Heirs’ Guide to Renovating an Inherited Home

Let me start with a disclosure: This article is not for everyone. It is for a lucky few who don’t have to hustle to find an investment property they can afford. Such property lands on their lap because of the great intergenerational wealth transfer currently underway. In the next 20 years, more than $80 trillion in assets will change hands. And if you are a lucky heir to one of the 26% of Americans planning to leave a financial gift to their families, such a gift might come in the form and shape of an older home requiring a renovation.

If this is the case, you will have a decision to make. You can sell the property in its current condition and convert the existing equity into cash in your pocket. Alternatively, you can grow this equity by investing in renovating your inherited home. The process would require time, money, and skills, but can substantially increase the size of your inheritance. As a private lender, we work with heirs who decide to take a plunge and try their luck in the rehab business. If you need help deciding which route to take, read on – I have some warnings and best practices to share.

Let’s start with things that are self-evident. First of all, to be “an inheritance,” the property must have substantial equity in it. If it does not, and it’s mortgaged to the tilt, it’s more of a nuisance to the heirs stuck with disposing of it. Secondly, it’s safe to assume that those ancestors who have passed their financial life work onto the next generations wanted their gift to be used wisely. They might have hoped their assets would provide their heirs with new opportunities. It could be an opportunity to get higher education or to start a new business. Their gift could allow their heirs to travel and see the world.  Or it could simply carry the family through difficult times. At the very least, they expected their bequest not to be diminished due to the recipient’s inability to manage it effectively. Unfortunately, this is not always what we see as a private lender.  

At New Funding Resources, we routinely work with borrowers who inherited a home that is free-and-clear (i.e. it has no liens on it) or has substantial equity. Why do these borrowers need us if they already own that property? Because they are considering renovating it and need funds to do so. Either because of the property’s condition or their borrower profile, they cannot qualify for a conventional loan. An asset-based lender like us has underwriting flexibility to lend them funds when others won’t.

As a hard money lender, we make their lending decisions based on two elements. The first element relies purely on math. Does this transaction make financial sense for both the borrower and the lender?  In other words, does it generate enough profit for the borrower and does it also provide sufficient collateral for the lender? If the answer is “yes,” it’s a big step in the right direction. However, there is one more hurdle the file needs to clear on its path to the final approval.

This last element is more of an art than science: the lender must decide whether that particular borrower can execute the vision. To evaluate it, the lenders might look at the borrower’s prior renovation experience, savings level, income, and credit history. For example, a luxury condo conversion in Washington, DC, might be too much to bite for a newbie investor with no experience. Still, it could be the right project for an experienced rehabber familiar with the market.

The heirs to a home with substantial equity often get a free pass when it comes to this element of a transaction. In the lender’s eyes, the equity that Grandma and Grandpop left behind is enough to compensate for the heir’s possible lack of experience, imperfect credit, and little assets of their own. It’s a head start many are looking for, but it’s also why we see some heirs struggle with their home renovation and perform poorly on repaying their loans.

Common Afflictions for Borrowers Flipping Inherited Homes:

1. Lack of Experience: Many heirs have little real estate investment experience prior to inheriting their relatives’ home. Some might feel embolden to take on the project well above their skill. Others get prodded by someone who will directly benefit from the project – such as a friend in the construction business and ready to “take that job on.” They describe their projects as “no-brainer”,” “no-risk,” and “no-risk” and promise to “repay in three months or less while moving lightning-fast.” If only so.
2. No Sense of Urgency: Much of the talk on being lightning-fast evaporates post-closing. The reality settles in. Permits take too long. The contractor-friend discovers new issues with the house and then gets sick before disappearing for good (and sometimes with a chunk of cash).
3. Lack of Reserves: Some heirs struggle with the lack of funds to pay the ongoing expenses of owning the property. Real estate taxes are typically paid every six months. The insurance premiums are ongoing. Many properties have heavy HOA fees. Less-capitalized borrowers find themselves in stressful situations of not being able to consistently meet those expenses.

So, let’s talk about being a good steward of your inheritance. Rule #1 is not to squander its principle. Rule #2 is to grow it while minimizing the risks. Here is how to honor Grandma and set yourself up for a successful flip.

How to Set Yourself for Success Flipping an Inherited Property:

1. Run the numbers: Let’s assume you inherited a free-and-clear property worth $200K in its current condition. Once the property is out of probate, you can sell it without renovating for that amount minus real estate commissions, taxes, and closing costs. Let’s assume that your sales proceeds are $180K. Alternatively, you can choose to renovate your inherited property and potentially net more than that. Whether it is possible or not depends on the property’s after-repair value and the renovation expenses you would accrue. The key is to make sure you use numbers that are realistic. Consult several real estate agents and run your own after-repair value analysis using public information. Interview several contractors and get several quotes to adequately budget for repairs.  Once you have a good grip on the numbers, use our hard money loan calculator to run two scenarios: selling as-is and selling after the renovations are completed.
2. Do your homework: Before you borrow the funds needed to renovate your inherited property, make sure you laid the groundwork for your rehab’s success.
   • Ask your realtor to take you to the listed properties in your neighborhood so you can get a feel for the construction standards in your neighborhood and how much renovation is needed to get the after-repair value you want.
   • Consult with experts and decide whether you need construction permits. If you can, start working on them before borrowing the funds.
   • Talk to several contractors and have an alternative ready if your original contractor flakes out.
3. Budget Accurately: Your relatives’ generosity might allow you to borrow against the equity in their home, but once your loan has been closed, you will work with a finite amount of money to complete your task. Make sure you’ve budgeted enough to:
   • Make monthly payments on your loan. At New Funding Resources, we offer our borrowers the ability to roll some payments into their loan if their equity position allows it.
   • Have enough funds to cover the unexpected expenses you might not have budgeted for initially. You will also need some cushion to pay taxes and renew insurance.
4. Control Your Costs: Once you’ve laid the groundwork for your project’s success, your main task is to ensure you are staying the course by controlling your costs. You need to be mindful of these areas:
   • Many contractors will try to collect as much money in advance as possible, leaving them with little sense of urgency and forcing you to chase them at every turn. To manage your contractors efficiently, dole out the money in small chunks and, when possible, only for work completed.
   • Stick as close as possible to the draw schedule you’ve agreed to with your private lender. If you change the nature of your renovation mid-course and deviate from the schedule significantly, your lender might not release the funds to you.
   • Practice delayed gratification to avoid using the construction funds for your personal use. The goal of your project is to increase your profit. If you run out of money, you cannot complete your rehab.
5. Stay Involved: Time is money. The longer it takes to renovate the property, the less money you will make. Every day, you incur expenses, the largest of which is the cost of your financing. Yes, if you rolled your monthly payments into the loan, you might not be noticing it, but it’s draining your profits. Here is a simple example. If your monthly payment is $2,000, you save at least $14,000 by completing your project in six months vs twelve months. The savings will come from paying $12,000 less to your lender and saving at least $2,000 by not paying for an additional six months in taxes and insurance.

Inheriting a property can be both a tremendous opportunity and a significant responsibility. Whether you choose to sell it as-is or embark on a renovation journey, the key is to approach the decision thoughtfully and strategically. By running the numbers, budgeting accurately, controlling costs, and staying actively involved in the process, you can honor the legacy of your loved ones while creating lasting financial benefits. Remember, an inheritance is more than a financial gift—it’s a chance to build on the foundation laid by previous generations. With the right planning and resources, you can turn this opportunity into a meaningful and rewarding success. New Funding Resources is here to help along the way.