How to Rehab Homes for Resale
|"Tired of always being broke? Tired of the cash flow battle? Tired of being a "Paper Millionaire" with a zero bank balance? Well, cheer up bucky, 'cause what you need is a shot of cash to chase those blues away!" |
To help you make this the best year of your life, we're going to talk about one of the best ways to generate cash as a Real Estate Entrepreneur, namely Rehabbing Homes For Resale. Rehabbing can provide you with lump sums of cash without a great deal of time and effort on your part.
You're probably thinking "No Way! I'm not falling for that. I don't even know which end of a hammer to hold, and even if I did, I don't know anything about construction. And don't try to suck me into this scam by telling me it won't take a bunch of my time and effort. I know better. Much better!"
Well, O.K. You probably know what's best for you. But consider this: Rehabbing and reselling just 2 houses this year could earn you (conservatively) an extra $20,000 to $30,000 in cash profits. In my area, those would be two $40,000 houses. Depending on where you live, these houses probably exist in your area, too. If not, change the numbers to reflect your market.
Just in case you forgot, let me remind you that a lot of people will dress up in a coat and tie and bust their butts for 40 plus hours a week for a whole lot less. Look around. It's true.
Even starting out in the Rehabbing business, it's not necessary to devote 40 hours a week to your project. Unless, of course, you want to undertake the repairs yourself. That's a decision you'll have to make on your own. Personally, I don't enjoy painting and carpentry and all of that. In fact, truth be known...
I Really Don't Like Work at All!
But, you may be different. If you have the skills and the time, have at it. Just remember, you'll be working for the same wages as the person you would have paid.
O.K. Let's talk turkey. How much time does it really take?
Assuming you subcontract everything, you'd be hard pressed to spend 2 hours a day on a project, including talking on the phone. I probably average 5 hours a week for the first four to six weeks of a project, then the time commitment drops off dramatically. You could almost say it's a part time job.
Not bad when you consider the profit potential.
Now, Let's Talk about the Negatives.
There are actually two negative aspects to Rehabbing. The first goes back to time. Although your actual time commitment is minimal, these projects from purchase to sale, take a significant amount of time. Plan on 180 days start to finish. That means you may not see any profit for six months. Hopefully, your projects will close out much faster. But mentally commit yourself to a longer time frame.
The second negative is money (the very thing we're after). Unless you have a partnership arrangement, you will have to come up with quite a little money for these projects. I consistently put $10,000 to $20,000 in repairs alone into a house. Add that to your purchase price and you can see you'll need access to quite a bit of cash money. Plus, that money could be tied up for 180 days or more.
Along with these two negatives (which we'll try to short circuit) you'll also have to learn to deal with mortgage financing. In order for you to make a cash profit, your buyers will have to obtain new financing. And guess what? The vast majority of buyers don't have a clue about mortgage financing. So it would behoove you to become an expert on the mortgage programs available in your area. This would entail establishing relationships with several mortgage lenders who will keep you abreast of this ever changing market. Mortgage financing is important. Real important!
These negatives aren't anything you can't overcome. You'll see how important it becomes to have a well thought-out plan to minimize the negatives and accent the positives. But before we get into the meat of Rehabbing, I'll bet you are wondering...
How Do You Find These Houses?
Prospecting is a topic in and of itself. There isn't enough room here to discuss it in detail. However...
Chances are the house you are looking for is either vacant and/or boarded up. The house you are looking for will be in need of repair. This may or may not be obvious from the outside. Ugly houses, just plain old ugly houses, need love too.
Let it be known you are looking for vacant, abandoned, boarded up, ugly houses you can buy in "As Is" condition. The best deals require "All Cash" but don't be afraid to ask for Owner Financing. Sometimes Owners of these types of properties will "tote the note" for you until the property is sold. Why not ask? Owners of these properties are motivated and often times will make you a very good deal.
Keep in mind, you're looking for the house nobody else wants. You'll have little, if any, competition. Once you find one of these dogs you'll need to know...
How to Estimate Repairs
Estimating repairs isn't as difficult as you might think. Once you rehab two or three houses, you'll know within a couple hundred dollars what you're repairs will run. This is where a CheckList becomes invaluable.
A Word of Caution: "If your just getting started, don't fool around with houses with major structural problems. In my town, this means foundation problems. Cut your teeth on houses in need of cosmetic repairs or updating. You'll save yourself a lot of grief. Once you become confident in your abilities, you may want to take on a bigger challenge but go slow and be careful!"
