That First Rehab

What a rush, closing on that first rehab deal! Now it’s time to start making every mistake in the book, at least that’s how it was for me. On the surface it looked like a great deal. I had purchased a bank REO for about 60% of the market value after repairs. I had construction experience and a lot of enthusiasm. What I didn’t have was any idea of how to manage a project like this. Another minor snag was that I had spent every dime I had to acquire the property, but that’s what credit cards are for, right?

I bought the house for my own personal use, buying a fixer allowed me to live in a better neighborhood than I might otherwise be able to afford. Because I was going to live in the house as I renovated it I didn’t have the same sense of urgency that I would if I needed to do a quick flip. I also knew that it would be a great learning experience since we learn best by doing. Unfortunately we also learn the most from our mistakes, I just wish I hadn’t learned so much!

Let the Mistakes Begin!

My first mistake was that I didn’t have a home inspection before the purchase. My thinking at the time was that the house is going to be totally renovated so what difference will it make? The power and water were off which would make it difficult to check many things and I didn’t want to “waste” the $300. The bank was insisting on an as-is purchase anyway. The bank was also giving me the financing so I didn’t have a lender demanding actual proof that things worked.

So what was wrong? It might be easier to list the things that were right. The heat was a hot water system with an oil-fired furnace. I knew from looking at it that the unit was only a couple of years old, no problem right? Wrong, the system was not properly shut down and all of the seals dried out. I owned the house for three days and I was already hit with an unexpected $2,500 replacement. After the new furnace was installed I learned that the water had never been drained from the system which caused the water in the pipes to freeze and rupture most of the lines. Cha-ching! Other “little” things that were wrong would include termites using the front of the house for a midnight snack, and carpenter ants devouring about a quarter of the roof deck. Cha-ching! There were live electrical wires buried in the wall along with other electrical problems. Cha-Ching! The list went on and on.

I made the classic rookie mistake of underestimating the amount of work that was needed and the length of time that the project would take. Another mistake was not having sufficient capital to keep the project going. I hadn’t explored my financing options or taken the time to learn about the reality of rehabbing houses. I watched shows like Home Time and This Old House and thought that this would be a lot of fun.

The funny thing is that despite everything that went wrong it was still a profitable deal. Sometimes it’s better to be lucky than good, I benefited because the market had appreciated. If the real estate market had been flat or declined I would have lost a bundle on this deal. The education that I received, however, was priceless.

Know What You Don’t Know

Before jumping into your first rehab you need to do an in-depth evaluation. Not of the property or the neighborhood or the real estate market. You need to take a hard look at yourself. What are your strengths and shortcomings? What do you do well and where do you need help? I think that most rehabbers are optimists by nature. You have to be in order to see the possibilities and believe that you can turn that dump at the end of the street into a palace. That optimism can be a double-edged sword if you aren’t careful. Optimism can cause you to think that a project will be easier than it is, take less time than it realistically will and will sell for more than the market will allow. I am not suggesting that you analyze everything to death but that you do frequent reality checks. Rehabbing can be very satisfying and financially rewarding but it isn’t always easy.

If you find yourself in a hole, stop digging! – Will Rogers

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Tags: fixer, real estate investing, rehab, rehabber, Rehabbing