That First Rehab

9

What a rush, closing on that first rehab deal! Now it’s time to start making every mistake in the book, at least that’s how it was for me. On the surface it looked like a great deal. I had purchased a bank REO for about 60% of the market value after repairs. I had construction experience and a lot of enthusiasm. What I didn’t have was any idea of how to manage a project like this. Another minor snag was that I had spent every dime I had to acquire the property, but that’s what credit cards are for, right?

I bought the house for my own personal use, buying a fixer allowed me to live in a better neighborhood than I might otherwise be able to afford. Because I was going to live in the house as I renovated it I didn’t have the same sense of urgency that I would if I needed to do a quick flip. I also knew that it would be a great learning experience since we learn best by doing. Unfortunately we also learn the most from our mistakes, I just wish I hadn’t learned so much!

Let the Mistakes Begin!

My first mistake was that I didn’t have a home inspection before the purchase. My thinking at the time was that the house is going to be totally renovated so what difference will it make? The power and water were off which would make it difficult to check many things and I didn’t want to “waste” the $300. The bank was insisting on an as-is purchase anyway. The bank was also giving me the financing so I didn’t have a lender demanding actual proof that things worked.

So what was wrong? It might be easier to list the things that were right. The heat was a hot water system with an oil-fired furnace. I knew from looking at it that the unit was only a couple of years old, no problem right? Wrong, the system was not properly shut down and all of the seals dried out. I owned the house for three days and I was already hit with an unexpected $2,500 replacement. After the new furnace was installed I learned that the water had never been drained from the system which caused the water in the pipes to freeze and rupture most of the lines. Cha-ching! Other “little” things that were wrong would include termites using the front of the house for a midnight snack, and carpenter ants devouring about a quarter of the roof deck. Cha-ching! There were live electrical wires buried in the wall along with other electrical problems. Cha-Ching! The list went on and on.

I made the classic rookie mistake of underestimating the amount of work that was needed and the length of time that the project would take. Another mistake was not having sufficient capital to keep the project going. I hadn’t explored my financing options or taken the time to learn about the reality of rehabbing houses. I watched shows like Home Time and This Old House and thought that this would be a lot of fun.

The funny thing is that despite everything that went wrong it was still a profitable deal. Sometimes it’s better to be lucky than good, I benefited because the market had appreciated. If the real estate market had been flat or declined I would have lost a bundle on this deal. The education that I received, however, was priceless.

Know What You Don’t Know

Before jumping into your first rehab you need to do an in-depth evaluation. Not of the property or the neighborhood or the real estate market. You need to take a hard look at yourself. What are your strengths and shortcomings? What do you do well and where do you need help? I think that most rehabbers are optimists by nature. You have to be in order to see the possibilities and believe that you can turn that dump at the end of the street into a palace. That optimism can be a double-edged sword if you aren’t careful. Optimism can cause you to think that a project will be easier than it is, take less time than it realistically will and will sell for more than the market will allow. I am not suggesting that you analyze everything to death but that you do frequent reality checks. Rehabbing can be very satisfying and financially rewarding but it isn’t always easy.

If you find yourself in a hole, stop digging! – Will Rogers

 

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9 Comments

  1. Good story! I too have been in the construction field in the past, one thing I noticed every time we did a remodel or rehab is that the job got harder the closer we looked at it and the further into we got.

    Nothing was ever what it initially appeared to be. Or at least that is what it seemed like!

    Your story is a good reminder for many who want to venture into the rehab business… that mishaps occur!

  2. No one is certain on which part should be rehab or not, which is a very good news to those who are in the rehab business. however, there are things to remember, particularly accessibility and availability. If you are just venturing in this kind of business, try organizing your tasks and potential jobs then never overlooked advertisements. They play an important role in the survival of real estate business. You have to put your service out there.

  3. Steven Boorstein on

    Great points. On my first flip, I woefully underestimated the amount of work needed. I had seen the house, had to make a quick decision and in the process fell in love with the idea of restoring it. I also didn’t have a home inspection since I thought I had a great deal and “hey the place needs to be rehabbed anyway!”

    Once I got in and started the repairs, I realized it was going to become a money pit (for me as an investor), if I saw it through to the total rehab. There was nothing structurally or mechanically wrong, but it was just one of those old Victorian houses where the windows and doors were all oversized and “custom” and the number of rooms and floors made it an expensive project. I did the things that mattered like refinished the hardwood floor, laid new carpets, painted, replaced old plasterwalls with new drywall, etc. And, then was fortunate enough to be able to sell it at a discount to the overall market… still as a “fixer” to owner occupants who didn’t think that it would be a money pit, but more a “labor of love” to restore a historic-like house such as that one. I had to agree, the house had features that were beautiful, but not practical for me to continue the rehab.

    In the end it all worked out and I made a nice profit, although I realized that when “when your eyes are bigger than your head” you have to be careful. Never buy a property because you “love it”… but it because it makes good business sense.

    Steven Boorstein
    Landlord Business Insider

  4. Connie Brzowski on

    Enjoyed reading about your first rehab– our first personal residence was in original condition when we bought. We did some expansion and updated the kitchen… and the market plummetted. We couldn’t sell for half our purchase price.

    When the market finally turned around (7 years later) we sold for more but not much 🙂

    Great article~!

  5. Sorry to hear that this project cost you more than you wanted. I had a similar situation with my first, except my homes well pump failed and I had to replace the hot water heater, furnace, well pump (obviously), and the sump pump. That would have saved me a fair amount on the project, but we live and learn.

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