"Prehab" Strategy Question
Saint Paul, MN · Member since 2016 · 13 posts · 3 votes
I just listened to the last BP podcast, and Dave Short discussed a strategy he's been using lately that I had not heard before. He called it Prehab. I'm sure I can't do it justice, but if I understand it correctly, it essentially means doing necessary, structural, and/or unsexy work only (e.g. windows, framing or exterior work, plumbing, etc.) on deeply discounted properties.
I believe the idea then is to market these mildly discounted properties as blank canvases for home buyers or traditional rehabbers who choose their own finishing touches.
My question is to Realtors or anyone with experience doing this; is this something can be sold to home buyers who aren't necessarily looking for it? Or, generally speaking, is there a significant market to support this strategy?
I'm going to jump in here because I have a house that I might utilize this strategy on. I have already been doing this (at a lesser scale) and considering this strategy. I think Dave and I thought of it around the same time LOL He just had the resources to do it more easily. Oh and he's been in the buis for a minuscule 44 yrs.
Option 1
The house could be assigned for a good sized profit. It would leave an excess amount of equity in the property for the next buyer.
Option 2
Rebuild the bedroom wall roof, install siding and windows for around 25-35 and put it on the MLS. Listing on the MLS will expose the property to a lot more investors that meets a return for those type of buyers. Lower return than wholesale buyers. Prehab will net me a little higher return and hold the property a little longer. It would be sold to a cash buyer and close quickly. Equity in the property would meet the investment criteria for cash buyers buying on the MLS.
Option 3
Complete rehab and sell to end user at full retail. I pay buyers closing cost and wait for buyers conventional/fha funding. Nets me the most money. Close in 45 days It's a much longer turnover and I don't really enjoy being married to my properties for longer than a couple months. I will opt for option 1 or 2 over 3.
Prehab=Another strategy that can be used on the right properties.
The reason for prehab is partly to appeal to that larger pool of cash buyers who use the mls for purchasing rehabs.
That's my take,
Jon
I think this will depend on area and the right buyer. I see a lot of homes that are built minus the finishings and they sit for a long time. If you are going to do this strategy you are eliminating for the most part your everyday home owner that wants/needs a place to live. There for only investors and the select few people looking for a project. Your buying pool becomes a lot smaller.
Your milage may vary though.
Thanks, @Jon H. and @Mike Hanneman!
This path is intriguing because it could remove the need to make all the "design" decisions and reduce work time (albeit minimally, and could be offset by longer hold times).
It could appeal to flippers that could know that all the "hard" work has already been done, assuming there's still enough value in the property. And, assuming this is a sizable market, could appeal to homebuyers that had the time and possibly cash to "make it their own".
That being said, to @Mike Hanneman's point, it would probably remove the "traditional" home buyer market.
I guess there are a lot of assumptions to be made for this to be a successful strategy, but in the right place and time it must have it's merits.
@Mike Hanneman Absolutely agree! I think this strategy is best utilized in markets with high demand. High demand like we're experiencing in the Seattle region. I'm sure it can be done anywhere with the right acquisition price.
I think it increases your buying pool from a wholesaling strategy but decreases able buyers from a retail strategy. It's the middle ground little larger profit than assigning little less than retail. Little bit more work than assigning little less work than retail. Little more holding time than assigning little less holding time than retail sale.
It makes more sense the larger the spread on the property.