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

Rehabbing a house can be a nail-biting experience, particularly the first time around. Sometimes, nice readers over at my blog email asking advice about their latest rehab project. Generally, the questions involve finishing issues such as whether to paint or replace kitchen cabinets, or if carpet or wood floors work better in a rental. I always try to answer, mainly because I remember what it’s like to be a new investor with seemingly thousands of decisions, all pounding away at the bottom line.

Secretly, I’m hoping the writer remembers that mine is just another opinion. Ask 10 different rehab professionals and get 10 different answers. All are probably right to varying degrees and all may be dead wrong for the project in question. It’s akin to asking a complete stranger if you should get a dog. Everyone’s got an opinion but you’re going to be the only one taking Cujo on a walk every night.

Asking the Right Questions

When making rehab choices, you need to:

• Know your exit strategy
• Know your market
• Know your budget

Once you’ve identified these three, it’s much easier to make rehab decisions.

What’s your exit strategy?

Do you plan to sell this house quickly for profit? Then you’ll need to investigate the common materials and finishes of houses for sale in the same price range and neighborhood. If all the other kids on the market have granite counters, you can’t cheap out with laminate without hurting your bottom line. In this case, durability gives way to aesthetics. Make it pretty.

Do you plan to hold long term and rent? Tenants are notoriously hard on rent houses. Durability of materials trumps looks. Renters in most markets don’t expect the same level of custom upgrades as buyers and the house may have to be redone before selling anyway. Think neutral and sturdy.

What does your market dictate?

Part of the joy of having a few houses under your belt is having folks think you’re an expert, but here’s the rub. No one- no matter how smart and/or successful-can be an expert in your market unless they live and invest in your market. And even then, so many variables come into play that any expert advice may not apply anyhow.

What do prospective tenants in this particular neighborhood, at this particular price-point expect? Do they want central air and heat or are window units and space heaters okay? Laminate or granite counters? Builder grade carpet or hardwood floors? The only way to know is to talk to current and former tenants, attend open houses, and make a few calls. However, if you’ve lived in the area any length of time, you may know the answers already.

What’s the budget?

There’s a tipping point with every house and every neighborhood where one more dollar spent will not bring another dollar of profit no matter what. It’s called, Over Improvement for Market and the principle applies for both rent houses and flips.

For example: A 1/1 duplex rents for $500/month.

In an upscale area full of young professionals, upgrading to granite counters and stainless appliances might warrant a rental increase to $750 and attract a more stable tenant.

In a declining area, it won’t raise the rent one penny because prospective tenants can’t pay more than $500 a month working at Burger Barn. And it might attract an unmarked van to swipe the lovely appliances.

The Payoff

Rehabbing old houses is lots of fun. Of course, not everyone gets a thrill from sawdust and color charts (silly beans) and that’s okay. But making rehab selections doesn’t have to be paralyzing either.

There’s nothing better than picking paint colors, siding and sinks on a Friday night. Researching new products and trying something a little different with each house adds spice to the rehab life. And who doesn’t love taking out the frustrations via sledgehammer on a wall that simply must come down before midnight?

But the big payoff comes when you see something rotting and icky transformed into a solid, functional asset to the community.

And fortunately, it gets easier as you go.

Kitchen cabinets desperately in need of rehab decision-making skillz.

Mid-project, after a first coat of Sherwin Williams Dover White.

And finally, after a hand-rubbed glaze, polyurethane coating and new hardware.

Tags: contractor, rehab, rehabber, Rehabbing

Although the days of getting cash credits towards closing costs are seemingly coming to an end with the tightening of mortgage regulations, there are still viable ways to accomplish that goal. Both Non-Agency and Dual-Agency arrangements can be used for this purpose.

Often buyers mistakenly believe Dual-Agency is created when buyers approach a listing agent and ask, “if we don’t have an Agent can we receive the selling office commission (SOC) at closing for closing costs”? What’s actually created in this situation is a Non-Agency agreement.