Unless you are going to be doing the repairs yourself, you'll need to find sub-contractors you can do business with. You can find these people by looking in the classified section of the newspaper. They generally have their own special section. However, the best way to find good, reliable people is by word of mouth. Find out who others are using. Ask the subs you like if they can recommend a good painter or electrician or whatever you need.
Get these subs to give you bids on your project. To protect yourself, always get more than one bid. Pretty soon you will be able to estimate these figures without bids. You'll know how much it costs to replace a roof or install central heat and air or paint a house inside and out. It's really not difficult. Once you find good subs, you'll stay with them for a long time.
Whoa! Stop the Presses... Stop the Presses...
This isn't working. Rehabbing can be a lot of fun (and very profitable) and I'm making it sound like work. Drudgery. Worse than going to the dentists office. Man, I've got to come at this a different way. Let's see, how about...
A Simple Overview
O.K. Here's what we're going to do. We're going to go out an find a run-down, piece of junk house. Purchase it for it's true value (which isn't very much). Put local tradesmen to work to bring this house back up to neighborhood standards. Attract an owner-occupant buyer and sell them the house with new mortgage financing. Now...
Look at what we've accomplished. It's nothing short of recycling. We've taken a house in need of repairs, possibly put it back on the tax rolls or at the very least, used it to improve the neighborhood. We've provided a dozen workers in our community with a job. Provided a good, solid house for someone to buy and occupy (It's still the American Dream, you know!). Provided a piece of business for the mortgage lenders, appraisers, pest control people, the attorneys, the title companies and even the utility companies. Oh yeah, and what about the insurance companies, the building supply houses and the appliance dealers. It's a chain reaction.
The very best part is our much deserved, well earned profit. A profit we can feel good about because we have actually produced something. A profit we created. Now, don't you just feel warm all over.
If You Fail to Plan, You're Planning to Fail!
How true it is. So let's get our plan together. First let's start with our objective. Now, I know what you're thinking... our objective is to make a whole bunch of money without lifting a finger. Yeah, yeah, yeah. But, we need to expand on our objective a little.
How about this: Our objective is to make the maximum cash profit by purchasing a home in need of repair, repairing it and re-selling it on the retail market to an owner occupant in the minimum amount of time.
Now that's a little better. So...how are we going to accomplish our objective? This is where we need to develop our strategy. Our plan of attack. We need to get our ducks in a row, so to speak.
Since there are three distinct phases to our objective, we'll need three distinct strategies.
1. A Purchase Strategy
2. A Repair Strategy
3. A Marketing Strategy
Agreed? O.K. so let's get to it. Let's start with our...
All three of these strategies are important, but this is where you determine your profit potential. This is where your going to analyze the deal. This is where you will determine how much you can afford to pay for the property. And that, my friends, is a direct function of how much you want to make (Profit).
You have to be realistic here. Don't get involved in a rehab project with less than a $10,000 profit potential. You'll be tempted. Just don't do it. The reason is simple. It doesn't take much of a snag in the process to eat up a couple of thousand dollars. Maybe you overlooked a repair. Maybe your market time was extended. Maybe the market hic-upped. You know what I mean? Things happen! The $10,000 not only represents your profit potential, it represents your cushion of safety, too. It's your insurance against loss.
Please keep in mind. We're talking about houses in the $40,000 to $50,000 range. You'll need to adjust these figures upward for higher priced houses. Obviously, you would want a much higher profit potential/cushion on a $500,000 home. When in doubt, use 20% of the retail value as a guide.
One other thing. Keep in mind $10,000 is the minimum. Part of our strategy is to determine the maximum we can afford to pay for a house. >From that point, we are going to make the best deal possible. The profit potential may, in fact, end up being much greater. It all depends on how good a deal we can make.
Here's the formula:
Estimated Resale Price (Conservative) As you can see, it's important to have access to Current Market Information. Be conservative on your Estimated Resale Price. You will probably end up selling for more, but for the sake of these important calculations, you'll want to be conservative.
Less: Repairs Costs
Less: Holding Costs
Less: Resale Costs
Less: Minimum Profit ($10,000)
Equals: Maximum Purchase Price
The other half of our Purchase Strategy deals with the resale potential of our target property. Simply stated, we want to buy in an area with resale potential. Stay away from those neighborhoods owner occupants refuse to buy in. You don't have to be in the elite subdivisions, but it's absolutely critical you buy in neighborhoods with sales activity.
