REHAB FOR REHABERS
We been inside a lot of foreclosures over the years and it never fails to amaze us just how many are “half completed rehabs”! We’re not sure, but we wonder if there have been maybe just a few too many rehab “reality” show that are not quite … well … REAL!
We do think it is entertaining to watch rehab shows. Before and after shots are totally cool and honestly we have seen some very interesting and creative ideas. But we’re still inclined to put them in the “entertainment” category, rather than the “this is how to really do it right” category.
There are still many distressed properties on the market today and the opportunities are definitely still here as never before for those who know how to rehab successfully. Here are six fundamental things you need to know if you want to be successful at rehabbing:
1. You must buy at a “deal” price!
When we look for properties for our rehab clients, we look at properties that are priced at least 40% to 50% below typical comparables in the immediate neighborhood – absolutely no less than 40% to 50% under the local area! Of course it depends on how much work a property needs. We’ve helped our clients buy properties for as little as 10 to 20% of nearby comparable properties in good condition. (Pictures here are examples of properties like this that Realty Dynamics has helped people buy.)
“Wow, what a DEAL!” – Be careful when you see what looks like a “Wow price”. Remember you have to buy it right to have enough “room” to do the rehab and end up with a profit. You must be ready to react quickly when you see a “Wow” property, but you need to have a discipline to put every interesting property through a strict analysis before you write any offer. The key to successful buying is simple: develop a straightforward analytical routine – one that you can execute quickly; then believe in the numbers it gives you. Write offers when it makes sense and walk away when it doesn’t! Watch the market regularly and be ready to act fast!
2. Buy a property that matches your skill level.
If you have extensive contracting experience, bad basement walls, a nasty roof or a structural issue or two might not be a big deal for you. Lots of people are afraid of properties with “big” issues – so prices sometimes can be really good and you’ll find a lot less competition from other rehabbers.
Mold makes you panic? Then don’t buy a property with “hair”, “fuzz” or anything that resembles a mushroom growing out of the carpet – ’nuff said! But if you’re a pro, you might just want to take another look, because many times mold can be completely mitigated – often at a price that might surprise you and even sometimes with a guarantee from a qualified contractor!
If though, your skills don’t go much past cleaning, painting and a little landscaping, then look for a “dated” or “tired” property that is in overall good condition. With a bit of patience and determination you will find a property that is right for you!
3. Carrying Costs Can Be Hazardous to Your Wallet!
Beware of “estimated cost to complete” pitfalls that have derailed many a rehab project and took out the rehabber along with it! Everyone know that the total cost estimate, must include all of the following:
- Original purchase price
- Closing costs
- Labor and material costs to rehab
- Final selling costs less sales commission and/or advertising … and don’t forget the transfer tax and title insurance
That is unfortunately the “quick list” that too many “never did a rehab” rehabbers come up with. It usually bares little or no relationship to the actual final cost for two reasons. First, many inexperienced rehabbers do not fully and correctly estimate how much the “labor and materials” piece will be. Here’s a quick suggestion – make your list and check it twice. Then give it your best shot and add at least another 10% for good measure. It just might help you to clear the tree tops at the end of the runway!
Then secondly is a poor, incomplete or “I didn’t think that was important” approach to estimating the carrying cost component of a project. Here’s a checklist to help insure that you’re estimating the carrying costs for your project correctly. (These are the ones that separate successful rehabbers from the wanna-bees!) – read on –
- Utilities You will likely need gas, electric and/or water for the rehab, but even if you don’t there are usually base monthly charges. Also if you’re buying a bank owned property, some utilities might have been turned off and you may have to pay reconnection fees.
- The cost of interest on the mortgage you have or interest foregone on your money if you’ll be buying with cash.
- Permits that are needed, if any, to properly complete the rehab. Oh, planning on not doing permits?? Here are a few thoughts. First of all, plan on the fact that the Devil (cleverly disguised as the local building inspector) will rain down fire and brimstone upon you! Also, remember that if work has been done without a permit your property insurance coverage is very likely no longer worth the paper that the policy is printed on! Capable buyers will want to know if the work was done under permits. Improperly done work without permits might tank your final selling price. It might even tank your new rehab biz!
- The cost to insure the property during the time you own it
- The cost to maintain the property during your ownership – grass cutting and yard maintenance and/or snow removal
- Subdivision Dues for each month between the date you buy a property and the date you sell it – if the property is in a subdivision check to see if there are annual dues. If so your pro rata share will add to your costs.
4. Don’t Over-rehab!
– Granite countertops and top of the line stainless steel appliances in a 2 bedroom, 1 bath house, just a little bit bigger than a postage stamp …
– All new mega-size shrubs and new super size trees in both the front and back yard and the waterfall and river just like on those TV shows.
– Top of the line whirlpool tub in a basement bathroom?
Get a grip! Take a deep breath! Find your center!
Make a rehab fit the house and (probably even more importantly) make it fit the neighborhood. Remember you’re not producing a TV show; you’re in business for a profit!
… and here’s an important concept that you must never forget: you are rehabbing (or rehabilitating), not restoring or trying to make a property like new once again. Your focus ALWAYS must be on finding the optimum level of rehabilitation, i.e., the least cost and effort that can produce the greatest return on your time and effort.
It’s a learned skill. Being a skilled tradesman or having experience in general contracting does not guarantee financial success in rehabbing. At Realty Dynamics, as our client, you can tap into our extensive expertise. We go far beyond providing simple real estate services.
5. Turn and Burn!
Buy it, fix it up and sell it fast! Get it? The shorter the time between the date you buy and the date your sell, the lower the carrying costs and the harder you make your money work for you. So, how do you turn and burn?
A) Make an aggressive rehab plan and stick to it – As soon as your offer is accepted, your charge is to carefully figure out what needs to be done, in what order it must be done, to what extent you can overlap tasks and how fast can it can be done. Do like the best construction contractors do: plan, create a schedule and work hard to beat it, every step of the way. If you can “play” the rehab project in your mind like a movie before you begin, you’re on your way to success! Be proactive and anticipate problems so that they can be avoided or at least handled efficiently.
B) Start marketing your property for sale as early as possible – don’t wait until the last detail is done. Start marketing when people can see what has been done and what you’ll be finishing up soon.
C) Finally; want to sell fast? Offer a great deal price! Its much better to sell at 10% below the market in 30 days than to hold out for a full market price that might take 5 to 6 months.
6. Manage Your Cash
Just because your sure your project will turn a profit, doesn’t necessarily mean that you might not run into a cash crunch somewhere along the way. Following points 1 through 5 won’t save your rehab, much less your “you know what” if your run out of cash! Anticipate your cash outflow and then plan accordingly just like you’ve planned your work schedule. That way you’ll be certain that you’ll have the funds you need at every step along the way.
Remember “Buy a Deal – Give a Deal!” Buy a property that fits your skills and carefully estimate all costs. Plan your rehab project – don’t just “get started”. Do a balanced rehab that’s right for the property and fits the neighborhood and finally, get it done and get it sold as quickly as possible. Above all, manage your cash proactively. Although we’ve come out of bad foreclosure times, there will remain a large inventory of tired houses for some years -profit opportunities for rehabbers. Do it right and you too can enjoy the rewards of rehabbing.
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