Many real estate investors are interested in abandoned homes, as a low-cost way to acquire potentially valuable real estate. Classic investment strategies for these properties include buying abandoned and neglected homes, repairing and remodeling, and then reselling or renting the property. While many investors anticipate the cost of repairs, they often under-estimate the cost for the removal of trash and other items from from the property.
The cost to remove trash from an abandoned property is one reason why some seasoned investors might choose not to buy a property. Less-experienced investors can neglect to include trash removal as an additional expense in their estimates for an otherwise profitable transaction, and end up with less profit, or underwater on the deal.
Screening a property for trash, personal belonging, or hazardous materials is a good step in the property evaluation process. If a property has a lot of items that need to be removed before the repairs can begin, that can be okay, but may require a lower bid (or price concessions from the seller at closing) to accommodate that expense and keep the deal profitable.
Let’s take the BRRRR investment strategy. For investors that pursue a BRRRR strategy, the plan is to “buy” (B), “repair/reform” the property (R), “rent” the property (R), “refinance” (R) the property based on the new value, and take the cash from the refinance and “repeat” (R) the process again on the next property. Because BRRRR investors are looking for forced-appreciation opportunities, they focus on distressed properties, many of which can be in that abandoned category.
These BRRRR investors are looking to maximize the lift from their initial capital expenditure, to that extra cash that is available after the property is generating revenue, has been reassessed at a higher value, and then refinanced, pulling cash out at closing that can be used for the next investment. In that middle stage of “repair” or reform, these investors budget for repair costs. Experienced investors may budget for demolition cost as a part of the rehab of the property, and the trash removal from the rehab, as a line item in their business plan for the property. There is time and expense in collecting the debris from the demolition, loading it onto trucks, shipping it off to the disposal site, and paying fees for that disposal.
Now imagine if the property not only needs some demolition, but is also full of the belonging of the previous owner that have to be removed before the demo and repairs can begin? Has the investor budgeted for those costs? Can you make a deal work if an excess of trash is a part of the condition of the property? What if the materials that need to be removed are hazardous or dangerous, like old paint, oil, or other chemicals?
When an abandoned property is full of the belongings of the previous owner, before demo work can begin, all of those items have to be similarly collected, loaded onto trucks, shipped to the trash dump, and the disposal fees have to be paid. That process can be very manual, with a team of workers required to gather those items. Even with a two or three man team, loading a life’s worth of furniture and other belongings into a truck can add one or two days to the schedule, and hundreds or thousands of dollars in costs.
While repair and demolition are easier to imagine, the inclusion of trash and personal belongings can come as a surprise.
For these distressed properties, there is typically very little effort that goes into the marketing of the listing. If there are pictures at all, they are typically of the exterior. When an abandoned property is for sale, if it is full of trash and personal items, the seller or their agent will not want to show evidence of those items; the inclusion of trash and personal belonging don’t help the perception of value. Owner and agents may do their best to avoiding helping investors to see those hidden costs.
To make matters worse, once a property appears to be abandoned, other residents in the community may begin to use that property to dispose of their own trash, making these abandoned properties unofficial collection sites for trash (including hazardous materials like motor oil) in the surrounding neighborhood. You may not only end up “buying the former owner’s trash,” but all of the add-on trash that has accumulated from others over the years the property has been neglected.
Preexisting trash from the previous owner is a problem worth considering.
However, many investors know that “buying other peoples problems” is why many successful BRRRR investments can be so profitable.
“Repositioning is when you buy a property with a problem, fix that problem, and resell the property for a big profit.”
— David Lindahl, from Multi-Family Millions
Some investors are (or become) particularly well-suited for these kind of properties, as they develop expertise or capacity with the trash problem in particular. Do-it-yourselfers can sometimes just suck up the extra time and labor costs themselves (even if the disposal costs remain a factor). Some insiders like construction companies have the trucks, the labor, and the relationship with landfills and other disposal sites that allow them to minimize the impact of a cluttered property, or to be the only buyer when the state of the site intimidates other investors.
For investors that want to bid on property where the accumulation of trash may be an issue – and it often is with abandoned property – they can work with their agent to include a clause in their offer that allows for concessions based on the existence of “the owner’s possessions” in the structure, or allow you as the buyer to back out of the offer if the work involved adds too much cost, of if the materials involved – like hazardous materials – make the deal undesirable.