Real Estate is not for faint-hearted.
Just as you think you figured out what laws and regulations you have to follow, they change. Just as you think your investment property is in a tip-top shape, something needs repair. And just as you think you got a perfect tenant, you discover that their application paperwork was forged. Happy Halloween! Yes, there is a light at the end of these tunnels – read on… (These are real stories, but for privacy of all involved, the names have been changed).
Story 1: Color Me… Fine – EPA style
John and Eva were thrilled: they just purchased their eleventh investment property, completing the minimum requirement for the “10+1” investor retirement mantra – own ten rental properties to support you and one to cover maintenance and property tax expenses on them. It was an old colonial house, with a lot of character and in a nice neighborhood, and, unlike so many properties that were offered for sale “as is”, this one was not all beat up. You could term the damage “cosmetic” – a bit of clean-up and paint, and it would be the neighborhood eye-candy. Renting it out should be a breeze.
The couple set out to clean everything up and began painting as the neighbors passed by and complimented them on the color choices… Then the nightmare arrived. As John and Eva pulled up to their new house one morning, there was a notice from code inspector pinned to their front door: they were found in violation of EPA rule for remodeling properties containing led-paint. The fine they faced was $20,000. John and Eva were stunned. Sure, the house was built before 1978, but in the throes of negotiations, purchase paperwork, and calculating repair costs, they never even thought to check whether or not the house indeed had led paint in it, or to have an inspector come out to test.
Per EPA, if a property contains led paint, the only repairs that are exempt from the Lead Renovation, Repair and Painting (RRP) Rule are “Minor repair and maintenance activities that disturb 6 square feet or less of paint per room inside, or 20 square feet or less on the exterior of a home or building” (https://www.epa.gov/lead). Having scraped, sanded, and brushed the entire exterior of their house, John and Eva were way over the allowed limit and in violation of the EPA rule.
After the initial shock has passed and the fear-induced thought “Let’s just sell it off and get rid of it!” was put to rest, the couple made a plan to get out of the disaster. The investment property was still a good deal, even with the fine and higher repair costs figured into it – John and Eva paid $75,000 less than the market price of the house will be after the repairs are applied. They pulled the money from other income properties to pay the fine and found local led-certified contractors to finish the work. While they ended up “collecting” $30,000 less in equity than was originally projected, as a result of led-related repair costs and fines, they managed not to lose their heads and have a “fire sale” to dump the property. Four months after the scare, the couple happily rented out their new property (with all the proper led disclosures furnished to the tenants) and finally celebrated their achievement of the “10+1” goal.
Here are some of their thoughts to pass on to any investors looking for a fixer upper:
- An old house can still be a good deal, BUT do your research and make sure you know what the repairs will cost you: EPA approved led-certified contractors have to charge more because of all the special handling they have to do (avoid air and soil pollution by using special techniques to protect the area, double-bagging all waste, and having to manually scrape rather than sand with tools some or most of the areas – more time and effort spent = more money out);
- If you are not ready for extra cost or just do not want to deal with led paint issues and possible fines, stick to looking for newer properties: anything built after 1978 is exempt from the rule because by that year California ceased to use led paint in construction;
- Do your numbers BEFORE the purchase, so you know how much “wiggle room” you have – what will be the value of the house once it is brought up to its intended condition after repairs? What is your purchase price, along with closing costs, repairs, and any necessary permits you will have to pull to improve it? Hiring a real estate professional and a licensed contractor to help you with the process is a good idea, because you want to base your decisions on the real market data and not hearsay or someone’s well-meaning opinion that may not be based on facts.
Have a deal in mind that you want to discuss? Give me a call for a free investment consultation!
Marina Alkasas | Realtor® | Cal DRE License # 02070557 | Century 21 CARE
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