Avoid These Common Rehabbing Mistakes
Pulling off a successful rehab project is a lot more difficult than most investors imagine. You need to find the perfect mix of the right property coupled with the right improvements. All the while you need to keep an eye on the budget and deliver quality work. When everything works there are plenty of profits to go around. However even the slightest error or omission can cost you. All it takes is one mistake in a number of different areas to completely change the bottom line of the property. In most cases the errors you make are avoidable and will be nothing more than a bump in the road. It is the large scale, expensive errors that you need to avoid at all cost. Here are the four most common rehabbing mistakes and what you can do to avoid them.
- Purchase Assumptions. The first step in any rehab property is the purchase. It doesn’t take a rocket scientist to know that you want to acquire the property at the lowest possible price. However in your rush to get a good deal you need to know exactly what you are buying. Without proper due diligence you could very easily end up with a lemon of a property that is nothing but trouble. It is important that you take a step back and understand everything about the property. Never skip the inspection unless you are knocking the property down. Issues with the foundation, roof or mold are costly and time consuming. The same is the case with issues on title or with zoning. An unexpected lien can often take weeks to remove even if you have contact with the lienholder. There is nothing about the property, the purchase history and the neighborhood that you should not know. Even if you lose a deal or two along the way by performing your due diligence that is ok. It is the one deal that you buy without doing your homework that will lead to trouble. Always put the work in and know exactly what you are buying.
- Unrealistic Budget. Watching your favorite investor on TV walk into a property and throw out a repair number looks pretty cool. The reality is that they have been in the business for years and know their market inside and out. What you don’t see is that they have also been to the property with their contractor at least a few times before they nail down a budget. If you are not realistic with your budget you are only hurting yourself. You can throw out any number and with enough bending make that number work. The best projects are the ones where you have a detailed outline of everything even before you make an offer. For all of the unexpected surprises you should keep a buffer to brace for the overages. With your buffer your property should still have enough room for potential profit. If you need everything to break perfectly and no room to the budget at all you are probably taking on too much risk. Understand all of your expenses and know exactly what you are paying for before you get too far.
- Poor Work. With every rehab property your goal is to improve the property to a point where a potential buyer finds it desirable. It is not enough to simply put some work in and hope for the best. That may be sufficient to get the project completed but won’t work in creating profit. The most successful rehabs are the ones where the work quality is perfect. You don’t need to break the bank to have high quality work. It is often the little things that buyers notice most. The finishes in the living room or the fixtures in the bathroom. It is the flooring your chose for the kitchen and how the hallway is painted. As a general rule of thumb buyers will pay for quality. Quality doesn’t always have to be expensive and over the top. If you find yourself working with a contractor whose work you can’t count on you need to find someone else. The location and even price of the property may not be enough to make up for poor work quality.
- Listing Too High. After you finish the property you need to get it sold. In the past it was enough to list at any price and wait for buyers to roll in. Even in buyers markets those days are long gone. To get the most out of your rehab you need to list at a price that is in line with the market. Many rehabbers still want to push the envelope and list above the market. By doing this you lose that important surge of initial interest. Instead of creating demand from real estate agents and buyers your property will be dismissed. Only when you reduce your price will some buyers consider coming back. This process usually takes weeks before you realize you made a mistake. All the while you are paying the carrying costs on the property and other homes in your area are being sold. It is best to listen to the advice of your real estate agent. They will give you the unbiased truth about your property. Often times you are too close to it to see just how it stacks up to the market. Even though you may have made great improvements you still need to listen to the market and list at the right price.
Rehabbing is a great way to create wealth in real estate but only if you know what you are doing. Whatever you do avoid these four mistakes at all cost.