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I can’t help but think of a good friend of mine
who got a great deal on an old 1930’s farmhouse. He bought it and 15
acres of land for only 25 thousand dollars. And to boot, he only had
to pay $250 a month on the property while he was rehabbing it. The
property was worth about 75 to 85K fixed up. With such low holding
costs, a repair budget of 20K and an ARV of $80K, It looked like a
dream deal. He was all set to make a fast 35 thousand or so in
profit.
His dream deal started out well enough, as the
repairs on the house proceeded along on schedule at first. But then
my friend started to fall prey to the temptation to fix up all sorts
of little things that were less important, rather than focusing on
the most essential items.
For starters, the house needed a furnace
installed. The old gas heater in the living room was not going to be
adequate for today’s buyers. You would think this would have been a
no-brainer. But Sam got so hung up on how pretty the house would
look with some nice landscaping that he sort of forgot about the
furnace.
Then there was that big room on the back of the
house that accounted for about 30% of the living space. This room
had suffered some pretty severe water damage and had to be gutted.
Instead of redoing the room and retaining the living space, Sam
decided that this area would make a killer screened in porch. It
did, but at the cost of 30% of the square footage that could be
counted for the appraised value.
The bathroom was no small problem either. Over
the years water leakage from the tub had rotted out the floor
joists, causing the need to rip out the entire bath, replace the
floor joists and then redo the bath. To save money, Sam decided to
hire one of his buddies who would work for beer, to repair the
floor. The buddy took so long to get the job done that Sam would
have been better off paying a contractor.
To make a very long story short, what should have
been a 3 month, 20K repair project turned into a 12 month, 40K
fiasco, as Sam flittered from one idea to another, and tried to cut
corners by using friends to do the work.
The one contractor on the project, frustrated by
Sam’s inability to focus on the important work finally quit in
disgust. To top it off Sam had heard that houses painted yellow with
green shutters sell more quickly and for more money that other
colors. But school bus yellow? Yep, he painted it the same shade of
yellow as a school bus, despite the objections of his family,
friends, and the painter. It’s now been 17 months, and the house
still belongs to Sam. He finally did rent it out, but these classic
mistakes pretty much put Sam out of the rehab business. Sam’s
biggest single mistake was assuming he knew more than he really did.
There are 4 main components that you must be
realistic about:
1. How much profit do you REALLY need to net to
make this project worth while? If it takes 6 months to fix up,
market and resell, is a $20,000 profit worth the time and effort?
For some folks it is, while others can earn more than that working a
regular job. Set a minimum acceptable profit goal.
2. What repairs are REALLY going to have to be
done to compare favorably with the competition in this area and
attract a buyer? Don’t forget to compare the condition of similar
properties. Is the quality high, medium or average? Are the bath’s
made with imported Italian marble, or just a fiberglass insert? Are
the kitchen cabinets going to have to be solid oak or just veneer?
This is important information for determining how much you will need
to spend on repairs to be competitive with other properties on the
market in that specific area.
3. How much are those necessary repairs or
improvements REALLY going to cost? And how long are they likely to
take? Be realistic about these numbers. And don’t forget about
holding costs which will accumulate if your project is not completed
on time. Interest, payments, utilities, taxes, theft protection,
insurance, etc.
4. Can I REALLY do this myself, or will I need to
hire professionals? Do you know how to do the work involved, or were
you planning to buy a set of Time-Life How To books? Be sure you
have the time necessary to devote to your project.
If you have no experience with rehabbing you need
to educate yourself before you take on a project. Read some books,
attend some seminars, check out some websites on this subject. I am
not a big fan of the expensive courses that you see for sale. Most
of these courses are not worth their sales price. Books at your
local bookstore will be better to use as a reference manual, at a
much lower price.
You could take a contractor to the site before
making an offer and have them provide an estimate. And if you will
need to hire a contractor, do you know one? Do you know how to find
one? How will you check their credentials? Who will be in charge on
a day to day basis, you or the contractor? Are they going to be
available when you need them? A contractor you can trust and work
well with can be difficult to find. There are a number of websites
that offer contractor services that have met certain screening
criteria. One of those is improvenet.com.
If you want to take a more hands on approach,
there is a book called “Home Repair and Remodel Cost Guide” by
Marshall & Swift, which is updated yearly. This book allows you to
break your costs down into major components, such as Kitchens,
Electrical, Windows, Roofing, etc. It can be purchased through
www.marshallswift.com, or book stores can order it. The ISBN number
is 1-56842-071-4. There are also several web sites that make the
book available as part of their educational literature.
And finally, there are expenses to include that
many “newbies” overlook. For example, assuming you will not need the
services of a real estate agent to resell the property, and
therefore failing to include this potential expense in your cost
estimate can wipe out narrow profit margins
Not including some extra holding costs for the
marketing period can hurt you too. Everyone seems to think that
because Atlanta has been blessed with a “hot” market, any house will
sell in two weeks or less. I have seen very nice homes in very “hot”
parts of town sit on the market for months and months. The interest
expense for hard money loans can really add up. If you are smart,
you will always include an additional 3-6 months of holding expenses
for marketing time in your estimates.
There is good money to be made in retailing
houses, if you do it right. Take the time to educate yourself and
above all be realistic. Then you will be on your way to a successful
(and happy) career in retailing.
Donna Robinson is a real estate investor, author,
and consultant located in Atlanta Georgia. You may read more of her
articles on her website at
http://www.realestateinvestorhelp.com/
or you may contact her by email at
drobinson@reihelp.com or call 404 542-9903. |
Estimating
Expenses for Retailing Your Properties