Budgeting repairs on a house you're never allowed to walk through

Question

This is the question I would have kept to myself in a room full of people, so here it is.

Everything I read about auctions says you buy as-is, sight unseen, no inspection. Fine. But then the same articles say underwrite accurately or you'll lose money. How do you do both? You can't underwrite a roof and a furnace from the sidewalk.

Someone at a meetup told me to just use $10 a square foot for a cosmetic rehab and double it if the house looks rough. That felt like a made-up number the second I heard it, but I don't have a better one. The listing on the county site has one exterior photo that looks like it was taken from a moving car.

So what does a real drive-by underwrite actually look like, and how much padding is normal?

Rena Guide · Accepted Answer

You solve it by pricing the ignorance instead of pretending to see through walls.

A drive-by underwrite gets you a handful of real facts. Roof age and shape, whether the gutters have plants growing in them, window condition, whether the siding is bulging anywhere, how the lot drains toward the foundation, and whether the meters have been pulled. Boarded windows and a padlock mean the servicer secured it. A pulled electric meter often means it's been off for a long stretch, which raises the odds on plumbing and appliances. Neighbors will tell you things the file never will, including whether there was a fire or a long-running leak.

What you cannot see is the entire mechanical picture, the sewer lateral, and anything behind drywall. So you don't budget those, you reserve for them. A common approach is to build the repair number from the visible items, then add a contingency of 20 to 30 percent for a house you've walked, and considerably more for one you've only seen from the curb. The $10 a square foot figure is a light cosmetic refresh in a cheap labor market. It won't carry a system replacement.

The part that changes the whole question: this is exactly what you're paying for when you buy REO instead of bidding at auction. Bank-owned sales usually let you inspect, and you'll typically pay a higher price for that access. If unknown repair risk is what keeps you up, the auction discount may not be worth what it costs you in blind spots. That tradeoff is a legitimate reason to pick one entry point over another rather than a sign you aren't ready.

kevin_lombard · Answer

I keep coming back to this one. What does winterized actually mean in practice? I gather the water is shut off, but is the pink stuff in the toilets a good sign or a bad one?

dmitri_v6 · Answer

The document side is the piece I'd worry about before the roof. A trustee's deed or sheriff's deed conveys whatever interest the foreclosing lender's position carried and generally comes with no warranty of title at all, which is not the same instrument as the warranty deed you get in a retail purchase. Some states also have a post-sale redemption period where the former owner can pay and take it back, and the length varies a lot by state. In those states a title company may not insure you until the window closes. Ask a local closing attorney what your state does before you budget the drywall.

renee_dubois · Answer

On the two and three unit stuff I look at, I assume every mechanical is dead if I can't see it. Two furnaces, two water heaters, that's real money before I've touched a wall. A sewer scope is $200 to $400 in my area and I'd pay it twice over rather than find a collapsed clay lateral after closing. On an auction property you can't get one, which is exactly why the discount has to be bigger than it feels like it should be.

omar_haddad · Answer

The roof is the item everyone prices from the curb and it's the least of your problems. A roof is a known quantity with a quote in two days. What eats the budget is the stuff you find on day nine: knob and tube behind the plaster so now the whole house is a rewire, or a crawl space with standing water and joists you can push a screwdriver into. I've watched a scope go from paint and flooring to structural because one guy opened a bathroom floor.

My padding rule is that the contingency scales with how little of the house I touched, and on a sight unseen buy I don't call it 20 percent, I call it a second budget.

aliyah_b · Answer

Reading all this, I'm now leaning toward starting with REO purely because I can get an inspector inside. I came in thinking the auction discount was the whole point and I'd figure out repairs later. Between harrow's second budget and warrant's redemption period thing, I'm less sure what my first deal even looks like than I was this morning.

Budgeting repairs on a house you're never allowed to walk through

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