It takes more than home improvement know-how to make the big bucks in rehab properties. In order to be a successful investor, you need to know what needs to be repaired – in addition to knowing how to do it. You also need to know how to work with others. Even if you fancy yourself the second coming of Bob Vila, you only have two hands and sometimes it pays to have an extra set (or more). This means not only assessing the cost of labor but also dealing with insurance and tax issues – not to mention city work permits and other legal hassles.
Estimating Repair Costs
Even experienced investors routinely underestimate repair costs, and in doing so, they often sacrifice what would have been healthy profits. Remember, you make your money on a deal when you buy, not when you sell, so before signing your name to the dotted line, be sure to do a thorough room-by-room repairs assessment. Write down everything that needs to be fixed or replaced, and then take your list to Home Depot or Lowe’s and total the bill. For labor, anticipate between $0.50 and $1.00 of installation cost per dollar spent on materials – and then add 10 to 20% percent to the total. This way, you are unlikely to underestimate the costs and you will be sure to make an offer that allows you to turn a handsome profit. For older houses, add as much as 30% to 50% to the total, for the “Hoffa” factor (the chance that you will find Jimmy Hoffa buried inside the walls!).
TIP: Think in terms of even numbers – $10,000, $15,000, $20,000. Amateurs always guess $12,430.00, which should be rounded to $15,000. Amateur golfers make the same mistake, always missing the green short on their approach shot, ending up in a sand trap. Always take an extra club, so to speak – you’re not as good as Tiger Woods!
Determining What Should Be Repaired
Many new investors have the urge to spruce up everything and turn their investment property into a place that they would like to call home. Others are would-be slumlords who want to leave all but the bare essentials unfixed. Which approach is more effective? The answer is, it depends on the home’s neighborhood.
our goal as a rehab flipper should be to upgrade the condition of your property so that it fits in with other homes in the neighborhood. You don’t usually want the nicest house on the block – just the cleanest! For example, if every house in a half-mile radius has an air conditioning unit hanging out of a window, then it would be foolish to install central air. Regardless of the neighborhood’s affluence, the following upgrades rarely pay for themselves: New windows, sprinklers, security systems, and storm doors.
In general, your goal with any repair should be for it to add double its cost to the home’s value. Installing a ceiling fan, for example, adds to a property’s desirability factor well beyond its purchase price and cost to install. Switching old door knobs, switch plates, toilet seats and trim can also do wonders for a home’s selling price.
Finally, the least expensive thing you can do to increase a home’s value is some simple yard work. Even modest landscaping can greatly increase the curb appeal of your property, which is generously reflected in a retail buyer’s perception of value.
Cutting Through the Red Tape – Dealing With Insurance and Work Permits
If you hire professional contractors, make sure they show proof of disability and liability insurance. However, chances are you will be hiring acquaintances or perhaps day laborers you find through your local paper’s classified ads, and these people are unlikely to be insured. Therefore, ask your insurance agent about a “landlord-type” insurance policy, which should cover you for any injuries sustained while performing most tasks. If your agent tries to steer you toward a more expensive “builder’s risk” policy, make sure that it is truly necessary. It is also imperative to carry fire and hazard insurance on any properties that you purchase.
Few people enjoy dealing with insurance agents, but even fewer relish the opportunity to deal with government bureaucrats. Many localities enact extremely strict building codes, and if you ask whether something is permissible without a permit, the answer you get from a city official will probably be “No!” However, be sure to talk to contractors from your area because they will know what you can really get away with without a permit. There’s no sense wading through red tape in order to get the government’s permission to change a burned out light bulb – your time could be better spent finding and negotiating new deals!
TIP: In some parts of the Country, you need a Certificate of Occupancy (“C.O.”) from the local building department before you can close a property that you did a rehab on. Also, while local building departments may not require it, a lender who is funding a refi or purchase may insist on it.
Watch Out for Hidden Health Hazards!
You should always have a professional home inspector thoroughly examine any property you intend to buy and insist that he pays special attention to any potential health hazards. For your own knowledge, you should be aware that water damage can lead to black mold, which is a serious health threat and very expensive to deal with. Lead-based paint, asbestos, and radon gas are just a few of many other lawsuits waiting to happen if you don’t address them. While only serious health hazards should jeopardize a deal, you can use the presence of them to justify a lower asking price. Calculate the cost of dealing with the hazards, add in 50 to 100 percent, and then subtract that amount from your offer.
The rehab field is where the big boys and girls of real estate play, and where the big bucks are made – and lost. In order to succeed, you not only need a strong business sense and plenty of ambition, but also an appreciation for the details. Having a trusted advisor or mentor to help you along the way can be money well-spent! With a basic understanding of the subjects discussed in this article, you will already be on the right path to property rehab success.
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.