During my 20 years as a real estate investor, I’ve dealt with fire damage on multiple occasions. As such, new real estate investors often ask me: should I buy a fire damaged house?
Whether or not to buy a fire damaged house depends on the percentage of the house that’s actually been damaged. The rule of thumb for buying a fire damaged house that I have refined over the last 20 years is, if a property has more than 30% fire damage, it’s more trouble than it’s worth.
In this article, I’ll explain both the considerations to these sorts of purchases and the rule of thumb I use when deciding whether or not to buy a fire damaged house.
Specifically, I’ll dive into each of the following fire-related topics:
- What Is a Fire Damaged House?
- Pros of Buying / Rehabbing a Fire Damaged House
- Cons of Buying / Rehabbing a Fire Damaged House
- Should I Buy a Fire Damaged House?
What Is a Fire Damaged House?
As stated above, I’ve dealt with fire damaged houses or flood-damaged houses on more than a few occasions, both as an investor and with my primary residence.
Actual fire damage
Broadly speaking, the first category of fire damaged house includes actual fire damage. In other words, part or all of a property has actually been on fire.
In one of my rental properties, a tenant once left a gas tank next to a water heater (poor decision) and, inevitably, the gas tank blew up and lit the house on fire. I forget the exact numbers, but this fire caused between $70,000 to $90,000 in damage to the property. While insurance helped us recoup some costs, this damage still created a major headache for me.
At the end of the day, rather than deal with the damage, I decided to sell the property “as is,” collecting what we could in the sale. We just about broke even on that one.
A fire near your house
The second category of fire damage occurs when there’s a fire near your house. This happened to my actual primary residence a few years back when a wildfire sprung up in the area. In these situations, the fire itself doesn’t cause the damage – the smoke does.
With this smoke damage, a house may not burn down, per se, but the ashes and soot from the fire can make a home uninhabitable. To clean up this residue, people need to use a special type of sponge/cloth to thoroughly wipe down the entire house. After completing this wipe-down, homeowners then need to use a special ozonator to treat the air in the house, removing the smoke molecules from the air. If you don’t take both of these steps, the house will continue to smell terrible.
All told, it cost me about $15,000 to get my smoke-damaged house back to its original, pre-fire shape.
With both of the above categories of fire damage, the questions for investors become, is it worth fixing up the property? Or, should I just cut my losses and sell the property as is?
In the following sections, I’ll outline the pros and cons of dealing with fire damaged houses. Armed with this information, investors can make educated decisions when considering a purchase.
Pros of Buying or Rehabbing a Fire Damaged House
When trying to quickly find an investment property, buyers typically look for any edge they can get over other potential buyers. This leads directly into the first major advantage to buying and rehabbing a fire damaged house:
Due to the risk and extra work a fire damaged house entails, many investors (and essentially all primary home buyers) won’t even consider them. As such, for investors willing to shoulder this additional risk and work, you will likely find less competition in the market for these sorts of properties.
Fact – fire causes significant damage to houses. Consequently, sellers need to price this damage into their asking price, meaning that investors can typically purchase a fire damaged house – even a renovated one – for less than a comparable property.
Related to the above two pros, buying a fire damaged house typically provides investors far more negotiating power with sellers. In addition to fewer potential buyers, homeowners in these scenarios generally want to just get these properties off their hands as quickly as possible, meaning they’ll often accept offers below their initial asking price.
Some investors see significant remodeling potential to a fire damaged home. Specifically, with enough damage, an investor can A) buy an investment property for an absolute bargain (for the above reasons), and B) treat the damaged house as a blank slate, rehabbing it to a new floor plan (something that may not make financial or operational sense in an undamaged property).
Cons of Buying or Rehabbing a Fire Damaged House
While the above advantages exist, investors also need to understand the inherent risks to buying a fire damaged house.
Risk of the unknown
With fire damage, too many unknowns – or wildcards – exist for most investors. Most notably, it can be difficult to measure the exact level of wood damage caused by fire. Is it fine? Does the wood need to be augmented? Does it need to be completely replaced? Frequently, investors can’t answer these questions with complete certainty, which shoulders them with tremendous risk during a rehab process.
Difficult budget projections
Related to the above, significant fire damage can make accurately projecting a property’s rehab budget impossible. And, as real estate investors know, the key to understanding a deal’s profitability rests in accurate rehab / holding period budgets. Put simply, rehabbing a fire damaged property turns an accurate budget projection into a gamble, which I always want to avoid in a deal.
If a house has been damaged by fire once, insurance actuaries typically assume a higher likelihood of repeat fire damage. Fair or not, this means that investors will likely need to pay a higher insurance premium on a rental property previously damaged by fire, an expense that can quickly convert a cash-flowing property into an unprofitable one.
If a wildfire causes fire or smoke damage to a house, that means that underlying environmental conditions inherently increase the risk of future fire damage for a given property. In other words, if a wildfire happened once, chances are good it’ll happen again.
Should I Buy a Fire Damaged House?
So, should I buy that fire damaged home or not? Bottom line, it depends on the percentage of the house that’s actually been damaged.
I have an actual rule of thumb for this situation, something I’ve refined over years of seeing these sorts of properties on the market. In general, if a property has more than 30% fire damage, it’s more trouble than it’s worth.
Put in more concrete financial terms, I argue that if a property requires less than $5,000 in fire-related repairs, move forward with the deal. On the other hand, if you’re looking at a bill for more than $5,000, it’s likely not worth the trouble you’ll face in rehabbing the property.
However, I will caveat the above for general contractors. If you’re an investor and general contractor with fire damage experience, you can tailor the amount of allowable fire damage to your own unique experience and preferences.
For everyone else, exercise tremendous caution buying a fire damaged home. And, at a minimum, ensure thorough inspections – both aesthetic and structural – during the due diligence period. It’s better to pay a little more in upfront inspection costs than face a nasty rehab surprise after purchasing a property.