AgentInvesting

Why I don’t fear ‘foundation problem’ houses

One man's issues are another man's opportunities
  • Pier-and-beam foundation problems often are minor repairs.
  • Most investors run from foundation problems. I run to them.
  • A wholesale construction crew can fix most for $3,000-$5,000.

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Nothing scares most home owners and real estate investors more than a house with a foundation problem. That’s understandable; a serious foundation problem can ruin a house — and your investment — if it’s not repaired in time. Foundation issues are particularly common in older distressed properties, including the ones I buy in San Antonio, Texas.

However, I learned years ago to not fear houses with foundation problems in my area. I won’t tell you to never worry about foundation problems in your potential investment properties, of course.

Still, you shouldn’t automatically nix a real estate deal because of a reported foundation problem. They can be some of the best investment opportunities around.

Lessons my mentor taught me

I have had the good fortune to have several highly successful real estate investing mentors over the years. When I first started in 2001, I, too, was afraid of purchasing a house with any kind of foundation issue. But most distressed properties under market value in south Texas have foundation issues.

Try to find a distressed old house with a pristine foundation. They are rare, and the competition to buy them soon drives the price over market value. Finding houses was tough.

One of my Atlanta real estate mentors taught me that simply the term “foundation problem” instantly sends three-quarters of potential investors running for cover. Reduced competition for a deal means you can save thousands, some of which you can spend on foundation repairs.

So when I inspect an under-market-value investment property in San Antonio, I not only don’t worry about a foundation issue, but I actively seek them out. Here are the main reasons why:

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1. Uneven floors are normal in old houses.

My owner-financed end buyers are used to living in houses with non-perfect foundations, so a sloping floor isn’t usually a deal-breaker.

However, investors notice the uneven floors in a house right away, and they usually assume the worst. My experience with distressed houses in my market is that almost all of them — built from 1910 to 1960 — have uneven floors on a pier-and-beam foundation.

This can be for several reasons, such as rotting floor joists, ground settling or simply poor construction.

When I conduct the house inspection, I do my best to get under the house and see how serious the problems look. For most of these investment properties, it’s simply a matter of replacing a few floor joists and leveling the foundation.

It is rare that I have a pier-and-beam foundation that needs more than $5,000 in repair. Usually, it’s less than $3,000. I just make sure to negotiate the sale price with that in mind. Often, I can get the house at a discount because most other investors ran for the hills.

2. Wholesale construction saves thousands

If you have a typical foundation company fix your foundation issue, the bill will always be much higher. To survive in distressed house investing, you have to find less expensive ways to fix foundations.

I run a small, full-time construction company. My team can fix a foundation problem in most cases for a reasonable price, and this includes all permits and required engineering reports.

Typical investors pay retail prices for their foundation work, which makes it difficult to turn a profit.

3. Bad foundation houses can turn a profit

I have bought and sold several hundred houses with foundation issues in the past 15 years. This one was a typical example:

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It is located 3 miles west of downtown San Antonio in zip code 78207 with a pier-and-beam foundation.

When I bought it for $25,000, the left part of the house was sitting on the ground, especially the left front corner. That’s probably why it had sat on the market for five months.

I bought it, and my crew repaired the foundation by inserting new floor joists and leveling it for $3,000.

I then sold this under market value property to another investor for a $5,000 profit. She did $5,000 more in repairs and clean up.

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The repaired house was sold with owner financing: $5,000 down, $550 per month, for $49,900 (fair market value). I earned a commission on that transaction of $1,500. On a “foundation problem” house that no one wanted, I made $6,500.

In my experience, an investment property with a foundation problem is actually an opportunity. Look at it this way, and you can uncover some amazingly profitable distressed property deals.

John Majalca financially retired in real estate investing in 2006 with more than $35,000 per month in cash flow; he also is a licensed agent. Visit his website, and follow him on LinkedIn.

Email John Majalca.