You don’t need the construction skills of Bob Vila to be a rehab professional, yet it’s no secret you can save if you do some of the work yourself. As a general rule, estimates from contractors in our area run 1/3 for materials and 2/3’s for labor. So theoretically, we save 66% by doing the project ourselves, right?

Well… maybe.

To decide, consider:

• Cost of materials: Can materials be purchased at contractor cost or will you pay a hefty up-charge? Is it possible to find materials at salvage or a Habitat-type store to increase your margin of profit?
• Cost of time: How much longer will this take to DIY? And in real dollars, how much will this add to holding costs? Holding costs include but are not limited to mortgage payments, insurance (generally higher when property is empty and/or under construction), utility bills, and lost rent. If it takes 2 weeks working nights and weekends to complete a project your contractor can finish in 2 days, add 10 days of holding costs.

Just an Opinion:

The decision to DIY should be a simple mathematical equation where you:

• price materials
• estimate the time needed to complete the project
• multiply the number of days/weeks by the daily/weekly rate for holding costs, then
• subtract that amount from the contractor bid

Of course it’s not that easy… how much fun would that be?

For starters, you may not be delaying completion of the project if other work is going on anyway. Contractor delays are a common problem and if your’s has a history of putting off your projects for another day, you might be able to finish sooner than he can anyway. But besides that, there’s value hidden away in DIY projects that can only be mined by rolling up the sleeves and getting your nails encrusted with something icky.

By learning a new skill, you increase both ability and confidence. You’re also learning to identify quality work, the amount and difficulty of labor, special tools needed for the job, and reasonable time estimates for completion. If you decide to hire someone next time, you’ll have a much better idea what’s involved in the project and if bids are reasonable. That type of knowledge is invaluable to the rehab professional, paying dividends with every new project.

One of the mister’s favorite DIY projects is installing pine flooring in our rent houses. For more info, click here.

Just Another Opinion:

Consider taking on at least one new project with each rehab, even if it’s as simple as replacing a light switch or changing out a door knob. With experience, you’ll learn which repairs save the most and which are best left to others. During your first few houses, try to be as hands-on as possible and consider it part of your rehab education.

If you have no handy-man skills whatsoever, you might try working alongside your contractor (if he’ll have you). He may tell you to pound sand (politely of course), but if you have a good working relationship, it’s worth a shot. Later, you may find that hiring reputable contractors for most (if not all) of the work will save enough in holding costs to justify the expense.

Working alongside a professional is one of the best ways to learn a new skill. Here, Mr. Brz watches while our friend Marc Bridges demonstrates proper glazing technique.

And working with a friend is lots more fun. We’ll probably need Marc to teach us something else next time around.

construction, Contractor, DIY, handy-man

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Tags: DIY, do it yourself, fixer, real estate investing, rehab, rehabber, Rehabbing

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

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

“There are too many foreclosures in my area.”
“The market is dead”
“New home construction is making it impossible to compete with.”

When I hear any of the above statements, my response is, “Whatever.”

If everyone believed the media hype about global warming, everyone might move to higher ground. The media continues to report that the Toyota Camry is among the most stolen vehicles. Does that hype lead to no one wanting to buy Camry’s? Hardly. That model is among the best sellers nationwide.

Negative real estate hype…Don’t believe it all. It’s as simple as that.

Does that mean there is no truth to it all? No. The media really isn’t lying. They merely aren’t being terribly specific. It’s popular. The media could come out and say, “Real estate is thriving in certain areas of the country.” But real estate is doing poorly in more areas than areas doing well. It’s a generalization with a popular topic right now. In other words…Its hype.

The market is dead in certain places but not everywhere. It is tough to compete with a new home builder, who is offering no money down, free upgrades, warranties on everything and no closing costs if the house you are rehabbing is across the street from it. I don’t like to buy houses if there is new construction within a few miles of the house I am looking at. Foreclosures are at record highs in many parts of the Country but they aren’t killing every market.

“Whatever! Just be smart!”

Let’s take a look at a metropolitan area that is not doing very well… Detroit. Even in Texas, I keep hearing about how awful real estate is in the state of Michigan.

Michigan? I thought we were talking about Detroit? We were talking about Detroit but Detroit is in Michigan, so it must be bad everywhere in the state, right?

I doubt it. Well look at all the foreclosures in Michigan, people say. Okay, let’s look at all the foreclosures in Michigan… Where are the majority of them located? Wayne County. And which city within Wayne County has the highest number of foreclosures? Detroit. What’s my point? Don’t believe the media hype.
A good deal in Detroit is a good deal in Detroit.

Let’s take a look at a real estate investor in Detroit. They come home, sit down to watch the news on CNN and the lead story is about how the property values in the state of Michigan are nose diving. The investor smirks at the news, takes a sip from a can of beer and flips the channel. All without a second of worry about the property he is currently rehabbing in Detroit. Why? Because that investor was smart and didn’t buy into the media hype.

A smart investor will research the area and immediate area around the house they are looking to buy. If there are 15 other houses for sale on the same street and most have been on the market for over 100 days, a smart investor will not try to convince themselves that their house will sell faster than the others. Now what if there are no houses for sale on that block and only a handful in a quarter mile radius? Look closer. What if there have been several sales in that area within the past six months that all sold with a reasonable price per square foot? Look closer. How much will the house cost to buy right now, in its current condition? How much should it sell for after being fixed up, based on the recent comparables? Don’t look at the deal in terms of dollars though. Look at the percentage in the deal. A deal should have a minimum of 30% equity and if there are a lot of repairs needed, the amount of equity needed should increase as well. “But the house is worth $200,000 fixed up and I can get it for $150,000. That’s $50,000 in equity”! Umm, no it’s not. That’s only 25% equity. You have to pay closing costs when you buy it AND when you sell it. You will likely need a Realtor and that will be at least 5%. Then it will cost money to fix it up. It’s going to cost money for utilities and holding costs as well. That $50,000 gets eaten up pretty quick. Ok, ok, ok….. I am getting off the subject a little.

The point I am trying to make is an investor, with a property in an area the rest of the country believes to be dead, smirks all the way to the bank. Why? They are smart and don’t listen to the media hype.

• So be smart. Don’t try to compete with a builder. Buy a house where builders aren’t.
• Be smart. Instead of blaming foreclosures for killing a market, why not try to BUY one of those foreclosures and cash in?
• Be smart. If a market really isn’t doing well, find the parts that are doing well. The day people literally stop buying and selling houses, is the day you can honestly say, “The market is dead.”

As I said, a deal is a deal, no matter where it is.
Smart investors don’t listen to the hype.

Tags: buyers, fixer, foreclosure, Foreclosures, housing, housing market, real estate investing