rehabbing a waste of money?

Question

I am a beginner who just "rehabbed" a house.  I followed the model you see on HGTv where an investor comes in and updates things.  I put in a new kitchen, new bathrooms, updated paint and floor coverings.  We finished the basement, updated the curb appeal, and took the house from 1972, to what looks like a new home.

The house went under contract within a week, but failed to appraise.  In fact, the appraiser compared it to basic, unimproved houses.  Under finish quality, she just listed C3 or average for every house.

My realtor says this is a mistake many investors make.  She says that updates are largely a waste since they don't add value to the house.  They make it sell faster, but you can't get more money.  I don't know if this is something unique to west Michigan or Kalamazoo.  But I see houses selling with green carpet, paneling, 1970s painted cabinets, and they fetch the same price as updated homes.  They may sit on the market 90 days longer.  But I think in this area, updates don't count for much.  Not sure if the buyer pool is uneducated about them, doesn't care about them, underestimates the value they add or what they cost or what.

Basically, I am being told that every penny I spent on the basement was a waste, that I could have just freshened up the place with paint, clean low grade finishes, and it would have appraised for the same and even sold for the same.  As I look at the appraisal and recent sales data, I tend to agree.   Is this the experience of other West Michigan investors?  Fix and flip, yes because you make the property eligible for finance or fix some glaring cosmetics.  But rehab updating, is it worth it?

Pat L. · Answer

I just wish local appraisers were as optimistic as our tax assessors who inflate (taxable) value beyond comprehension.

A colleague spent 3 months & a lot of money rehabbing a classic old home only to have it appraised too low. He gave in just to get rid of the carrying costs & cleared about $5k for 90 days of painful nights & weekends.

Yet I see downsized new builds several miles from me selling out for $499,000 with DIY quality workmanship, RTA style kitchens, with 'premium lots' adding as much as $90k to the sale????

Aaron Mazzrillo · Answer

Lesson 101 of investing - Give the market what the market wants.

Why spend tons of money rehabbing a house if buyers are willing to buy similar properties, but finished with 1960s interiors? In my market, a rehabbed house will definitely sell faster, but I make so much more money selling properties with only light fix ups and basically putting them back on the market pretty much as I bought them. I'll do a few strategic things like convert a useless dining room into an extra bedroom, put el cheapo Chinese granite counter tops on crappy cabinets and paint them just to make them look good, replace the toilet, add some updated fixtures then, put some lipstick (paint) on that pig and sell it for almost top dollar.

I'm not in the business of doing full blown rehabs so I can impress my facebook friends with photos as I used to see so many other investors do... back when I had one of those totally useless and time sucking accounts. I want to make as much money on each deal as I can.

If the market is willing to buy pigs with lipstick, I'm selling pigs with lipstick, eye shadow and maybe a splash of perfume.

Micki M. · Answer

How did you calculate your ARV in the first place? Generally you find your comps before you start a project so you know what price range you need to stay in.  My Indy flip last year was in a very distressed area but there were other rehab and new build projects near enough to make it worthwhile.  However I stayed away from the $150k ARV that I could have justified knowing it would sell much faster at $125ish.  Based on that we made choices like going with laminate countertops instead of solid surface, etc.

Having said all that, your realtor should be going to bat for you on the appraisal unless the home is simply way over improved for the area.  Can you give us more specifics.

Bryan O. · Answer

Over-rehab happens. I know an investor here in Denver that made a property way nicer than the area. It won't appraise for that price and only people who are unfamiliar with the area think it is worth it. The bright side is, you can chalk up the cost to a very good education. Ask anyone who spent $20k on gurus how much they actually learned ;)

Scott Schultz · Answer

We see the same thing in Northern Wisconsin, you can have 2 1400 sq ft 3 bedroom ranches in the same neighborhood, one has not been touched since 1980, but clean and well kept, the other updated with, new cabinets, granite countertops, tile floors, new roof and siding, furnace, ect. they will both sell within 5% of one another. you have to get a deal when you buy, and be below market when your done, or your sunk.

John Whittle · Answer

I just bought my 2 bed fixer upper for over the summer, lender had no problems rolling repairs into the loan.  Until the appraiser comes in and says this house is worth 42k needs this this this and this.  When every thing is fixed it will be worth 42k.  Yet there are plenty of comps in the area at 60k-90k.  The bank is local right up the street and has lent on plenty of houses on my street including the one right next door. Loan officer knew the appraiser screwed up but his hands were tied.

Same area one of the guys I work for refinanced all of his properties.  He has a 16 unit townhouse complex with 4 identical buildings.  Each set of 4 units has it own address.  Lender sends 4 different appraisers in one for each building.  All 4 were all over the place from 125k to 275k.  None of them were even close to each other.

Leigh C · Answer

Welcome to the school of hard knocks.

Ned Carey · Answer

This goes to knowing your market and whether you can push up prices or not. You have to know your buyers expectations and whet they will and will not pay for.

However it seems you did find a buyer but the problem was simply the appraisal. I would challenge that appraisal and ask why she did not adjust for newer components in your house.  Comparing a new kitchen and bath to a 45 year old kitchen and bath is not a fair comparison.

Of course the devil is in the details. We don't know the quality of your work. Perhaps you left a 45 year old roof and the others put on a  new roof but left dated cosmetics.

rehabbing a waste of money?

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