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The Real Estate Investment Over-Improvement Trap

by Danny Johnson on November 19, 2012 · 12 comments

  
opulent home

This is a topic that can be the deciding factor in whether you make a lot of money on a rehab or rental, or lose money. What I’m talking about here is spending too much money and time on fixing up properties. There’s an art to knowing how much “improving” is necessary and appropriate.

The Over-Improvement Trap For The Rehabber

For the rehabber, there is a delicate balance regarding how much and which improvements should be made in order to save money.

We’re being pulled in two different directions.

The first is that we need to keep everything we do within our budget. You know those analysis calculations you do before you make an offer? I sure hope you are! Well, you use certain numbers in those calculations for the cost of improvements. You need to stick to those numbers so that you can realize the profit that you assumed you would make.

This requires that you don’t go overboard on spending. You might think you have it under control, but that first time you go into your home improvement store and see those fancy LED lights and shower sprayers, temptation might cause you to throw those numbers out the window.

The second is improving the house so that it stands out and is memorable. When people are shopping for a house, they will typically see quite a few before and after viewing yours. It’s crucial that your house stands out and really causes the buyer to go back to it in their mind when they think back about the houses they’ve seen.

Are You A Designer?

We’ve got to use fixtures and finishes that appeal to the largest group of buyers so that we are more likely to sell quickly. This doesn’t mean that everything has to be “blah” brown and neutral. You can use designer colors, but please make sure that an actual designer picked them out.

A lot of us have the ability to pick amazing colors that stand out and appeal to a lot of buyers (I’ll be the first to admit that I can’t, but my wife sure can), but most of us cannot if our life depended on it. The scary thing is that a lot of people that think they can pick out amazing colors and combinations, can’t. Just sayin’.

We’ve got to be mindful of what “level” of improvement and materials we need for each house. This means that you probably shouldn’t be putting granite in a house that retails for $60,000. It’s just not necessary and costs too much. The same goes for fancy Berber carpet and Jacuzzi tubs.

Check Out The Competition

What we need to always do is check on the competition. It’s different for each house. I’ll be the first to admit that I get busy (lazy) and fail to do this a lot of times, but things work out better when I do. Check the listings for other houses and see what kind of shape they are in. Are they rehabbed, updated or remodeled? What sort of “wow” factors if any do they have? What type of flooring did they use? Focus on the kitchen and bathrooms. Most of the time you’re really not competing with much. A lot of houses are being sold by owners that never even updated.

This biggest cause of this mistake is fixing up a house as if you are going to move into it yourself. You’re not (or at least I hope you’re not). The house is not going to be your house. Don’t go overboard!

Stick to your numbers and focus on just beating the competition.

How To Stand Out Without Breaking the Bank

There are several great ways to make your end product stand out without breaking the bank. Remember to focus these on the kitchen and bathrooms.

Kitchens

You can add a fancy mosaic backsplash tile. This usually doesn’t cost very much because it’s not a lot of square footage. You can add under cabinet lighting on the cheap as well. If you feel granite would be over doing it but that laminated counters would be too cheap, why not use granite tiles? They are usually much cheaper to buy and install. Paint the cabinets. Try to find a good color other than white (most of the time they look cheap when just painted white – believe me we did it for years and I always regretted it). Add crown molding to the cabinets if you are painting them.

Bathrooms

Add a decorative tile border around the tub surround (if you are tiling of course). Add decorative molding around the mirror or buy a designer framed mirror (about $70). Change out the cabinet hardware (can be done in the kitchen as well). Change the faucet and light fixture.

Staging

I cannot begin to tell you what a huge difference staging makes (when done correctly). The goal should be to set up the house so that when buyers come through they will get an impression of what it would feel like to be living in the house. The furniture doesn’t have to be expensive to “feel” lavish and expensive. Use rugs and nice pictures on the walls. Matted framed black and white pictures are always in style. By using furniture with classic lines and neutral colors, you can use bright more stylish colors for your accents. Make sure the house smells clean. Plants are always a nice touch as well.

Remember, the whole idea is to create an expensive “feel”.

The Over-Improvement Trap For The Landlord

Most of what was mentioned for rehabbers holds true for rental properties. The key difference is that landlords should focus on durability of the materials used. You don’t want to be repainting (even though, no matter what, this seems to always be needed) and replacing flooring with each new tenant.

