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The Rules of Rehab | By: Multiple Speaker(s)

The Rules of Rehab
By Vena Jones-Cox

Rehabbing is a fact of life for most real estate professionals. Never mind the folks who buy for the purpose of rehabbing and reselling; even buyers of “pretty houses” eventually end up doing a repair here and there. And almost every long-term, wealth-building strategy (you know, rentals, lease/options, that kind of thing) includes the occasional repair or turnover, and sometimes a complete overhaul of the property to make it habitable.

Most investors think of rehab as an unfortunate fact of life, much like the presidential election season or kidney stones. You don’t have to like it, but you do have to get through it as best you can.

In today’s post-bubble, post-easy-mortgage world, the opportunities in ugly properties have exploded. The phrase “buying for pennies on the dollar” has taken on a whole new meaning, now that foreclosures are setting prices in many borderzone areas.

Thing is, if you’re going to play the ugly house game, you need to know how the rehab process works (yes, even if you’re a wholesaler…in fact, the next wholesaler who calls me to buy his deal and can’t tell me what the property needs or how much it will cost to fix it is going to turn up in little pieces in hefty bags scattered all over the city).

What You Need to Complete a Successful, Profitable Rehab
Completing a renovation and completing a renovation in a way that meets your goals are 2 very different things. Whether you’re rehabbing for a planned resale or a long-term hold, you have to know certain things to be consistently successful, including:

What’s wrong with the property to begin with. No profitable rehab ever began with a poor inspection. In fact, I think that most “cost overruns” in a renovation happen when the investor doesn’t know the scope of repairs at the start. Yeah, some things will always come as a surprise in a major rehab, but most problems are discoverable with a thurough inspection (if you’re experienced) or a professional inspection (if you’re not). A termite inspection is also a good idea anytime you’re buying a property for renovation.

Which repairs or replacements should be done, based on the area and your exit strategy. Until you’ve decided whether to replace or patch that suspicious-looking roof (I recommend the former), it’s tough to figure out what the overall cost of the repairs might be, which makes it hard to decide the price at which to purchase the property in the first place, which is where most rehab mistakes begin.

Some repairs are more obvious than others: clearly, you’ll replace the stolen copper waterlines, but will you put linoleum in the kitchen, or ceramic tile? The answers to some of these questions depend on the area and ARV of the property (ceramic in a bread-and-butter area, linoleum in a borderzone) as well as your exit strategy (renters might LIKE a granite countertop, but they won’t take any better care of it than they will Formica, and Formica’s a lot cheaper to replace!).

How to plan out the project on paper before purchasing the property or, if you already own the property, before beginning the project. In any rehab project, holding costs are a major source of loss. Planning out the order of repairs, the scheduling of the contractors and materials deliveries and so on, can drastically cut holding times. For instance, there’s no real reason that the roofer and electrician can’t be working on the property in the same week; but there’s a really good reason not to have the electrician and drywaller working side by side.

How to buy the property at a price commensurate with the repair and holding costs and the risks associated with a major rehab. This means that you’ll generally have to offer, oh 30-60% of the ARV (a $150,000 home needing $40,000 in rehab and holding costs would call for an offer of $150 * .7=$105-40=$65,000, or 61% of ARV). “Asking price” has nothing to do with what you can pay, and you should never, ever be a motivated buyer when it comes to rehabs

How to control the property in a way that assures you won’t lose your investment. I was watching television last night, and caught part of a show where an investor was doing a bunch of work to a property he didn’t own yet so that he could get a higher appraisal and therefore a higher loan. All I could think was, “Buddy, what are you going to do when the seller comes in and discovers you’ve made his house $20,000 more valuable?”

Because rehabs require that SOMEONE—whether you, your credit card company, or your private lender—dump a LOT of money into a deal, it’s important that you actually own the property. Own, as in have title. Not an option to buy, not a land contract, not anything that requires the seller to make a second decision to sign the deed over to you AFTER you’ve done a bazillion dollars in work. BUY your rehab properties…don’t lease them.

Have ample cash and/or credit to completely finish the job. A half-rehabbed property is often worth LESS on the open market than a non-rehabbed one. Be sure you have access to more than enough money to get the job done.

Know (or know how to find) quick, affordable, reliable specialists to complete each phase of the work. The biggest risk in rehab is that it depends on contractors. Working with them is a skill set in itself, requiring management expertise, the willingness to threaten, beg cajole, ultimately fire in mid-project, and oh so much more. Some contractors are bigger babies and will make your life more difficult than others; having a team (or being able to develop one through your contacts) is crucial

Have the time, energy, and drive to stay on top of the work until it’s finished. I you think that fact that someone else is doing the work means that you can go about your business just waiting for a call telling you it’s all done, you’ve never done a rehab. You’ll be on site several times a week, if not every day, just making sure that everything’s going as planned…or you’ll regret it.

Have exit strategies that work. Retailers buy, fix, and resell properties…except when the properties don’t resell, in which case they buy, fix, and lease/option or buy, fix, and hold. If one of the latter 2 becomes necessary (which, in today’s market, it often does), you’d better have a way to refinance the property to get your repair money out so that you can move on to the next job and, hopefully, have a rate and terms that allows the deal to cash flow until you can sell. To assure your profit, knowing what to do at the end of a rehab is as important as knowing what to do at the beginning.


When--and only when--these factors are in place will you turn a profit renovating properties


Reprinted with permission of Vena Jones-Cox. To get more free articles and tips, subscribe at www.TheRealEstateGoddess.com

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