Is This a Good Time for Rehabbing?

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before_after by Runder at http://www.flickr.com/photos/runder/2047482425/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

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6 Comments

  1. EXACTLY! I’ve been preaching this all along! It’s a great time to be flipping, but you HAVE TO stay on top of the deal and your #s! You gotta buy low enough that you can have the nicest house in the area, for the lowest price, and STILL make a profit! It is possible- I’m doing it all the time. Great article!

  2. Richard,
    I agree, flipping is still viable if done right. On the selling side, besides the low price, I might add on a seller “will carry” second. Some of your profit would be on hold, but with the interest, and a call or balloon, it would be profitable, and serve the credit crunched consumer.

    Kathleen

  3. The “flip and grow rich” TV shows make it seem so simple.

    Wait a second. Are you saying that the road to riches is not paved with granite countertops? 🙂

    Good article. I think those of us in areas where the flipping model never changed (no big double digit price growth) are still puzzling at the repeated stories of the bubble flippers as evidence of a real estate calamity. Also, Rick makes a good point about buying and holding right now in some areas. I believe the credit fallout makes it important for rehabbers to at least have a plan B of renting for awhile simply because nervous underwriting may artificially depress prices for a period.

  4. This is a great way to make some money fast. If you have money to put up front, you can expect a nice return.

    The key is to find a home, and have it heavily inspected. You don’t want to end up with a home beyond “flipping” at a reasonable price.

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