How to Invest in Condemned Properties

by Daria Kelly Uhlig

Local authorities have the power to condemn buildings they determine to be uninhabitable and a threat to public safety. The possibility of entanglement in a mile of red tape leads many potential investors to seek out less risky properties, such as foreclosures. However, a well-chosen condemned property can be an excellent investment for a buyer able to cooperate with authorities while moving quickly to prepare the property for sale or lease.

Condemnation Overview

The offices and departments responsible for condemning uninhabitable property vary by state, county and municipality. Often, condemnation is ordered by a board of health or housing code enforcement office. The enforcement entity notifies a property owner of its intent to condemn after an inspection finds the property to be structurally unsound or to be uninhabitable because of dangerous or unhealthy conditions such as a compromised roof, lack of electrical service or a nonfunctioning septic system. Once the property has been posted and occupants have vacated, the owner usually has a specific period of time to make the repairs. In the meantime, fines accumulate. If the repairs are not made, the enforcement entity may eventually order demolition and removal of the structure.

Finding Worthy Investments

Counties and municipalities make lists of condemned properties available to the public at no or low cost. Obtain a list, then drive past the properties to evaluate their locations and to compare the condemned properties to surrounding ones. After you've chosen several you believe to be well located, that would compare favorably to surrounding properties once renovated, contact the code enforcement office to arrange to view the inspection citations that resulted in condemnation. It's vital that you know precisely what the citations are so you can determine the minimum work that needs to be done before you can request the certificate of occupancy that allows the structure to be used again. Narrow your choices to the properties that offer reasonable overall value in terms of current value, anticipated future value and the cost of renovations. There's no guarantee that any of the properties you research are for sale, so have several choices to fall back on.

Buying a Condemned Property

You'll have to purchase condemned property from its owner. If the owners' names and current addresses aren't included on the list, obtain the information from the tax assessor's office. Although you can't force an owner to sell, you're likely to find some who are willing, and perhaps even anxious, because they can't afford to pay the fines and make the repairs or remove the condemned structures from the land.

Financial Considerations

The baseline you'll use to determine your offer price is the post-renovation value of the property minus the cost of renovations, liens, unpaid taxes and homeowner association fees and closing costs. Prepare for unexpected repair issues by adding 25 percent to your contractor's renovation estimate. Also, be aware that the municipality may have liens against the property that you'll be responsible for paying if your purchase it. This is not unusual in cities that have weed and rubbish restrictions, for example. The city can have the weeds and rubbish removed, then file liens against the property to recover the costs. You can find out from the local authority whether such liens exist. Unpaid property taxes and homeowner association fees are other common expenses. A title search should uncover all of the liens and other title issues. However, title insurance is the only absolute assurance you have of getting a clear title. Finally, note that condemned property can't be financed with a mortgage loan. You'll need to pay cash, whether from your own funds or from hard-money investors who issue loans privately.

Working With Authorities

The property won't regain value as a habitable property until you’ve brought the structure up to code, paid the fines and obtained a certificate of occupancy. You'll need to work closely with the code-enforcing authorities to get the certificate. A plan showing the work you intend to do and the timeline you intend to follow is necessary. Inspections at each milestone show you’re keeping your word and give you bargaining power in negotiating a settlement for unpaid fines. Good communication is key. You're bound to run into unanticipated problems. Keeping the code-enforcement authorities apprised of the situation and your handling of it will help to ensure their cooperation when it comes time to apply for your certificate.

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