If you have considered fixing up a property with the intent to sell instead of holding it as a rental, then here are some tips to make a nice profit on the properties you are considering investing in, fixing up and reselling.
There are two sides to this equation, the buying side and the selling side. Both sides need to work in harmony in order to maximize your profitability on a deal. Let’s first talk about considerations for buying a fixer upper property:
Buy Right. First of all, there is the old saying in real estate, “You make your money when you buy.” In that regard, make sure you buy at a low enough discount in order to cover your purchase, fix-up, holding and selling costs and still allow yourself a 10-15% NET profit margin on the sale. Stay away from “slim” deals”! This is where an experienced Team member or Mentor can make a big difference.
Do a Proper Inspection. When starting out, you will want to enlist the services of either a reputable home inspector or a very experienced rehabber to look over the property. Cosmetic stuff that you can see normally isn’t the danger- it’s the items you don’t see that can cost an arm and a leg; such as mold and structural issues. In addition, spend a hundred or so bucks and have a company run a sewer scope to see what may be lurking there.
Calculate an Accurate ARV. In determining whether or not a property will be a profitable deal or not, it’s important to come up with an accurate ARV (After Repaired Value) This is a price that the property should sell for; assuming it is fixed up to the standard of the neighborhood and we prefer a price that will move the property within 30 days.
Know Your Rehab Costs. There are several costs one must keep in mind when completing a rehab. You will need to accurately know the cost of your rehab. This will include contractor, subcontractors, permits, materials, labor, etc. It’s also wise to add a 10% “whoops” or “surprise” factor as it will normally cost a bit more and take a little longer than you expect.
Know All of Your Other Costs. You will have costs for both buying the property (closing, loan points and interest, legal. etc.) and selling costs (realtor commissions, closing, holding costs, possible seller concessions, etc.) It crucial to make sure that you know exactly what these costs will be and to track your expenditures in timely manner.
Have a Great Working Relationship with a Contractor. You need to establish a solid business relationship with a reputable contractor. Put everything in writing. Get a line by line bid as to exactly what work will be done. Avoid change orders unless absolutely necessary. Have a materials list that specifies what type and quality of materials will be used, otherwise your contractor may choose the most economical available. Get a solid completion timeline from your contractor as time is, indeed, money. Don’t pay everything up front (we like to break it into 3-4 payments) but be sure to pay on time when agreed- upon construction milestones have been reached to your satisfaction. At the final walk- through, hold back 10-15% until the final “punch list” has been completed. Make sure you get “Partial Lien Releases” and a full “Release of Lien” once the work has been completed and the contractor has been paid; in order to avoid any liens or judgments being placed on the property by the contractor, suppliers or subs.
Fix to the Standard of the Neighborhood. It’s important to either look at other rehabs that have been completed in the area or attend open houses near your fixer- upper. This will give you an idea of what other investors are doing so that you can compete on an even keel. Be sure to look at more than one property. If the other properties have stainless steel appliances and granite counter tops- then guess what? You will need to budget for them too. Be careful, however, not to go wild, and over-fix and in the process, blow your budget.
So you have completed the rehab and your property is ready to sell. Let’s talk about a few important factors that will help move the property quickly and profitably:
Price it Right. Price is important. Be aware that prices can vary depending on the season. In many areas, the best time to sell is when the weather is nice. Avoid putting your property up for sale between Thanksgiving and New Year’s. Price aggressively in order to move your property quickly, but try not to leave a lot of money on the table. Although we suggest you use the services and advice of a Realtor in most cases to suggest a list price and sell your property, do your own due diligence and comps also.
Use an Experienced, Proactive Real Estate Agent. Did you know that 98% of properties are sold through the local MLS? Your best shot at getting the “word out” and selling quickly is through that system, like it or not. However, make sure that you utilize an agent that is proactive in selling your property. If you are sending multiple deals through the same agent, you might see if you could get a bit of a deal on the listing commission. That being said, like all of us, agents are motivated by a paycheck, so sometimes you get what you pay for. Be fair.
First Impressions Count. You have a short period of time to make a lasting impression on a potential buyer over your competitors. This starts with curb appeal and then moves to the home’s interior.
Outside: Make sure that when someone drives up to the property, that it emits a positive feeling. Is the yard in good shape, watered, trimmed and mowed? If it’s winter, then make sure the walks and driveway are cleared. Make sure the home is freshly painted on the outside. If the house doesn’t need new paint, then sometimes a good power washing and painting the trim will give the home a whole new look. Make sure the front door is painted an attractive color accompanied by a nice welcome mat.
Inside: The inside of the property should look neat and clean, appear light and smell nice. Don’t use overpowering odors. Use something “light” like the smell of clean sheets or the like. Make sure the utilities and water are on (plan that cost into your budget) to provide a warm, welcoming and functional feel. Put lighting on timers to discourage break-ins.
Unless, you are selling a high-end home, it’s not necessary to do a total staging job, but a few items here and there to evoke some emotions on the part of the potential buyer can help sell the property. An example might be a plant with an up-light in order to highlight the plant. A comfy chair with a book laying in it would be another. A couple of good looking pans, a recipe book, and some pasta in the kitchen might be another example.
Follow Up. This is very important. Have your agent (or you, if you are selling it yourself) call the buyer’s agent and ask them how they liked the property. If the buyer isn’t interested in purchasing, be sure to ask why. Sometimes it can be an issue that you can work with. Other times it can be something that you can improve on in order to make the property more attractive to the next buyer.
Go to Contract. Once you get the contract, if you are new, get the advice of a mentor or team member as to any parts of the contract that need to be addressed. Be prepared to negotiate. If a buyer wants us to put in a new furnace, for example even if the furnace is only a few years old, we will may give up a seller’s concession, if it makes sense, rather than replacing the furnace, which could last another several years. A new furnace can run $3,000. We might be able to give a $1,000 concession and satisfy everyone. Obviously if there are hazards or safety issues, they need to be addressed, and fixed.
That’s it in a nutshell. There is a lot to buying, fixing and selling a property, but it is done countless times a year by others, so why shouldn’t you get in on the action and the profits?
Here’s to your success!
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Attorney William ("Bill") Bronchick, the host of Legalwiz.com, has authored six best-selling books and is sought nationwide for his 30+ years of real estate and legal knowledge. He has been interviewed by numerous media outlets, such as CNBC, TIME Magazine, USA Today, Investor Business Daily, Forbes, and the LA Times, to name a few. William Bronchick is the co-founder and past President of the Colorado Association of Real Estate Investors and the President of the Colorado Landlords Association. Click on the "About" link above for more information on William Bronchick.