Using semi-gloss paint helps because it can be cleaned to a degree. Using vinyl, ceramic or laminate flooring is usually better than carpet because they resist stains. Floors can really be torn up easily as people drag furniture and appliances around during moving.

You also don’t want to be putting in expensive fixtures (unless of course the house is in a great area and by doing so you can increase the rent or get better tenants) just so that they can disappear with the tenant.

Conclusion

Remember, you are not going to be moving into the house, so don’t fix it up as if that were the goal.

Photo: Karen Roe

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{ 12 comments… read them below or add one }

Karen Rittenhouse November 19, 2012 at 6:55 am

One problem my husband and I have is that he sees one set if things to be done, I see another. Rather than compromise (we’re married, don’t forget) we each do what we think needs to be done. Double the cost – great for our tenants and buyers. :)

Thanks, Danny, for the reminder.

Reply

Danny Johnson November 19, 2012 at 7:35 am

With us, I sometimes will just have the contractor do what I feel is necessary. This happens when I am overly busy. Then, when my wife comes by to see the house, she is usually really disappointed. It’s funny thinking back about those situations, but was not at the time.

We’ve been a lot better lately about both going over the figure out our scope of work before bringing our contractor by. I like to think I have good design sense, but I’ve proven before that I’m not quite there. :)

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Sharon Vornholt November 19, 2012 at 7:06 am

Danny -

These are all great ideas to make your property stand out from the rest. It’s amazing how a few hundred dollars in “extras” and some staging gives back a huge return and a quicker sale.

Sharon

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Danny Johnson November 19, 2012 at 7:36 am

Thanks Sharon. I still can’t believe we weren’t doing some of these things a few years ago. Glad I finally saw the light. Our houses are selling much faster now.

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Mike Mulcahy November 19, 2012 at 7:23 am

Who does your staging for you? Do you hire a professional “stager”, or do you have some home-grown talent?

If it’s professionally staged, does that person bring their own furniture to your house? Generally speaking, what does that cost you on a square foot basis per unit of time?

Great article – it definitely seems like a delicate balance to make your house stand out without breaking the budget.

Reply

Danny Johnson November 19, 2012 at 7:48 am

My wife does our staging.

We do a lot of rehabs, so we figured it would be best to buy staging furniture. We have a couple sets and move them from house to house as they are sold. This has proven to be very cost effective. My wife spent several days shopping at discount furniture stores like Salvation Army, Goodwill, Big Lots, etc. Garage sales are also a great place. She wrote an article for our blog about this very subject. You can read it here: http://www.flippingjunkie.com/2011/staging-a-house-flip-lesson-learned

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Mike Mulcahy November 19, 2012 at 12:28 pm

Danny, thanks for the information and the link to your wife’s write-up. I perused the site for a bit and will definitely be back – so much good content to learn from!

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Danny Johnson November 19, 2012 at 4:50 pm

No problem, Mike. Glad you like the blog.

Jim Pratt November 19, 2012 at 12:54 pm

Kitchens and bathrooms are number 1 & 2, number 3 is exterior appearance. If they don’t like the exterior, their not going to go inside. Staging does not work in my area, I know because I’ve tried it. So I simply leave the curtains partially open to let as much light in as possible. Sick to the 70% rule when buying and rehabbing, works 95% of the time. You want the best looking property not the most expensive or fanciest. Little tricks of the trade can add a lot of value for very little money like new hardware, electrical lighting and laminate flooring. Very good article.

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Danny Johnson November 19, 2012 at 4:51 pm

Great point about the exterior of the house.

Thanks Jim.

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Mike Hurney November 26, 2012 at 7:19 am

Good Job Danny!
My pet peeve is when a Rehabber will change direction after they speak with anyone. This errodes the confidence your crew has in your ability to take charge and give direction. I’ve got a neighbor that will ask at least 50 people walking by her house, during a Summer month, what color they like. Like, they’re qualified because they walk by?

Never take RE advice from someone unless they’re Full Time in RE and have made much more money than you in RE.
Good Luck Investing, Mike

Reply

Danny Johnson November 26, 2012 at 2:23 pm

Thanks, Mike.

It can be hard to just make a decision and stick to it. I’ve experienced what you are talking about and it can be a total nightmare.

Reply

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