When agents enter into such non-agency arrangements their obligations are to represent the seller and seller only throughout the sale; thus they will write the Purchase/Sale Agreement (PSA) to reflect that the buyer has no representation (they represent themselves). Non-Agency arrangements offer the buyer no professional representation whatsoever, as opposed to Dual-Agency.

These are not a strategies I recommend anyone (buyer or seller) engage in for minor monetary savings or to expedite a sale. If there needs to be a cash credit at closing to cover closing cost, and the seller does not want to pay-out additional monies over and above expenses already written into the listing agreement, these methods can accomplish that.

In the Dual-Agency relationship, The Purchase & Sale Agreement will reflect that the agency and Brokerage are in fact representing both parties and will be crediting a percentage of the SOC to the buyer. With the approval of the seller the buyer and agent prior to negotiating a purchase sign an agency agreement. This insures both parties (buyer & seller) are proceeding with professional advice.

Previously, as a dual-agent I’ve granted as much as two thirds of the SOC to the buyer, and then reduced the listing side of the commission by 1/3 so that the seller may also enjoy a savings.

Upon closing, the seller saved money and the buyer got a substantial amount of cash towards closing cost’s, Structuring a sale like this works well on a newer model or fully refurbished home where controversy over price and repairs are not an issue.

Dual-agency relationships can certainly be a vehicle towards conflict of interest by the agent if not handled properly, and should be avoided as a general practice. Non-Agency relationships can accomplish the same monetary goals, but offer the buyer no professional advice.

Nevertheless, if both parties desire and agree to either Dual-Agency or Non-Agency representation they will accomplish the goal of covering closing cost when other methods are not available.

Tags: closing, real estate closing, real estate investing, realestate, rehab, rehabber

I had just acquired my second rehab project and I couldn’t wait to get started. Like the first, this was going to be my personal residence. It was a three bedroom ranch in a great area that I had acquired from HUD. Like many foreclosures it had been badly neglected and needed a fair amount of work but it had enormous potential. My wife was extremely excited about it as well and was looking forward to moving in. However before she would stay in the house she was insisting that it have running water, electric, heat and that it had to be a lot less “icky”, she can be so unreasonable sometimes.

The water, electric and heat were not, I admit, unreasonable requests but surely a little ickiness had to be expected. The previous owner had animals that seemed to prefer staying indoors and the place smelled like an abandoned kennel. Getting rid of the carpets and trash took care of most of it and my wife did move in after the house passed the sniff test. We proceeded to rehab the house room by room and it ended up being an excellent home. It also turned into one of my most profitable deals and paved the way for my future as a rehabber.

If it’s “icky” I’m not picky!

I clearly recall looking for my first investment rehab with my wife tagging along. We were looking at properties with an agent and I had a friend of mine along with me. He owned a few investment properties and some experience with rehab and I was looking for his input on any possible deals. The first house that we looked at had a very large lot that was overgrown and loaded with debris. As we went in my friend and I were looking around and getting a little bit excited about the potential that we saw but in the background I heard “eeeeew, this place is disgusting!” It had failed my wife’s sniff test. My friend and I looked at each other, neither one of us had noticed since we were too busy looking at the future possibilities of the house. We didn’t buy that particular property because we located another that worked out much better in terms of expected profit but it would have been a good deal.

It was at this point that I realized the power of the ick factor. The average retail buyer is turned off by things that I am immune to. I am more concerned with a property’s future potential than by its present state. This actually works in my favor. Since most buyers are turned off by “ickiness”, the seller is at a disadvantage and I have less competition. Less competition means that I can usually get a much better deal.

Theory Confirmed

A short time after I realized the power of this factor my theory was confirmed. I had been out looking at properties with another friend of mine. He saw what I was doing with my real estate investments and he wanted to buy investment properties as well. In his case he was looking for rental properties that didn’t need much, if any, work. We looked at about a dozen houses for him but I had one that I wanted to see for myself. It was a duplex in a blue collar neighborhood that required extensive rehab. From a numbers perspective it was a hot deal and I couldn’t wait to get a better look at it. From the outside it looked like a real dump and the inside it was even worse. The place was built in 1930 and I suspect that the most recent cleaning also took place about that time. I was going through the house and figuring out what the scope of work would be and figuring out my potential profit. As I was doing this I noticed my friend practically running out of the house.

