Why Subpar Rehabs by Real Estate Investors Create a Losing Situation for Everyone

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Just because you buy a piece of real estate, paint some walls, and put some carpet into it DOESN’T mean you’re a real estate investor.

It might. But it’s no guarantee.

For more than a year (probably more like 15 months), an investor near my house “rehabbed” a small house. He actually bought the house for a really great deal — I think honestly a better deal than he realized. And so there the renovations went — on, and on, and on, and on.

Eventually, they ended up putting a roof on the house. During and after winter, they began building their deck. It was so out of square, they ended up tearing the whole thing down after working for the first 2-3 weeks and doing it all again. It wasn’t much better afterwards.

Finally, the property came up on the MLS. I was pretty curious as to what the property looked like and went searching for the listing, but there actually were no photos of the house at all. None on the MLS or anywhere else.

Once the property sold and closed, we ended up meeting the new family that moved in. They were a very nice young couple, and we enjoyed chatting with them. With zero prompting or questions on our end, they started sharing how they had so much work to do on the house, how bad it was, and how they basically needed to rehab the house.

So, let’s think on this:

  • “Investor” buys house
  • They rehab for more than a year
  • They put it on the MLS with no pictures
  • They sell to new owners for a profit at near retail price
  • The new owners have to redo most of the house

Now, I’m sure there are some of you who find this totally acceptable. That no matter what, at all costs, this kind of deal is OK for the end user because they were the ones who decided to buy it, after all.

Related: 6 FREE Places to Get Design Inspiration for Awesome-Looking, On-Trend House Flips

Fine.

I’ve made money many times in wholesale deals deals doing absolutely nothing. But this WASN’T a wholesale deal. It wasn’t putting a non-rehabbed property on the MLS and selling it as is. It was a flip house, meant to be a flip house to an end user.

rehab-issues

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A True Win-Win Deal

When we speak of a “win-win” deal in the real estate business, this means it has to be a positive for all parties in the transaction. Just because you CAN do a crappy renovation on a house and sell it for a profit doesn’t mean you SHOULD.

Ack. It gets me so upset. Why do mediocre work?

It’s my very strong opinion the real estate investing community has a role to play and a job to do. Our role is to set better expectations of what our renovations look like, helping make neighborhoods better, giving awesome places for our buyers or clients to live in. Better houses for tenants to live in. And setting a standard of having really nice homes, rentals, flips, or whatever else. Not the cheapest crap we can bang out for the highest profit.

Now, I do understand there are skill levels in investors. I also understand there are learning curves for new investors. If you aren’t sure what to do, bring in a partner. Ask a friend. Hire a contractor who does great work. Learn from someone in the business.

Experience and Trial By Fire

I’m not remotely suggesting that my first 10+ renovations looked like the ones we do now. I’m also not suggesting we still don’t miss problems, find issues in walls, go over budget, or have inspection items to repair. There is a huge learning curve in renovating a property, simply from the standpoint of what to fix, how to fix, and what makes a great house. You’ll need to learn how to prepare, who to have on your team, what to do yourself, and when to bring someone in to help.

There is no substitute for someone with both the skill and the experience. Bring those people in, and make sure you surround yourself with experts, even in your first or second renovation projects. Make a personal commitment to doing an awesome job. Don’t settle for an “OK” job.

Applications to Our Turnkey Business

When we meet with clients in town, they see the rehabs for our rental properties and quickly realize they are nicer than most of the regular retail flip projects out there. Our entire team is obsessive about having the best rental and turnkey properties out there.

Related: 5 Highly Actionable Tips From the #1 Book I’d Recommend on House Flipping

Our approach to real estate in general is if it doesn’t have at least 10 years of useful life left, it gets replaced. Every plug, switch, vent, anything on the walls, it gets replaced. Plumbing and toilets, vanities, they get replaced. New paint everywhere. We refinish hardwoods whenever possible. Our finishes are nicer than some retail flip houses, and these properties will soon be occupied by tenants!

exterior_rehab_buy_and_hold_renovation_tips

Wallet Approach

The other obvious question here is — are you really making more money by doing a subpar job? My guess is no. When we do a better rehab, take professional pictures, and have the property cleaned well, the property rents faster, sells faster — with fewer issues, questions, or negotiations.

If it’s a great product, someone will want it. In the market and style today, a few people want to buy the crap houses (my favorite), and most want to buy the “HGTV” ones. We buy the crap and make them HGTV. You know why? Because they sell the best and make the most profit, with the least amount of issue.

And because we have done the work up front, we know the future tenant and/or owner has a safe, functional, healthy home to live in.