Using your current market information, answer these two questions. Are houses selling in this subdivision? And if so, how long does it take them to sell? Don't get stuck in an area with 365+ days of marketing time. Shoot for 180 days or less. You'll like this business a whole lot more if you will follow this advice.
Our goal is to give our house an edge over any other property on the market in the neighborhood. We'll accomplish this by doing those repairs which are crucial to our resale potential. Let me give you an example...
If you were looking to buy a house in a good area, which would you buy (all other things being equal)? A house with a new roof or one with a 10 year old roof? One with new carpet or one with somebody else's used carpet? One with a new, modern paint scheme or a plain Jane? A house with a landscaped front yard or a house with the same old, same old? Do you like ceiling fans, or new light fixtures, or new counter tops? How about a new double stainless steel sink or new linoleum? How about an updated bathroom? Central Heat and Air? A new, modern look or the same old look? New windows, new siding? You tell me. Which would you choose?
Are you beginning to see how our Purchase Strategy, our Repair Strategy and our yet-to-be-discussed Marketing Strategy dovetail together? We're going for the sale, baby!
So, where do we start? Let's start where the Buyer starts, at the curb! Did you know curb appeal is what gets buyers interested in a house? It's true. So let's start on the outside of the house first. If the house deserves a new roof, put this on first. Then how about replacing those old windows on the front with new ones and putting up some new siding. Just on the front. We're going for curb appeal. The sides and back aren't as important. Replace any other rotten boards. How about a new front door. Paint with an attractive color scheme. Put up some new shutters. Then add the house numbers and new exterior light fixtures. Clean up an mow the entire yard then do some extra landscaping in the front.
Now we have a marketable house and we're only half way through with our repairs. People are going to start stopping buy and looking at this house. I'm talking about buyers. This house looks good (curb appeal) and people are going to want to buy it. Chances are, if you have done a good job, this is when you'll find your qualified buyers.
Now we're on the inside. Routinely, you'll want to add central heat and air (unless the house already has it), redo the ceilings, modernize the kitchen and bath, paint and/or panel, hang ceiling fans and new light fixtures, replace all door knobs and install new carpet and vinyl.
You get the idea. Make it look new. Give it an edge. When people are attracted by the outside, don't disappoint them with the inside.
One of the really neat things about this strategy (other than it makes sense) is you're attracting buyers while the subs are on site to keep the property open for you. Kind of like a...
Poor Boys Open House!
Tell your subs to expect this. Encourage them to be polite and friendly. They're your salesmen at this point.
Your house will be completely remodeled. It should have the edge over every other house on the street. You have positioned your house to sell first.
And Last, But Not Least, Our Marketing Strategy!
Our marketing strategy (as you've probably figured out by now) started with selecting the right house to begin with. A house in a saleable neighborhood. A neighborhood with homes selling in 180 days or less. This is where our Marketing Strategy begins.
Next, we're making our house attractive to the market by doing repairs buyers demand (want) and completing these repairs from the curb in, thus attracting potential buyers early.
We can add to this strategy with yard signs. Place a sign on the property as early as possible, which let's the public (and the neighbors) know who has purchased the property. Try something like "Purchased by Harry Rumpkin. I Buy Houses. Call 24 Hours for my Offer! 555-5555" Leave this sign up until you are finished with the outside. Once you are finished with the outside, replace this sign with one which reads: "For Sale. Harry Rumpkin, Realtor. 555-5555 Owner will Help!" Don't underestimate the power of yard signs. They are responsible for most real estate inquires. They're cheap and they work. What a great combination.
If the house isn't sold or under contract by the time you finish your repairs, consider going to newspaper advertising or listing with a REALTOR who farms the neighborhood. And, because your house is like new, you'll be able to sell for top dollar.
This was just an overview. But hopefully, you have enough info to see the extraordinary profit potential rehabbing offers.
Real Estate Success,
|Scott Britton, author and publisher of the “University of Real Estate Letter” is an active, full time Investor who has been successfully buying, selling and investing in Single Family Houses and Mortgages since 1979. Beginners and seasoned pros alike have profited from his down to earth, common sense investment advice. Scott is known for his clear thinking and problem solving abilities. His strategies for generating cash while building wealth, can help anyone accelerate their investment program while improving their lifestyle. Scott, along with his wife Cindy and their three children, live and work out of their high-tech, low-cost home office in historic Jackson, Mississippi, where he practices what he preaches on a daily basis. |
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