I went outside and my friend was waiting to get in the car. He was saying, “are we done here? Can we go? You aren’t thinking about buying this place, are you?” He couldn’t fathom how anyone would be interested in this house. After we left he was commenting on how he couldn’t believe that people actually lived like that, welcome to my world! I decided not to buy that place, not because of its condition but because of some serious foundation issues that I discovered.

The Theory in Practice

After several years of rehabbing properties my wife has come to realize that icky is a good thing if we aren’t going to live there. When we are out searching for property and my wife says “oh, this is nice!” I cross it off of my list. But if I hear “eeew, gross!” I think, cha-ching!

A pessimist is one who makes difficulties of his opportunities and an optimist is one who makes opportunities of his difficulties. – Harry S. Truman

Tags: real estate investing, rehab, rehabber

Last year, I bought a house, rehabbed it and finally sold it. When I got a contract to sell it, the experience I endured was simply gut-wrenching. I got “sand-bagged” just about every way possible until I fought back… And WON! Here is what happened…

This house was the first house deal I had done since 2003.

The reason I had not done any deals since then was because I began my teaching career and started my mentoring program soon after that. During a class I was teaching in May of 2006, two students arrogantly challenged me by saying, “Are you one of those people who tell others how to do it but never have the stones to do it yourself?”

I took it rather calmly but, I was on fire on the inside. I made two phone calls to wholesalers and was informed about the house. I looked at it the next day and made a phone call to the hard money lender that afternoon. I closed three days later. I set out to prove I practice what I preach and figured it would be a great thing to involve students in.

I got a call from a Realtor around 7PM last November and they wanted to show my house that night. I met her and the buyers at the house and they loved it. I offered to pay $5,000 towards closing costs and they agreed to a sales price of $253,000.

The Realtor told me I would have to wait until Monday (this was on a Saturday) to get the contract and earnest money because the buyers currently had a contract on another house to secure their interest rate. She told me they wanted my house and would cancel the other contract Monday morning. She then said that they wanted to close in one week. My response was, “No problem.”

On Monday, she called back and told me they would not be able to offer a contract because the buyer’s lender informed them that they would lose the interest rate if they pursued my house. I told her to call the lender back and inform them that the buyer’s would get funding elsewhere and the lender would buckle under and give them the same rate rather than lose the loan. She refused. I then offered to increase my contribution by $1,000, for $6,000 total. She refused.
I didn’t have a contract. I had nothing.

The following week the same Realtor called back. She asked if I would still accept the same terms. I agreed and she sent the contract over to Mark, my Realtor. From the start, I had been factoring the title policy cost being included in the $6,000 I was going to contribute to the closing costs.

Mark sent the contract over to me and we briefly went over a few points that I should contest, etc. The Realtor had checked the box which said the seller was to pay for the title policy. She had also added in the Provisions section that the seller was to pay $6,000 for closing costs. I saw nothing out of order so I signed it and sent it back to Mark. MISTAKE! That was one of the big mistakes I made. I should have written in specifically that the title policy expense was to be included in the $6,000. Instead, I ended up paying $1,700 for the title policy PLUS $6,000 for closing costs. I went nuts when it was pointed out that title policy costs are not considered part of closing costs. I went on to ask several title companies, escrow agents & real estate attorney’s what they thought. It was split. Half said it should have been included and half said they were separate.

When I went to the buyers agent to get it right (in my opinion), she countered by saying that it was not part of the agreement and she would “cancel the contract” if I pushed the issue. I asked my Realtor (Mark) if she could do that. He told me that she represented the buyer but it appeared that she took that to mean that she had Power of Attorney for the buyers. She refused to bring my concern to the buyers. I wanted to cancel the contract as it was still in the Option period but I had not had any other offers in three months so I backed off and in a way, allowed the Realtor to bully me on the issue. In other words, I would be coming out of pocket $7,700 now.

