Rehabbing houses looks oh so easy especially when you see all these reality shows that entertain you with house flipping. Unfortunately you don’t see the real numbers and all that is involved in pulling off a successful deal. When getting into the rehabbing business it’s import that you fully understand the real estate market. Tweet This So let’s look at some key areas that can cause you to lose money on your next rehab.
Paying Too Much For A Property
You may have heard what I’m about to say next and it’s the golden rule for rehabbers. Tweet This It’s extremely important that you buy the property at the right price; it’s not enough to just get the property below market value. You need to understand how to make offers and structure the deal in a way that covers your purchase, renovation, carrying costs, selling costs and profit. You are the last person to get paid so make sure you get paid by making offers and negotiating deals properly.
Obtaining the wrong financing
Tweet This Financing can make an ok deal great or a great deal just ok. There are so many factors to financing. The most common financing option for rehabbing is hard money. This is typically the most expensive money, but it may be your only option. Interest rates are typically 12 – 18% and terms will vary from 2 to 4 points and the notes are usually 6 to 12 months. Hard money loans are loans issued by private individuals who have experience in real estate investing and these loans are short term, high interest rate loans. The loans are usually determined by the deal and not always by the borrower.
It’s important for you to learn about other financing options and how to use these options to improve your profit margin. Other options would be private money from friends, family and other business professionals. Bank financing is another option. The rates and terms are typically better than hard money, however, you have to have good credit, collateral and be able to bring at least 20 to 30% of the purchase price in order to do the deal. Another strategy to consider if you don’t have access to money and your credit is not presently together is bringing in an equity partner. So understanding financing and having access to as many options as possible gives you the ability to do more deals and can improve your profit margins.
Under Estimating Your Rehab Cost
Make a checklist and carefully go through the house and put together a realistic estimate of what needs to be done and the cost. You can also have get a few estimates from contractors. This will help you confirm your numbers and ensure you haven’t missed anything. On my first rehab I hired a home inspector to inspect the house. The purpose for this was just to make sure I didn’t miss anything that could potentially cost me a lot of money to repair. It’s never good to under estimate or over estimate the number too far on your rehab project, however, when starting out you are better off over estimating. This may prevent you from getting the deal, but it’s a lot better than losing money.
When estimating your repairs it’s always a good idea to include a miscellaneous line for unforeseen items. We usually allow 10-20% of the total cost of the rehab for miscellaneous items. Unfortunately on most rehab projects you won’t see all the issues until after you complete the demo. If the numbers are tight on a potential deal, don’t try to “make the numbers work” by fudging your estimates. The repair costs are what they are. If anything, they will come out to be more than you expected, not less.
Over rehabbing tends to come into play when you select finishes that are too expensive for the price range of the house and/or that cut into your budget. This usually occurs because you pick things that you want or like as opposed to looking for value and maintaining a budget. Another way of over rehabbing is making improvements on things that don’t add any value to the house like shower doors, bay windows, recessed lighting, expensive tile mosaics, etc… It may be necessary to do some of these things, however, research your area and see what your buyers are expecting. Take the time to visit a few houses that are listed in the area of your rehab project. This can help separate what is necessary versus what YOU would like to do.
Selecting the Wrong Contractor
Finding contractors is an ongoing process for a rehabber especially if you are working on multiple projects. It’s important to properly screen your contractors and get references. Unfortunately this is another area where you can lose a lot of money if you are not careful. So make sure you have the proper documentation in place and make sure you are working with licensed contractors.
Selecting the Wrong Agent
Don’t just hire any agent to sell your houses. This is a business and it’s important to have the right people on your team. All agents are not created equal. There is a difference between listing your house and selling your house. You want to work with agents who have a proven track record of selling houses and selling them fast in the area you are rehabbing. So make sure you do your homework and find agents in your market that can deliver the desired results.
After reading this you may have a different outlook on rehabbing houses. The best thing you can do is attend your local REIA meetings, network with other investors and obtain the proper training and guidance and you will be fine. Consider working with a mentor especially one who is currently rehabbing property in your area. This will allow you to expedite your learning curve and establish your team quicker. As the saying goes time is money. Spend a little money and save a lot of time and aggravation. Good luck with your house flipping adventures and may you renovate many houses profitably!
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