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Real Estate Investing: What Is Rehabbing?

By: Matt Gerchow
Submitted: 10:13AM on Thursday 21 August 2008

Renovate and Retail aka Rehabbing

Another form of Real Estate Investing profit we will talk about is ‘Rehabbing or Renovate and Retail.’ It is important you understand the ‘ins and outs,’ of this business making a wrong move might end you up stuck with a property that leaves you very few options for unloading it.

Rehabbing is the process of purchasing a property that is in need of repair. Repair can run from as little as paint and carpet to as much as repairing the foundation and adding an additional story to the house. In general it works like this, the more rehab you do the more profit you are entitled to make. In rehabbing there is what we call the ‘headache factor.’ The bigger the headache, the more you make. It is crucial that you not underestimate the catastrophic possibilities that may occur during the renovation process.

You need to bid every project planning for the worst. If you plan to change the windows without a permit, make your cost estimate (and your offer) as though you had to pull every permit. Several times, I have made small repairs on a property and then the city inspector shows up randomly to take a look (haters).

This increases your permitting fees by double and the inspectors can be much more difficult after this. I can tell you nightmare after nightmare about each inspector having their determination of how the code should be interpreted and enforced. It doesn’t help that if you have a Range Rover or BMW in front of the house. Sometimes they are determined that you aren’t going to make profit on their watch.

If you are determined to succeed without problems, hire a licensed contractor to perform all of the work, but negotiate your fees to the equivalence of a handyman. There are a ton of contractors out there that need work and are willing to provide contractor quality for a fraction of their normal costs just to keep their crews in motion.

A good team of subcontractors is very difficult to assemble, and the contractors know this. A good way to find a decent group of contractors is to drive the immediate neighborhood where the property is located and find a contractor that is working on a low-rise commercial building. Every day they have guys sitting there on the clock while another process such as concrete drying or permit checking needs to be finished. These ‘extra’ guys can be utilized at your property and the contractor will give you a substantial discount because he was paying them anyway.

While rehabbing one needs to be familiar with the entire process from closing the property the first time with a seller or Wholesaler, to closing the property the second time with a retail buyer. The first closing is rather simple, but there are precautions you need to take. The first item to consider, you need to pay for a home inspection. Your hard money lender may not require it because they protect themselves by loaning a 60% or less of the eventual retail value, but there may be problems with the house (like mold) that are only discovered when your retail buyer performs their required home inspection.

In rehabbing, you need to have money for the initial purchase in addition to all of the rehab costs. Most people just starting out do not have this money set aside.

If you choose to do a rehab with hard money you might put yourself in a position where you have to pay back the money with ‘job money’.

To date, I have encountered the greatest headaches and the most profit in the rehab sector of the real estate business. The rehabber generally makes the greatest amount of money in the deal and they definitely earn it. But other than the amount of money you make one needs to consider the time it takes to make it.

Hope this Helps,

Matt Gerchow