A few days later, the buyers had the inspection and the appraisal done. The buyers agent handed me a complete copy of the inspection report and said there were several items that needed to be fixed. I called Mark and told him the inspection was complete and she had given me a copy of the report. Mark told me the agent should soon submit a list of repairs the buyers want done and we would go over them together before sending them back to the buyers agent. In other words, the inspection would reveal flaws in the house and the buyers then request which ones they would like me to fix in order for them to proceed to buy the house. In Texas, this is the Option Period.

Once the Option time passes, the contract is set and if the buyers back out after the option expires, then they lose their Earnest Money ($2,000).

The repair list never came. I called Mark and asked if they ever sent it. He confirmed that it had not been sent. Three days later, the Realtor came by to give me the Option check (which she should have given me the day the contract was offered) and asked me “How are the repairs coming along?” I was stunned. It quickly dawned on me that the Realtor actually thought that the inspection report she gave me was also the list of repairs the buyers wanted me to fix. When she did not get the report back from me, she assumed I had agreed to repair everything the report had listed. I said to the Realtor, “What repairs?” She got very annoyed and told me I didn’t respond to the report and I have to make the repairs. I replied, “The option period is over and you didn’t send us the list.” She then raised her voice and said, “The deal is off. I am canceling the deal.” As she got in her car, I said, “Okay but the buyers will lose their earnest money.” She shook her head and said, “Oh, no they won’t.” She drove off.

I quickly called Mark and he was beside himself. Since I am not a real estate agent, I depended on him to tell me what the buyers’ agent could and could not do. He told me that she could not threaten to cancel the contract without consulting with the buyer first. I had a problem now. The buyers Realtor didn’t know the rules and had messed up by not getting the requested list of repairs to me during the option period and to make it worse, was now threatening to cancel the contract if I didn’t agree to make any repairs. People that know me personally all know that I go out of my way to “C Y A” or in other words, “Cover Your Asset.” I went into CYA mode.

Later that night, the Buyers Agent called me but I let it go to Voice Mail. I was rewarded when she left a message and in it she said, “You need to make those repairs because if you don’t, I am going to cancel this whole deal.” I later found out that she left the same message on Marks voice mail. Since I was in CYA mode, I got out my computer and recorded the voice mail message and made it into a .wav file on my hard drive.
That’s when the fun started. Actually, that is when the stress started for me.

I had called TREC (Texas Real Estate Commission) and confirmed that the buyers’ agent did not have the authority to cancel a contract without the buyers’ consent.

I took my laptop to the buyers’ agents’ office and I asked to speak to the Broker. For the novice, the Broker (in this case it was Keller-Williams) is the top dog. They owned the Keller-Williams office and the buyers’ Realtor worked under the Broker.
The person who came in was not the Broker but they confirmed they were the highest ranking manager in that office. I sat with her and said, “I am sorry to come to you like this but I need this house to close on time and I am not confident that it will happen because your Agent is being a Cowboy.” I then played the recording of the voice mail. The office manager’s eyes began to widen and she shook her head. She said under her breathe, “Oh no… she didn’t.” The message ended and she said to me, “Mr. Watkins, I am sorry that this has happened. You have my word that I will get involved in this transaction and see to it that it closes without any further incident.”

I thanked her and left. I wish there had been no other incidents after that but, plenty followed.

The next day the buyers’ agent called me and had lost her attitude. She apologized for the confusion and said she had made a mistake. She then asked me if I was willing to move forward with the sale. I asked if I was going to be required to make the repairs and she said that it was her mistake and informed the buyers that she had messed up and the buyers still wanted to buy the house. I agreed and since I had met the buyers and had liked them the first night they looked at the house, I offered to make several repairs as an act of good faith. I figured the buyers had not made the mistake so I would not penalize them for their Realtor’s mistake. They were all grateful.

