Don’t expect your first rehab deal to be as easy as the ones you see on TV. This doesn’t mean it necessarily has to be filled with drama, but there are several areas where it can quickly go off script. Buying a home, making improvements and selling for a profit sounds easy in principal, but is not as simple in execution. There are several areas where you can be thrown for a loop and turn a property with tremendous upside into one with just average profits if you don’t know what you are doing. You should always expect some bumps in the road on your first handful of rehabs. Like anything else, the more you do the easier it becomes. Here are five tips for success on your initial fix and flip rehab deal.
- Market Knowledge: How well do you know the market the property is in? Have you been researching the area and looked at recent sales? Have you explored changes to demographics that can impact property values? Simply put, if you plan on making an offer on a property you must know everything about the market. It is not a stretch to say that the market is just as important as the property itself. You can get a seemingly great deal on a pristine property, but if the market suppresses the value it doesn’t make a difference. One of the ways that new investors get in trouble is by chasing every potential deal they can find. Without knowing anything about the market they make an offer, just to get their feet wet in real estate. It is not until they take ownership do they realize they overpaid for the property and the upside is limited. Never pursue any deal until you know everything about the market the property is located.
- Know The Numbers: There is a lot that factors into the profitability of a rehab. On the surface you buy low, sell high and make whatever is in the middle. The reality is that there are many seemingly hidden numbers that can make or break the transaction. On the acquisition there are closing costs, fees, taxes and insurance that can mean more capital at the closing table than anticipated. Once you get into the meat of the rehab there are carrying costs for taxes and insurance, budget overruns, material costs and plenty of unexpected items along the way. When you are finished and try to sell, your price may not be what the market had in mind. You also need to account for the closing costs, transfer taxes and a bevy of other costs and fees. The bottom line is that there is often little margin for error on your rehab deals and every dollar makes a difference. You must know exactly what you are walking into and understand how the numbers work. You never want to leave the closing table frustrated and disappointed that three months of work didn’t equal the profit you anticipated.
- Expect Issues: On one hand the chaos you see from your favorite rehabbing show is exaggerated for effect. On the other, there are plenty of mini crisis and sudden changes on every deal. It is essential that you accept these issues prior to getting started. It is the true exception to the rule that a rehab deal will go from start to finish without a problem. The more common scenario is that you will put out several mini fires from the time you take ownership until the time you sell. Instead of overreacting when they happen you should almost embrace them. If rehabbing was easy everyone would do it. Face these issues head on and accept that you will have to make difficult decisions along the way. The calmer you are when chaos is going on around you, the better decisions you will make and ultimately the more profitable the deal will be.
- Profitable Upgrades: All home improvements are not created equally. It is important to understand that the updates you make for an investment property are not the same as the ones you would make for your primary residence. Simply put, you are trying to add value to the property and make it as appealing to buyer as possible. Don’t focus your updates as to what you personally like, rather what can add value to the property. Here is where knowing the market and going to open houses can prove valuable. You will have an idea of what buyers may be looking for and can tailor your improvements accordingly. Adding a pool in the backyard or a “mancave” in the basement may work for you, but does it work for the market? If the answer is no, you need to pass and find something that does.
- Price Right: Finishing the rehab does not mean your work is over. You still need to find a buyer and get your property sold. How you price will go a long way in determining demand. Your impulse may be to look at the highest comparable sale and shoot for the moon. Doing this often kills any momentum you have and will leave your property struggling to find buyers. If buyers, and realtors, deem your property overpriced they will look elsewhere often without even scheduling a showing. Within a few weeks you will be forced to consider a price drop, which is a huge red flag to buyers. Eventually you will end up where you should have started in the first place, or even lower. You are almost always better off starting at the right price and working from there.
Things don’t have to go wrong on your first rehab deal. If you know the potential problem areas and work around them, you can easily have the success you anticipate.