solid. Of course, it would need to be replaced, but our contractor could manage that.
The jewel was on the next level. It had excellent air conditioning, for want of a better word. The third story and roof were severely damaged. In summary, between the fire and the experienced firefighters, who clearly understood how to preserve this property from total devastation, the roof required extensive repair; there seemed to be less roof than the airspace above us. So, a rapid mental calculation was performed. A $60k replacement cost was most likely included right there. The roof was not flat. It was a Victorian roof with several peaks. This repair killed the cash flow for a $145k real estate investment; a home that requires $60-80k of work after spending $145k is unsuitable if the after-repair value is just $210k. Our investor buddy was in hot water.
Have you reached an agreement with the insurance company?
When we reconvened outdoors, we spoke and asked important questions. What caused the fire to start? Have you gotten quotes for the repairs from a contractor yet? How much do you anticipate the repair will cost? Have you reached an agreement with the insurance company? Simple, courteous conversational inquiries were posed. She eagerly responded, and the narrative unfolded.
The fire had occurred roughly 60 days before our visit. These real estate investors spent $150k for the property two months before the fire and put another $25k into restoration and rebuilding within the first few weeks of ownership. It made perfect sense. It was a done deal. As investors, they had done the right thing by discovering a diamond in the rough. We would have liked to have found this property before the fire.
They had hired a contractor to repair and repaint the porch as part of the overall remodeling endeavor. The contractor lacked insurance. The contractor was a firm believer in stripping paint with a flame. And, as it turned out, the flame preferred the area where the porch roof descended into the house, and the porch header touched the title that carried the second-story corner within the house. As a result, the contractor was unaware that the header within the home had caught fire. Everything else is history. The fire was extinguished because there were individuals on-site before the property was further damaged. The courageous firefighters did an excellent job.
Employ an insured contractor.
However, the insurance company sent its representatives, and talks followed. This young woman is suddenly confronted with the unknown. The insurance company is searching for accountability and money from the uninsured contractor. The property owners are attempting to handle the dispute on their own. She said that they do not trust adjusters. They claim they may only get $20,000 to $30,000 in compensation. In fact, many are anxious that this will take too long and will never be resolved. One thing she said stuck out and motivated me to tell you this tale. She "wished" she had employed an insured contractor since this would have been "all over" if she had. It would have been a simple dispute between two insurance firms.
I have never had a fire-damaged property, which I am grateful for. But here I was, face to face with a genuine investor in difficulty... preventable difficulty. Ultimately, this investor and her partner will have to take much less than what was invested. If the future purchasers are astute, they will request the assignment of the insurance settlement. This would be a good value for us at about $60,000. Our investor buddy was free to accept whatever settlement came his way. We had no illusions that there would be a good payout; therefore, negotiating the assignment of insurance payment was not even an option. We couldn't put our confidence in her optimism for a resolution.
She, predictably, refused our offer. She also rejected the contract for the deed we offered her, which provided her what we believed was a solid six-figure amount over two years while we finished it up and leased it out, as well as two other imaginative options we made. She was looking for $145k or close to that. That was it. There was still one unfinished business.
So, I'm telling you this real estate investing tale to reinforce my conviction that there are certain things you have to pay for. I am not an insurance professional. I wonder why this is being delayed or what they may anticipate. I am aware that this home was a winner before the fire. That conclusion was given by a lovely location, excellent bones, and a reasonable purchasing price. The positive cash flow generated by this property after debt payment and expenditures would have more than covered the one-time investment in a fully insured contractor's (presumably) higher rates.