The Realtor then said her “Boss” was with her and was I willing to talk to him? I said “Sure” and her boss got on the phone. He identified himself as the Broker (I later found out from another agent in that office that he was a minority owner of that office).
He asked me, “What is your intention at this point?” My reply was, “I want to get this deal done but I was not willing to allow his agent to walk all over me because she didn’t know the rules.”

He then asked if I could come by his office to talk face to face. I said I would be there in 20 minutes.

When I arrived at his office, I saw the buyers’ agent was there as well. The three of us sat down and we made small talk. Let me stop for a second and talk about one of the biggest problems that exist in real estate (in my opinion)… EGO’S! That’s right… EGO’S! That Broker (I’ll call him Donald) was the most egotistical person I had met in real estate. He snapped his fingers all around, flailed his arms as he spoke, gave me details of his record of success he had enjoyed while he lived in Maryland and he kept going and going. I concluded that he loved hearing himself talk. Looking back on it, I think if he had not gotten involved in the deal, it would have closed without incident.

He asked me what my concerns were. I was blunt and told him I was not happy with how the Realtor was trying to bully me and I was not happy with having to spend an additional $1,700 for the title policy. Further, I had reviewed the HUD-1 and was disgusted at how the title company had padded their fees. He was surprised and asked me to show him what I meant.

I put the HUD-1 from when I bought the house in June down and then put the preliminary HUD-1 from the current sale next to it and told him to look for himself. To let the readers know what I was showing him… I had closed six months earlier with LandAmerica Title. It was being closed by LandAmerica as well but it was not the same branch.

The fees were very different when compared side by side. In fact, they were well over $1,000 higher and I wanted to know why. Donald, stood up and said, “That was in June. We are in a different County now and it has been six months. I can assure you that they are not padding the numbers.”

I asked, “Do you work for Land America Title? How can you tell me this as a fact?” He went on to tell me more of his great resume and never answered the questions. I looked at the buyers’ agent and told her I wanted to change title companies and she said, “The buyers won’t agree to that.”
I got mad and said, “Listen Dorothy, you represent the buyers, you do not have Power of Attorney for them. You HAVE to bring them my request.” She shook her head and the Broker told her I was right but said, “I am going to recommend to them that we stay with the same title company.”
I wanted to switch title companies so I could have someone in my corner who wouldn’t pad numbers.

That is when the Broker and I butted heads. The Broker then said to me, “Look Jim, it’s only a few hundred dollars. In the big picture, it’s really not a big deal. My advise to you is to let it go and let’s get this thing closed so we can all move on.” I sat up and fired back… “Donald, do you have a hundred dollars on you now?” He nodded his head, yes. I continued, “I want you to take it out of your pocket, place it on the table in front of you and go get a cup of coffee. When you come back, it will be gone! And guess what? You will be pissed!” He looked at me with a blank look.

I went on to say, “It is legalized theft. Period! You can’t give me an answer to why the figures are higher and you are defending the title company. It is legalized theft and it’s not right!”

He just shook his head. I then said, “Wait a minute… You are the Broker who is representing the buyers, correct?” He said he was. I said, “Surely as the Broker who represents the buyers, you are NOT GIVING ME, THE SELLER, advice… Are you?” His eyes widened, his mouth opened but nothing came out. I stood up, gathered my things and walked towards the door. I stopped at the door and turned around. I said, “Both of you have made mistakes that should not have been made. The effects of those mistakes will hurt both me and the buyers in the end. I have signed the contract and I will honor my end, even though I made a mistake on the closing costs. I expect both of you to honor your end and I expect this deal to close as planned. The only issue at hand now is where it will close. I will expect to hear back by tomorrow, what the buyers said about changing title companies. Oh, and Dorothy, I want the buyers answer to be in writing with their signatures. I want verification that you asked them as you were directed.” I turned and walked out.

I am bringing Part 1 to a close at this point but I wanted to make sure people understand what I was facing at this point.

