Rehabbing or flipping is almost 100% art. There are very few hard and fast rules. The goal, like in any business, is to maximize profit. Many times I have quoted the old saying that you make your money when you buy a property, and I stand by that statement. Once you’ve made a smart buy the money is immediately yours to keep… or loose. Over-improving a home is one of the best and most efficient ways to give away your money.

The Symptoms of Over-Improving

• Falling in love with the property.
• Remodeling like it was your dream home.
• Confused self Image/ falling in love with the process
  • Are you acting more like a builder, contractor, remodeler
  • Are you trying to make a model home
  • Are you doing improvements just to show how well you do an improvement
• How many times have you said I will get the money back
• Justifying an improvement with a non-monetary return

The Warning Signs

Falling in love with a property is easy to do and hard to identify. You should be in love with a project to some degree. Love is a natural product of you passion for the business. The trick is to know when you have fallen. The best way to stay on your feet is to know your market inside and out and continually compare your decisions against the realities of the market. There are also a few other indicators. We all want to do a good job on our project but you may have slipped if you’re just spending money on things that no buyer will notice or pay for. Small things like door hardware are good examples. Are you spending $30 on a closet door knob when a $5 one would work just as well? Just ask yourself, is this something that would affect what a home buyer would be willing to pay for the home? You’re not being cheap. You’re not cutting corners. If the home buyer is willing to pay more for your home because you have Medeco locks on the house then by all means install those locks. If not then you’re not serving the wants and need of your clients you are serving your own.

Remodeling a home like it was your dream home sometimes has the same roots as falling in love with a property and if this is the case see the previous paragraph. But it is also common in new rehabbers who only know what they like. Their strategy is to make every home the home that they would buy.

Immerse yourself in the market. Go to every open house you can within the relevant market. Talk to the neighbors to try to identify the wants and the needs of the type of person who will buy in this neighborhood. Try to get in their skin so you can design the home for that person. Compare every decision you make against the realities of the market. It is amazing how eager most neighbors are to talk.

A confused self image is pretty common in rehabbers who have a couple jobs under their belt or contractors who get into rehabbing as a way to try to create their own work. New rehabbers can easily start to get a swagger about the remodeling process and begin to think they are contractors. Contractors who do an occasional rehab or move into flipping homes might not fully adjust to their new rolls. Just remember that there are no hard rules. What worked on the last job may not work so well on your current project. What you happen to be good at or comfortable with may not work on a given project.

Here are some danger signs:
Are you trying to make a show place of your construction skills? Men are very proud of manly work, like carpentry. Are you showing off your fancy finish carpentry with crown moldings and ornate built-up trim in an entry level rambler? Contractor, are you trying to make a model home for your construction business? If this is the case then make sure you write off those unmarketable additions to your advertising expense and not be disappointed when you can’t find a buyer to pay for them. In fact when you finally get a buyer not only will they not pay for all those extras, they won’t even say thank you for all the free stuff you gave them. Even if you are primarily a contractor you better change your hat when you walk into your rehab project because you are in a completely new business now.

Many home remodeling contractors base their business model on trying to push every high dollar improvement they can on to a home owner or client. A rehabber does not yet know his client when he starts demolition. There is no customer or contracts guaranteeing you a certain payment. You can’t put a lien on the house to collect payment for your time and materials at the end of the project. Well, you could but it wouldn’t do you much good. No, you either guess it right up front or you work for free, or worse, you pay cold hard cash out of your pocket for the privilege of working.

Keep track of how many times you say “I will get this money back when we sell.” So many rehabbers when faced with a decision to improve or not improve just shrug their shoulders and say improve we’ll get the money back when we sell. Remember that there is a cap on what that property will sell for no matter how much you improve the home. If you find you’re making this statement too often you might go back and add up all the costs that you’ve accepted based on this rational. That combined price just might open your eyes to see that there is no way you’ll get that entire lump sum back. From there, go back and be more selective with your improvements. Having a good plan from the beginning also helps you stay realistic.

A big danger sign is when you start justifying an improvement by anything other than a dollar return at the sale.
Now, keep in mind that every project requires some of these improvements. Curb appeal is a big non-monetary justification. Curb appeal is a huge marketing must. However, it must be kept in proper perspective and under control. There are very few landscaping additions that a buyer will actually pay for, and even fewer that an appraiser will give you a 100% dollar credit for. In most cases bad landscaping will take away from your profit but great landscaping features will not necessarily increase your sales price. Any landscaping improvements beyond just a good clean up should be carefully analyzed against the area comparables.