Review

  • Spend a little more money
  • Offer a nicer house for the tenant and/or owner
  • Make more or at least a much
  • Have a better product
  • Sell it or lease it faster, for more money

This is how we should operate as real estate investors. And this is a true win-win situation.

Let’s go win.

Investors: If you flip houses, how do you ensure a high quality product? Do subpar rehabs annoy you as well?

Let’s discuss in the comments section!

About Author

Nathan Brooks

Nathan Brooks is a dad, husband, worship leader, and real estate investor in the Kansas City market. Foodie. Coffee addict. Crossfit junkie.

23 Comments

  1. Patrick Desjardins

    “helping make neighborhoods better, giving awesome places for our buyers or clients to live in. ”

    Love it. Obviously each person has their own agenda and we can’t force them to fix up their place, but if more people did so then neighborhoods might get revitalized.

    Nathan, the usual objection is “I’m not going to put anything nice in it because tenants will ruin it”. What’s your experience with that?

    • I do not know about his experience, but my experience is such a landlord needs to screen better. And by screen, I do not mean credit reports because credit reports do not tell you what you need to know. A lot of landlords use credit reports as a shortcut, forgetting that landlords have been successfully screening tenants long before there was ever such a thing as credit reports,

      Poorly done rehabs send a message that not only does the landlord not actually care about his property, but also that he holds the “tenant class” in disdain, It is almost as if the landlord wants to create the broken window syndrome from the get-go, and then complain about it later. Such a landlord is creating confirmation bias about tenants. They think a great tenant is the fluke, not the bad tenant.

      • Nathan Brooks

        Hi Katie … this is a hard thing. Screening is all about the logic side, doing all the checks for tenancy and background, credit checks. It is also about how you feel with the tenant, how they handle themselves. Obviously not discriminating against anyway, but did you get a comfortable feeling with them. Did you want them in the house?

        Ask them questions on how long they have been in their last place?

        Then a poorly done rehab definitely sets the wrong feel for someone coming into the house. They think you don’t care, they will care less.

    • Nathan Brooks

      HI Patrick, thanks for taking time to respond. We love making a neighborhood better … and then we also get to benefit from other owners/tenants who want to do the same thing.

      We’ve had great luck with tenants loving their properties, and staying longer because of it.

    • Nathan Brooks

      Christina … great point. If you are going to spend time to do it, it’s worth doing it really well. And then show up to the appraisal with the comps, and chat up the appraiser. You can’t tell them what price to appraise at, but you certainly can give them all the information you want them to hear.

  2. Randy Phillips on

    I’m curious is to why the author didn’t get to know buyer doing the rehab & offer his help.
    Was it easier to sit on the sidelines and criticize the end result from this obvious newbie investor?
    Or do you not practice what you preach?

    • Probably, most people, newbie or otherwise, rehabbing a house do not want or appreciate advice from the neighbors, no matter how nicely and tactfully offered.

      I am more interested in why the buyer’s agent apparently was fine with his clients paying full ARV price when the agent surely knew that a lot of work would be required. It is very like just another example of how buyer’s agents fail to fulfill their fiduciary duty because nothing about the system aligns the agent’s interest with the buyer.

      Even someone as financially savvy as Morgan Housel (http://www.fool.com/investing/2016/06/16/what-i-learned-buying-a-house.aspx) was taken in by buyer’s agents claiming that their services are paid for by the seller.

      • dodie dawson

        Thanks for this link. I think everyone of us on BP should read this as a reminder as to why we’re in this industry in the first place.

        As the author so stated “Buying a home is not something you do to maximize your return on investment. It’s something you do to provide stability and quality of life for your family. It’s far more like picking a spouse than picking a stock. The reason so many people got burned during the housing bubble is because they came to believe the opposite.”

        • Nathan Brooks

          Thanks Dodie … we definitely think about the past, and how not to be in that kind of situation again. Why not do just a little bit more, and making it really nice, great investment? And then also create win wins for tenants/owners in them … and widen the possible exit strategies are before you are into this property, thinking of rental, retail sale, lease option … etc. If its nice, and marketable, you are going to be in a better position to sell if need be (if you must).

    • Nathan Brooks

      Randy, I had. Multiple times actually. They weren’t interested in my help, nor in spending any money… they were cheap, and didn’t care.

      So yes, I always do practice what I preach. Love to help, love to educate, and I can only do as much as someone would allow me to do.

    • Nathan Brooks

      Rhett … I’ve heard it as well, or “paint and carpet.” It isn’t to say there are not projects you can just do the basics with carpet, paint, update appliances, etc. But these are pretty unusual for us to find that don’t also have other major issues to deal with.

