My first REO cost me 11k more than the whole rehab budget because I never asked when the water was turned off

Small 2-unit, bank-owned, bought at 148k in a market where similar duplexes were trading around 205k. My plan was 30k of work, refinance, hold it. I've got three small multifamily buildings so I thought I knew what I was looking at.

Walkthrough was in October. Utilities were off, which everyone told me was normal for REO, and the listing had the standard as-is language. I looked at the roof, the electrical panel, the unit layouts, and I priced kitchens and flooring. What I did not do was ask when the property had been winterized or whether it ever had been.

It hadn't. Previous winter, vacant, heat off, water lines full. I found out in week two of the rehab when my plumber pressurized the system and water came through three ceilings. Split supply lines on both floors, a cracked distribution manifold on the boiler, a hairline in the cast iron waste stack that had been holding because nothing ran through it. Plumbing rough-in, boiler work, and drywall and paint that I'd already paid for once came to 41k against a 30k budget on the plumbing line alone. Total spend landed at 62k.

So 148k plus 62k is 210k into a building worth about 205k. I still own it and it rents, and the refinance appraised at 201k so I left more cash in than I planned by roughly 34k. That cash was supposed to be my next deal, and there was no next deal that year.

What I'd do differently: ask the listing agent in writing for the winterization record and the date utilities were shut, and if they can't produce one, pay a plumber to air-test the supply lines before I remove the inspection contingency. That's 350 dollars. I skipped it because the utilities were off and I told myself you can't test a dry system, which is wrong, you test it with air.

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0mikeoconnell7SP2APRO6

The air test is the right lesson and it's cheap enough that nobody should skip it. I'd add one thing to your list from the service side.

Ask for the property preservation history, not only the winterization sticker. Servicers order inspections and preservation work through vendors, and there's usually a file with dates for the initial secure, the winterization if it happened, and any reactivation for a prior showing. Sometimes the listing agent can get a summary, sometimes they can't, and either answer tells you something. A property that was winterized and then de-winterized for someone else's inspection and never re-done is the exact case that produces your three ceilings, because the sticker on the water heater says it was handled.

On the cause, I'd push back gently on framing this as a plumbing miss. You bought at 148k against 205k, which is a 57k spread, and you planned 30k of work with no real contingency on a vacant 2-unit that had been through a winter with the heat off. Even without the freeze you were one bad boiler away from break-even. The air test would have saved you this time. A contingency line would have saved you every time.

And for what it's worth, you own a renting duplex at 210k that's worth 205k, which in a couple of years of rent is a slow recovery rather than a hole.

My first REO cost me 11k more than the whole rehab budget because I never asked when the water was turned off

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