The Remedy: Know Your Market

*NOTICE*: Your market is usually a very small area.
It will likely be no more than a one mile radius and most times it will be much smaller. Forget those reports on the news about real estate. Forget the statistics for even your town. We are talking microscopic microeconomics here. Your home might be in a subdivision that contains 200 homes. If there happens to be 6 sales in the neighborhood in the last 6 months then those 200 homes are your market. Don’t try to compare your home to those across town or even those in the neighboring subdivision. Those homes are largely irrelevant in your little world. Verify this with an appraiser if possible, but in most cases the appraiser will not allow comps from outside your subdivision if there are enough recent sales within it.

The bright side is that it makes it easier to get educated and stay current on your market. You should continually pull comparables throughout the remodel phase of your project. Know when new homes have gone on the market, how they compare to yours and their list price. Talk to the Realtors who are listing homes on the market and even the Realtors for any recently sold homes. You can also learn a lot about a neighborhood from long time residents. They can give insight into what makes the neighborhood attractive. Just keep in mind that neighbors will have a biased opinion. Take this information only as another piece of a puzzle; never take a resident’s statements as actionable intelligence.

Your target buyer is also part of your market, so you’ll want to know generally who you’re fixing this property for. You certainly want to modernize your home when you remodel it, but you just want to make sure you do it without overspending. Don’t put granite countertops in an entry level home.

Go through builder model homes when possible.

Large builders are very current on what upgrades that home buyers in different price points are willing to pay for. If you have an entry level home that you’re rehabbing then visit several entry level new home subdivisions and tour their model homes. You want to make your home new, fresh and modern but that does not always have to be expensive.

I got a little lazy on one of the flips I did this year. I let an inexperienced partner make too many decisions. I put too much stock in the advice from the Realtor who was listing the house next door, who was probably trying to get my house as a listing, and I lost sight of what grade of home I was remodeling. In the end I made about $30,000 less than what I should have. No matter how experienced you are, always be weary of the over-improvement.

Admitting you have a problem is the first step.

Photo Credit: Qfamily,

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Rehabbers: Know the Warning Signs of Over-Improvement

Sometimes your best real estate deal may be the one you don’t make. As real estate investors we are always looking for the next “perfect” opportunity. You look around and see potential everywhere and are afraid of missing out. If you aren’t careful it can lead to a fatal case of gotta-do-a-deal-itis.

In your quest to stay in the game you may convince yourself that a marginal deal is one worthy of your attention. Even worse, you may find yourself ignoring warning signs about the potential investment or the market as a whole. When you are knee-deep in the investment world it isn’t always easy to remain objective but your long-term survival depends on it.

Case in Point

A couple of years ago I was offered the opportunity to partner on a rehab deal. Another investor had found what seemed like a great opportunity but was short on cash. I had cash looking for an opportunity so I looked at the deal. It was an REO (foreclosure) in a blue-collar section of Las Vegas. It was an area that had reasonable demand and there was enough of a profit margin in the deal to make it attractive. I was in and we moved ahead with the plan.

The Las Vegas market had started to slide and we were aware of it. We built the expectation of a lower sale price into the numbers and it still worked. An alternative exit strategy was to hold the home as a rental for a short time if necessary. The rental market was strong enough to allow for our costs to be easily covered but it would mean that our capital would be tied up. Still we considered this to be a worst-case fallback option.

As we moved forward things started to go wrong. The financing we had arranged and had pre-approved fell through. The lender had changed its guidelines and would no longer do the deal. We found another lender who would do it, albeit with a larger down payment, but no sooner had we agreed to it that it too collapsed.

Stepping Back

When the second lender pulled out we took another look at everything. On the surface it didn’t make sense. We were experienced investors with a track record and solid financials and the deal penciled out on paper. Lenders had become extremely skittish, even hard money lenders weren’t eager to commit. What were we missing?

It was a case of not seeing the forest for the trees. We were so focused on the tree that was the individual deal that we missed the forest, or overall market condition. The lenders were changing the rules so quickly because the market was collapsing all around them. We decided that the best course of action was to let the deal go.

A Better Deal

Hindsight tells us that we were witnessing the beginning of a steep and prolonged decline in the real estate market. Had we done that deal we would have been upside down by the time it was completed. The only real option would have been to rent it out until the market recovered. How long that would take is anyone’s guess, but it would have been a very bad deal.

