Flipping & Rehabbing Distressed Property: 3 on 3 Interview Series
The second 3 on 3 installment will focus on distressed property rehabilitation, also known as rehabbing, flipping, etc. Joining me in answering three rehab related questions are two experienced and very successful rehabbers:
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Will Barnard – Will is President of Barnard Enterprises, Inc. and a number of subsidiary companies. he has experience in many aspects of real estate investing including: spec building, fix and flip, rehabbing, wholesaling, land lording, short sales, land development, commercial, notes, and more. He does millions of dollars in real estate transactions each year. In 2012, he flipped $3,340,000 worth of single family properties in Southern California alone.
Jason “J” Scott – J is co-owner (with his wife) of Lish Properties, LLC, a real estate firm focused on buying, renovating and reselling properties in the Atlanta metro area. Over the past 4 years, Lish Properties has purchased and resold 30+ houses and has assisted other investors in the rehab and resale of dozens more. J and his wife are both licensed real estate agents in the state of Georgia.
1) How did you get starting in real estate investing and rehabbing in particular?
Will: I have been self-employed since the age of 19. During my time of owning an offset printing company, I had a strong desire for RE investing, specifically rehab flipping and land lording. Before I got educated and started in the RE world, I was under the assumption that to buy a home, I had to go to the bank, beg for a loan, sign 10,000 forms in blood and finally, 30 days later, get the money to do so. I was not aware of private lenders, hard money lenders, and joint ventures. Finally, after some education, I pulled the trigger and bought my first rental property out-of-state, then did that over and over again for 2 years. I then discovered an opportunity for land development and I started purchasing lots that I could improve and subdivide. I did so and also started spec building which involves building single family homes from the ground up (as well as duplex units and small apartment buildings. After the bubble burst in 2008, buying and holding did not look so good and the cost to build vs. the sales price no longer made sense so I switched to rehab flipping and have been doing that ever since with great success.
Jason: I spent about 15 years in the corporate world, and when my wife and I decided to get married and start a family, we agreed that having the freedom to both be home with the kids was more important than a career. So, we quit our jobs, moved across the country, and started thinking about what to do next. We were planning to do some passive real estate investing, and after watching a flip show on TV, my wife said, “Hey, let’s flip a house!” Two months later, we were flipping our first property, and shortly after that, we decided to turn it into a business. So, it was really just serendipity that we ended up rehabbing houses.
James: The entrepreneurial spirit has been a part of me since I was a kid and I always knew I wanted to start a business. After numerous conversations with a like-minded friend about the opportunities in real estate we finally decided to stop talking and start taking action. We focused on learning more about real estate and chose rehabbing as our initial strategy to help us acquire the capital needed to expand into other areas of real estate. After researching, planning and building our team we purchased our first property in November 2010 and haven’t looked back.
2) What is the greatest lesson you learned from a mistake during a rehab project?
Will: Thankfully, I have not made any large mistakes and have been profitable on all but one deal where I only lost about $1500. I would say that my biggest lesson was learned from a deal I did last year. I had a great home and rehabbed it to very high standards as I always do. The problem was, I picked an exit value (ARV) that was incorrect. The reason was not easy to see at first, but realized after it was all over. The property was on a very nice street with nice homes, but just a few streets below, the homes were older, smaller, and less expensive. Just one street above, there were fairly brand new & larger homes. This resulted in a less than conforming neighborhood. I have always tried to buy in conforming neighborhoods where comps were plentiful and values were easy to prove. In this case, I over estimated the exit value by $35,000 and had to drop my price that much to get it sold. The net result was a small profit of about $18,000 rather than a $50,000+ profit.
Jason: We've made lots of mistakes and have learned lots of lessons. The biggest mistake was probably the one that cost us the most time and money â that was the decision to give up on selling our very first rehab and instead, rent it out. The property had been on the market for two months, hadn't gotten much traffic, and my wife and I got antsy; we assumed that the property wouldn't sell at or near our listing price, and so we quickly jumped to our back-up plan, a lease-purchase. The buyers spent two and a half years trying to improve their credit to qualify for a loan, and never could. Ultimately, they moved out, we did a second rehab, and sold the property for a $3000 profit after owning it for 3 years. In retrospect, our original sales price was correct, the rehab was sufficient and we likely would have found a buyer within another month or two had we not pulled it off the market â we never considered that the average Days On Market in that area was over 4 months and it was the middle of winter when we were trying to sell. So, the lesson was, don't make emotional decisions â know your market, know the data and trust the data over your instincts, at least until your real estate instincts start to improve.
James: In our first several rehabs we waited until the property was completely finished before engaging in any marketing, to include putting a sign in the yard. We now start marketing as soon as renovations begin with the hopes of selling the property prior to completion or at a least gaining interest in the property early in the process. During our most recent project the eventual buyers first visited the property during the first full week of rehab and stopped by throughout the process, putting in an offer immediately after completion. From now on we will market early and often with goal of limiting the days on market and associated holding costs, thus increasing our return on investment.
3) True or false: You return on investment on rehab projects will be higher in 12 months than they are today?
Will: A very good question, and a difficult one to answer. A lot of what happens is dependent upon this year’s election and the manner in which the banks release their shadow inventory. Right now, spreads and returns are much smaller than those of last year, but I am guessing that investors like myself will be given the opportunity to purchase more deals in the upcoming 2 years allowing for increased margins and returns.
Jason: Actually, I expect them to be exactly the same. Over the past 4+ years, our average ROI per project has been tremendously consistent. Despite the market going up and down, despite us focusing on different cities, despite us rehabbing houses in different price points, the one thing that has remained consistent is our return on investment. I don’t know exactly why this is the case, but I expect (and hope!) that it doesn’t change. While are returns aren’t tremendously large in comparison to some other investors, the consistency is very nice.
James: While I don’t like to predict the future I see higher returns in 12 months due to the valuable experience we have gained over the last year and a half or so. With each project we have learned valuable lessons, become more efficient, expanded our network of contractors and learned methods to acquire materials at a lower cost. In addition, we have learned ways to more effectively plan and schedule projects and manage them to completion. These lessons and our growth as investors will hopefully lead to higher returns even if the market remains stagnant or declines.
Thanks to J and Will for providing excellent feedback about their rehabbing experience. They are further proof that rehabbing can be an extremely satisfying and rewarding real estate investing strategy. If you are interested in rehabbing make sure you understand the process, risks and your market, because it is much more difficult than portrayed on television and by self-proclaimed gurus