  3. Alex Craig

    If you are in the renal home business and obtaining a loan, the only way to make money is to rehab it right. To the cash flow investor, Nathan’s homes with his 10 year useful life model will be cash flow much better then the investor who would buy a deal just because their is equity. Equity does not mean more cash flow, it simply is a concept that makes a lot of investor feel better about their purchase. I prefer to let equity happen naturally through short vacancy, tenant retention, fewer maintenance calls and cheaper tenant turn cost through spending money up front instead of the back end.

    • Nathan Brooks

      Hi Alex, I couldn’t agree more. The lifespan of now having a new roof, windows, HVAC, etc … the tenant is happy, and the new owner/investor is happy. They both have value in the house, and its a great chance of having that tenant stay longer in their nice home, and keep the costs down with maintenance items that would have come up with not doing the more extensive (and better) rehab.

    • Nathan Brooks

      Hi Alex, I couldn’t agree more. The lifespan of now having a new roof, windows, HVAC, etc … the tenant is happy, and the new owner/investor is happy. They both have value in the house, and its a great chance of having that tenant stay longer in their nice home, and keep the costs down with maintenance items that would have come up with not doing the more extensive (and better) rehab …

      Why not spend a little extra on the renovations, be really proud of the product, have tenants fighting over who can run to the bank faster to get their deposit? I like that!

  4. Ed Chandler

    I’m not a seasoned investor but my rentals have always stayed at the top of the local market range for rents. I’m convinced that is because they are neutral, solid, clean, and with better than average appliances, fixtures, etc. I’ve never had trouble getting a renter. And since they’re paying at the highest end of the rental range, I typically find my renters care more and appreciate the quality of the house. These aren’t fancy places, just solid single family homes in average neighborhoods. In the end, I’m proud of my rental and my renters have a great place to live. If you invest on the side like me, the ability to accelerate depreciation of appliances, etc is also a nice benefit to offset taxes on my W2 income. Just make sure you make the investment as a rental and not as your primary (if you live in it first).

    • Nathan Brooks

      Hi Ed, I love this… and I think with this attitude and intention you will soon be a seasoned investor. I agree with your sentence about being at the higher end of the range, we find that our people care more (usually) as well … good luck with your business and growing investment portfolio!

    • My problem is if they are not “fancy places, just solid single family homes in average neighborhoods,” the tenants should not be paying the highest end of the rental range. They should be paying average rent. This problem is everywhere. Tenants pay average rent for sub-standard quality, and high rent for what should be standard quality. Tenants know they are paying too much, but they really have no choice.

      A lot of landlords will rationalize that tenants must be okay with paying too much because otherwise they would not have freely signed the lease, and conveniently forget that a place to live in a fairly inelastic need. Recent national data showing that over 50% of renters are cost-burdened should make it clear that no one absolutely freely chooses such a circumstance. When so many tenants are cost-burdened, it is clear that market rent and reasonable rent have become disconnected.

  5. Letitia Harris

    I witnessed this firsthand, and finally saw in person what “Lipstick on a pig” really looks like. I rehab to sell, a flipper if you will. There was a flip house 2 blocks away from my last one, that I was interested in, but chose mine instead. Someone else flipped it, and they put it on the market at the same time, but his was priced 30K LOWER than mine! I drove by, and their handyman was putting the finishing touches on it, and let me in. OMG, they painted over lumps on the walls, refinished the tub with it all gritty, I could go on and on… I was disgusted/horrified.
    The kicker is they sold for 7K above their lowball price, which looked great on paper, since my house 2 blocks away was at 165K. They probably made 10K more than me, but sold a very problematic house.

    My house was perfect turnkey, ready for someone to simply move in and enjoy. That’s the product I’d rather sell, and have my name attached to. I’ll admit it does stick in my craw that they made so much more $$… Oh well. Now to find the next one, in this dried up market.

    • E. Barret

      A well-timed article! Dubious flips bug me too:
      Seeing a lot of hack job flips up close (as well as some grade A ones) I can’t help but feel the buyers of the hack jobs are doomed to another round of foreclosures. Or maybe they’ll just be underwater on their house for decades. I see far too many buyers paying retail to flippers who use lipstick to hide century-old drains, single-outlet rooms, and general lack of structural maintenance. Had I not known these houses were flipped I’d have thought they were neglected vacancies the banks had been sitting on. (Ex: I bid 58k for a double that ended up selling for 124k!)
      It shocks me- how much the uninitiated will pay for something that requires so much capex in the very near future. I can’t imagine how they’ll prosper or how they’ll continue to think positively of real estate investment. Meanwhile these occurrences dilute the quality of our industry and contribute to the spread of poor opinions.

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