Not buying that property left me with cash for another opportunity. Several months later I had the opportunity to purchase a house from an estate for pennies on the dollar. Ultimately, not completing that Las Vegas purchase was one of the best investment decisions I have made. If you find yourself itching to make any deal just to have a deal, remember that doing nothing may be the best option.

Risk comes from not knowing what you are doing. - Warren Buffett

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

The Best Real Estate Deal Might be the One You Never Do!

This week we will look at rehabbing with the intention of flipping. Of rehabbing for personal use, rehabbing to rent and rehabbing to flip, flipping is,  by far, the riskiest of the three. However, it can also be the most lucrative if you do it right. The key word here is “if.”

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Rehabbing To Flip

I am now halfway through my 2-1/2 week vacation and currently in Hawaii. Here is another repost of a previous article on rehabbing.

Rehabbing A Rental Property

Last week we discussed rehabbing a home for personal use, this week we will explore rehabbing for the purpose of renting. Of the three main types of rehab, personal use, renting and flip, the rental falls in the middle in terms of risk. If the rental market is strong where the house is located, you do not have to worry about your exit strategy.

A simple fact of real estate investing is that renters will not take care of a property the way an owner would, in most cases. Another fact is that renters do not have the same expectations as buyers when it comes to quality. A person looking to buy a property might expect ceramic tile floors and granite countertops where a renter is quite satisfied with vinyl flooring and a laminate counter. This means that you can spend a lot less money on the rehab if your ultimate goal is to use it as a rental property.

Basic Systems

Tenants and buyers will both have certain expectations. They are looking for a home that has the basic systems in good working order. This means that the plumbing and electric must be adequate, the heating system works properly, the roof keeps the house dry and, in warmer climates, the air conditioning functions, as it should. With a rental, if these systems are not in order you can expect to have higher than normal maintenance costs.

Regardless of the ultimate goal, any rehab should include bringing the basic systems up to an acceptable level of performance. This is not an area where you should cut corners. Upgrading the electric or the plumbing doesn’t have the pizzazz of a new kitchen or bath and won’t add much value on resale or yield a higher rent. However, a house with the basic systems in poor condition can subtract value and make it difficult to sell or rent a property.

Durability Counts

Renters tend cause a greater amount of wear and tear than owners do. That being the case, you should usually choose items of greater durability wherever possible. When choosing carpet, paying a little more for a product with better durability may actually be less expensive in the long run. If you can avoid using carpet I certain areas, even better. You could consider using a product laminate flooring in high traffic areas.

When the time comes to sell a property, you can go back and complete the rehab. The time to do the fancy things and add the amenities that buyers love is when you are ready to sell. There is no point in doing a lot of high-end, high-cost rehab on a rental. More likely than not, you will just need to do it all over again when you are ready to sell.

Buy It Right

One of the most difficult aspects of real estate investing is finding property that will provide a positive rental cash flow. As hard as it is, it is significantly easier if you buy rehab property. Since a fixer-upper should be available for well below market value, it is likely to command a much higher rent as a percentage of purchase price. House “A” and house “B” may command the same rent if they are in comparable condition. However, house “A” may sell for $100,000 at full retail, but house ”B” is selling for $50,000 with $20,000 in repairs needed. The total costs for house “B” was $70,000 but will rent for the same amount as house “A” even though that house costs $30,000 more. That could well be the difference between a house that helps put food on the table as opposed to a house that eats you alive.

A fool and his money are soon elected.
- Will Rogers

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Rental Property Rehab

I am curenlty sailing the Pacific on a 2 1/2 week cruise (yes, this is a great business).  Rather than skipping my weekly posts, I thought I would share a previous article on getting started in rehab real estate investing.  And you thought re-runs only happened on TV!

Getting Started In Rehab Real Estate

When you are renovating a house with the intention of flipping, you need to keep the end user in mind. This usually means making conservative choices that will appeal to the widest number of potential buyers. If the house is going to be your residence you have the ability to incorporate your own personal taste. If you want purple walls with a pink ceiling, then go for it. Rehabbing a house for your own use allows you to create a home that fits the way you live.

You still need to keep resale in mind if you have any intention of selling in the near future. Determine what you resale timeframe might be and work with that in mind. If it is going to be a long-term hold you should do whatever makes you happy and fits your lifestyle.

