Rehabbing for Beginners
by Ken Lawrence, Senior Real Estate Adviser
Anyone who has watched one of the many house flipping shows on TV can’t help but be intrigued by the possibility of finding a house, giving it a facelift, and reselling it for a healthy profit. It sounds good in theory: buy a distressed property from a motivated seller, put in a little time, money, and sweat, and soon you are booking your next exotic vacation!
All too often, however, novice rehabbers find themselves mired in a money pit – rather than the quick fix and flip they had bargained for. How can you take some of the risks out of your first deal and protect yourself from a bad and costly first experience? Most miscalculations by first-time house flippers are made in the estimates of repairs. Overlooking the needed replacement of an HVAC unit and/or a few other necessary improvements can mean the difference between a profitable deal and a painful learning experience. This is why it may be wise to start with a project that needs more of a cosmetic facelift than a major rehab. Avoid homes that need expensive structural repairs. Bigger projects create more opportunity for uncertainty and miscalculation.
The age-old admonition of buying the worst house in the best neighborhood is still good advice. You want the other homes in the area to lift the value of your project rather than dragging it down. This will also make the home easier and quicker to sell when you are finished. Focus on improvements that will give you the biggest bang for your buck. New paint on the inside and attractive landscaping on the outside can often transform a home without costing a great deal. At the same time, you don’t want to keep a kitchen that is dated and obsolete if that is the improvement that will make the house sell quickly – and for top dollar.
Finding the right level to rehab real estate is sometimes the most difficult balance to find. If you have an eye for recognizing the potential in a property, and a talent for interior design, that can be a plus. Of course, walking the property with a trusted contractor (or two) before settling on an offering price is critical. Sometimes even an experienced contractor can miss things – so it never hurts to get more than one estimate.
Generally speaking, the best way to do your calculations is to begin with the expected resale price and work backwards to arrive at an offer. For example: If you know the after-repair value (ARV) is going to be $350,000, then start with that number and subtract your costs. If you know that your selling costs are going to be approximately $24,000, your rehab estimate is $58,000, and your purchasing, finance, and holding costs will total $16,000, then your break-even purchasing price would be about $252,000. From there, you would subtract the amount you feel that you need to make on the deal to arrive at your offering price. Of course, as always, you make your money when you buy the property. You simply collect the money at the time of sale. Buying it at the right price, allowing some margin for error, will determine whether your first experience is a positive one.
Rehabbing real estate can prove to be daunting without the proper due diligence involved. If there’s one thing we recommend, it’s taking the time to dive into your project and dial in the budget and stick to it.