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Profiting from Fire-Damaged Homes

by Dennis J. Hocker, Ph.D.   

Fire-damaged homes offer great profit potential but also pose special concerns and hidden risks for investors. I would not recommend a fire project for the first time investor, but I would suggest that experienced investors and renovators should not overlook an opportunity that has few competitors.

Obviously, a fire-damaged property will have structural damage. Most of these areas will be readily seen during your inspection. If damage has occurred to bearing walls, floor joists, or roofing members, I would recommend having a structural engineer evaluate the property. If the building is deemed structurally sound or repairable the following areas must be thoroughly evaluated:

Soot, smoke, and odor removal. This is a very specialized process best handled by professionals. All areas must be scrubbed, degreased, and sealed with a stain block paint. This includes the inside of wall and ceiling cavities so plan to remove drywall on exterior walls, one side of interior walls, and ceilings to provide access. A good restoration company can provide all these services. We recently completed 1600 sq. ft. two-story house where demolition, cleaning, and sealing cost about $6,000.

Plumbing. Fire and extreme heat have a tendency to un-solder copper and melt PVC. Be sure to consider replumbing when calculating repairs. Additionally, toilets, tubs, and sinks rarely clean up and may need to be replaced.

Electrical. The fire may have caused circuits to burn open or short circuit. One unexpected area is that all switches and receptacles will need to be replaced. They become brittle from heat. Plan to replace all lighting fixtures and fans; it is less expensive than cleaning. Don't forget to check phone, thermostat, and other control wiring as well.

Flood damage. It is not uncommon for the basement to get several feet of water when the fire is being extinguished. Check all mechanicals in the basement for water damage. This would include furnaces or boilers, water heaters, sump pumps, electrical panels, well pumps, water softeners, etc. If the basement was finished, wall coverings and insulation should be replaced.

Windows and doors.
If any are left undamaged by the fire or the fire fighters, they probably need to be replaced. Thermopane window seals that were damaged and vinyl windows, which cannot be cleaned, are most likely warped from heat.

Other areas. Hardwood floors, if undamaged, will need to be sanded and refinished. Ceramic tile should be checked for cracks. Exterior elements like vinyl or aluminum siding, gutters and downspouts, and roofing may have been damaged from heat. If the fire was severe check block/brick walls and foundations for cracks.

While this may sound like more trouble than it is worth, consider the profit potential. We recently purchased a damaged 1600 sq. ft. 4BR, 1 1/2 bath two-story house with 2-car garage on 1.5 acres for $28,000 (less than the value of the land alone). Fair market value when restored was $110,000 to 120,000. We sold the restored property in 74 days with a net profit of over 60%.

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