Instead of trying to earn a bazzillion dollars on your first deal, look for one that can propel you to future success. Start small and keep the project within your ability. With each success you can move into bigger and tougher projects. As your ability grows, your profits will increase and your profits will soar.

Happy rehabbing!

 The best way to see the future is to create it. –Unknown

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Getting Your Start In Rehab Real Estate

It’s 10am, do you know where your building inspector is? You certainly know where he isn’t, he isn’t approving the most recent work so that you can move on with your project. Your inspection was scheduled for first thing in the morning and the inspector finally shows up near the end of the day.  On the one hand you want to yell, scream and complain, on the other hand you know that you need him to sign off on the work so that you can proceed.  Outwardly you are respectful and cordial, inside you are seething and thinking, “next time I’m doing this without permits!”

Do I Really Need Permits?

It’s very tempting to do renovations without pulling permits.  You can save time, money and a big hassle, but at what cost?  The primary reason that municipalities require permits is so that they can be sure that work is performed to acceptable standards and that it meets all building codes.  The codes are created to set minimum standards for safety and appearance.  These standards give home buyers a reasonable level of assurance that a home is safe for them to live in. 

A lot of cosmetic work can be done without permits.  Installing new carpets, painting and simple changes do not normally require any kind of approval.  Major renovations involving plumbing, electric, foundations, extensions etc. almost always will.  A good starting point is the local building department.  They can give you an idea of what the local requirements are.  When in doubt, give them a call.

We Don’t Need No Stinkin Permits!

When working with contractors you need to be careful.  If they tell you that they don’t need permits to do the project you should check to be sure.  It could be that they are unlicensed or they may be looking to cut corners.  Be especially wary if they say that you can save money by not pulling permits, you may end up paying a lot more in the end.

Big City vs. Small Town

When working with a building department in a large city you a probably dealing with a bureaucracy and may not see the same inspector twice.  In a small town the local inspector may be the entire building department.  You need to adapt to whatever the situation is.  In a large city you want to develop a good reputation so that inspectors know that you are easy to deal with.  In a small town you need to make the inspector your friend.  Making an enemy of a small town inspector can be the kiss of death for your business as can a bad reputation in a big city.

Permits, inspectors and inspections can be a big hassle.  However, they are a part of the business and learning to deal with them can make your life a lot easier.

Tact is the ability to describe others as they see themselves. - Abraham Lincoln

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Municipal Building Inspector: Friend or Foe?

I made my first foray into small town real estate back in 2005.  Having been used to large suburban markets, I soon discovered that this was a different animal.  Many large markets had run amok with rampant speculation that was driving real estate prices into the stratosphere and I wanted no part of the risk associated with investments in those areas.  Through networking connections I had learned of a Nevada mining town that was experiencing an economic revival and, as a result, had a severe housing shortage. Despite the demand, prices had not climbed much but rents were high.  An investor’s paradise, or so it seemed.

The Perfect Storm

The town of Ely, Nevada had gone through years of economic decline when a mine, its primary industry, had shut down.  People left the area in search of work and houses were abandoned because there were no buyers.  Many of those who remained did not have the money to maintain their houses and they fell into a state of disrepair.  The future looked bleak for the area.

Fortune eventually shined on the area when the mine was bought by a much larger operation and re-opened.  Other industry came to the area in the form of a state prison and, not one but two, proposed power plants.  Suddenly workers were in demand but there was very little available housing.  I was one of the first rehabbers to enter the area and others soon followed.  Opportunity was everywhere.

Learning To Adapt

 On the surface you would think that people would be happy to see investment in their town.  However, it soon became apparent that outsiders were resented.  The townspeople were looking to protect their way of life and didn’t like the intrusion of the city slickers.  In many ways I could understand how they felt.

Many investors had come to the area and attempted to use their big city tactics and quickly found that they didn’t work.  The pace is slower and there wasn’t much competition between contractors since there were so few of them. To be successful in this area you had to learn how to fit in.  Those who were able to adapt thrived, those who couldn’t soon left the area.  The small town way of life isn’t for everyone.

A Different Atmosphere

It took a little getting used to but I came to love the area. The way of life is much more relaxed, the air is cleaner and the people have turned out to be terrific.  The area has seen tremendous changes in the three years that I have known it, yet in many ways it is the same as it must have been fifty years ago.  [See an article that I had published in The Ely Times ]  

Experience is the one thing you can’t get for nothing. – Oscar Wilde 

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Real Estate Investing in a Small Town