Let’s talk rehabbing.
We know that rehabbing the right property can bring in a good amount of profit, if you have your numbers right. So let’s imagine that you find a property for $40,000 (for example) and after your calculations, you can rehab it for $15,000 and sell it for $80,000. Not a bad $25,000 profit. You’ve budgeted for a new roof, flooring, kitchen countertops, appliances, and updating the bathroom.
What’s your plan when you discover a new water heater is needed? Or when the plumbing needs redone and part of the walls will need to be torn down? Where will the money come from?
Estimating costs of repair can be tricky. Something can pop up that will cost you maybe a few hundred dollars, or sometimes a few thousand dollars. It’s critical that you closely analyze the condition of all big ticket items (such as mechanicals) when you’re estimating your repairs so that this can be avoided.
You have to ask yourself what you’re going to do about it.
There are several options:
Using your budget for cosmetic repairs to fix more critical repairs
- This option won’t show as nicely to buyers
Fixing the critical repairs with a “patch”
- This option is not a permanent solution but it works… for now. Note that inspectors will most likely catch patch jobs a replacement might still need to be done after you’ve invested time and money into the temporary fix
Try to do it yourself
- This option saves on labor, if you know what you’re doing. Make sure to take into consideration how much your time is worth and how you could be making money on new deals.
Raise your repair budget and raise your selling price
- This option keeps your profit the same but is hard to do without adding value to the home (not all areas of your rehab will add value).
Raise your repair budget but keep the same selling price
- This option increases the chances of selling quickly and less holding costs.
Everyone chooses how he or she will handle this situation. Hard decisions must be made and these decisions ultimately affect your bottom dollar.
Cutting corners and using cheaply made material or using the “Band-Aid method” will only cause you more time and money in the long run. If something needs to be replaced, don’t try to just repair it.
Matt Andrews shares his story about repairing instead of replacing-
“There was a water heater in this property that had rusted and developed some leakage. In my brilliance, I decided to seal the leak myself instead of calling a pro. I had absolutely no idea what I was doing! The pro would have told me to trash the heater and buy a new one that worked perfectly for $300. But I decided to seal it myself.
A couple of weeks later, I arrived at the property to find the consequences of my “bright idea.” The leak re-emerged even worse than before and the brand new carpet was soaked throughout the property. I had to spend the next 3 days with industrial dryers running 24/7 to save the carpet. I just barely saved it. If I hadn’t, it would have cost me about $3,000 for new carpet. In my attempt to save
$300 I almost lost $3,000. Are you taking notes? That doesn’t even count the cost of renting the dryers and losing 3 days or renovation time.”
Below are two things you can do to help avoid the need to cut corners.
– Have a specialist (plumber, roofer, foundation company, etc.) who works with real estate investors and understands what you need to know from his/her report. This will provide you with a good starting point on calculating repair costs. Investor friendly specialists will be willing to negotiate on pricing for the chance at future business with you.
– Have a buffer in your budget. This can save your profits and allow you the ability to take care of issues that arise without stressing out. Make sure to pay close attention to the high dollar items on a home so that you aren’t as likely to go over budget. Having a nice 10% buffer can help you avoid this.
If you plan on fixing repairs yourself, this is okay, in certain instances. If you know what you’re doing and it’s truly repairable, this could be a solution for part of your rehab.
Ask yourself though, how much is your time worth? Could you be doing something more productive for your business? As an investor, your time is best spent on the buying and selling of properties, not making repairs. Leave that up to the experts.
Cutting corners often leads to work having to be redone or, like Matt’s example above, where even more work needed to be completed after something bad happens. The time, money, and effort were wasted on something that could have been done correctly the first time around.
Keep in mind what other houses in the neighborhood are like. Don’t over or under rehab. Sometimes, it’s okay to go with black appliances instead of stainless steel. Know the finish-out that sells in the area and have that be your goal. Cosmetic areas can sometimes have cheaper alternatives that still work for the particular property.
A few areas never to cut corners on are the mechanicals: roofing, electrical, plumbing, foundations, and your inspections. These core areas need to be done the right way. It’s not worth the money saved to try to go the cheap way on them.
If you don’t want to worry about repairs that could pop up unexpectedly, another option is wholetailing. This is where you are purchasing at a wholesale price and selling “as-is” to a retail buyer without fixing it up at all.
The retail buyer knows the property is a fixer upper and typically, they’ll be the ones living in the property. Keep in mind that many lenders won’t lend on a property that isn’t in livable condition or has issues with the mechanicals.
Wholetailing is perfect when you have a property that’s livable but could use updates and repairs. It takes the risk out of going over budget for your rehab and still allows for decent profit and there are retail buyers out there searching for these fixer upper homes.
Unexpectedness should be expected in a rehab. Have a buffer in your budget and make smart decisions that offer a quality product while still earning your profit.