I was being watched by a lot of students and there were several local “guru’s” watching over this transaction as well. I felt I was being bullied and I had wanted to withdraw the contract and place the house back on the market. I didn’t think the buyers would pursue the matter and sue me (as that would have been their right). However, if I had done that, I would have breached the contract. As an instructor in real estate, I knew that breaking the agreement would not have been an ethical thing to do. In other words, I had made mistakes thus far but I was not going to breach the contract and set what I felt would have been the worst example of my career, to my students and peers. I decided to move forward and I would take responsibility for the mistakes I had made and I was going to honor the contract.

Remember CYA? I read the contract over and over and over at that point. I was going to find a way for me to recoup some of the money that I was going to lose and I was going to do it legally.

The answer was in the contract.

Please look for Part II of this article as I will explain exactly how I stood up for myself against the Realtor, Broker, Title Company and the Buyers’ Lender…. And WON!

Tags: closing, real estate closing, real estate investing, realestate, rehab, rehabber

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

Doom and gloom is everywhere. Foreclosures are at record highs, builders are swimming in inventory, the mortgage market is in a shambles and there seems to be no end in sight. Buyers are afraid to buy because the market might go lower. Sellers are in a panic because there seems to be no hope of selling before the next millennium. Through it all the media is having a field day with all of the negative news.

There is no doubt that this is a difficult market for sellers. If it’s bad for sellers doesn’t that make it good for buyers? While there are many challenges for both sides due to the unsettled credit markets, deals can still be done. What has really happened is that people haven’t adjusted to the new reality. It seems that everyone is waiting for the market to return to the way it was, but waiting may prove to be an exercise in futility. What we experienced for several years was a speculative blow-off in an overheated market. The gains that were occurring were unsustainable, it was a classic case of “irrational exuberance.”

How Do We Make Money In This Market?

So how do we make money? The short answer is that we need to return to value investing. Gone are the days of buy high and sell higher, the music has definitely stopped in that game. A value investor will make his money when he buys, he doesn’t acquire property in the expectation that the price is going to appreciate. Making your money when you buy simply means that you buy a property that has a lot of potential equity. To do this you need to locate a motivated seller, someone trying to dispose of a distressed property will usually be highly motivated in this market.

When the markets are soaring into the stratosphere the only thing that sellers are motivated to do is get a ridiculously high price for any piece of garbage. Now that the pendulum has swung in the other direction they are feeling the heat. If it’s hard to sell a house in good condition imagine how difficult selling a fixer must be. The good news for the investor is that he can be the hero while earning a nice profit. You need to make the purchase at a price that will allow you to make the necessary repairs and still sell the completed project at a price low enough to attract buyers.

The Rehabber’s Advantage

The advantage that a rehabber has is that he has a very good idea of how much money he is going to make when he buys a property. If there is any appreciation at all it is just gravy. Of course that assumes that he has done his homework correctly. That homework includes properly evaluating the house to determine the scope of work required, carefully estimating the cost of renovations, determining what the sale price will be and allowing for unexpected problems. Easy, right?

If it was easy everyone would do it and we’d all be gazillionaires. The “flip and grow rich” TV shows make it seem so simple. The fact is that many novice rehabbers get into to trouble because they pay too much, underestimate time and repairs, expect to sell for more than is possible and do not take the time to learn how to do things the right way. There are no short cuts in this business. You need to pay your dues and learn from your mistakes and do it better the next time.

How To Get Started

You should begin by learning your market, look at dozens of houses to get a feel for things. Join one or more real estate investment clubs in order to network with other investors. Seek out people who have already done what you are looking to do and learn from them. There is no magic bullet and you can’t learn everything that you need to know by taking some guru’s over-priced course. However you can learn by doing and improving you techniques as you go along.

Rehabbing is a great way to make money under the current market conditions. If you buy it right it doesn’t matter if the market stays flat. You can also feel good about the fact that you help a distressed seller get rid of his problem. You make a lot of friends among the neighbors when you turn an ugly duckling into a swan. You are not just helping yourself, you are helping the whole neighborhood.

Money is better than poverty, if only for financial reasons. – Woody Allen

Tags: buyers, flip property, real estate, real estate investing, rehab, repair property, sellers