Want To Super-Size That Rehab?
“Would you like to super-size your value meal?”
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Quite often the response is “Sure, it’s only eighty-nine cents.” When people decline the offer it’s more often out of concern for their waistline than the bottom line. It’s such a trivial amount that you don’t really need to think about it from a financial perspective. For the fast-food establishments the “super-size” upgrade has had a tremendous impact on their profits. With a negligible effect on costs, an eighty-nine cent up-sell is a whopping 15% increase in gross sales if a value meal sells for around $6.
Other retailers use similar tactics. It is especially true with the large home improvement stores and that can greatly affect your profits if you are rehabbing or making repairs on a rental property. Take a walk down the plumbing aisle a look at how many different sinks, faucets, and toilets there are. Do we really need an entire aisle devoted to toilet seats? Compare the prices from one model to the next and you will usually see an added feature with a small price increase, another add-on with another little jump in cost. Carpet is another good example of small jumps for each step up. If you aren’t careful you can blow your rehab budget by purchasing things you don’t need because it was “only a little more.”
Watch the Pennies
When rehabbing a house you take great care in calculating the value once renovations are complete. After estimating the scope of work and related cost, acquisition cost, financing and selling and expected profit, that amount is subtracted from the selling price to determine what you can safely pay to achieve the desired results. When the project is done and sold you add up the profits and end up scratching your head – where did the money go?
While there may have been some unexpected expense that wasn’t accounted for, quite often some of your profits disappeared a few dollars at a time. That better faucet was only $10 more, the nicer sink just another $30; the better quality carpet was just a couple dollars more per yard. Frequently those nickels and dimes add up to thousands of dollars.
I often think back to someone I know who had a small rental apartment in his house. It needed a few repairs between tenants so he decided to fix all the annoying little things and do some minor upgrades. What should have cost less than $1,000 wound up being more than five times that. Why? Because he kept adding to quality as if he was the one living there. That apartment only brought in about $300 in rent each month.
Stick to Your Budget
When rehabbing, ask yourself a simple question before spending on a questionable upgrade:
Will this added expense result in a higher selling price or a quicker sale?
If the answer is “no” – don’t do it. Resist the urge super-size something if the regular item is all that’s needed. In the end your bottom line will thank you. You can use the added profits to super-size your next value meal!
Beware of little expenses. A small leak will sink a great ship. – Benjamin Franklin