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Avoid These 5 Common Rehab Mistakes

Rehabbing is currently the most popular form of real estate investing. Almost every new investor that enters the market wants to be the next great house flipper.  While this is certainly achievable there is plenty that can go wrong.  Things may look easy enough on TV but are often much more difficult than you may realize.  There are a handful of steps that you need to take to ensure your success.  A mistake in just one of these areas will cause you to not have the outcome you desire.  Before you dive into your next rehab property there are a few key items you need to focus on.  Here are five of the most common rehab mistakes you need to avoid.

• Overpaying. There are very few, if any, deals where the purchase price is not a major factor. In almost all situations you are will be walking a monetary tightrope as soon as you take ownership. It is critical that you get into the property for as low a price as possible. This may sound obvious but your mind can get clouded when there is increased competition. You may not think going a few thousand above your previous asking price is a big deal but it can be. Every dollar that you increase your purchase price has a direct impact on your bottom line. From the moment you take ownership you will be forced to look for ways to recoup this money. By cutting corners with the work you do or improvements you make you greatly decrease your profitability with the property. In addition it may cause the property to stay on the market much longer than anticipated. As difficult as it may be you need to stay disciplined with every offer you make.

• Wrong Work. All home improvements are not created equally. The work on you do on one property in one market may not be the same you do in a neighboring one. Rehabbing is more than buying a property putting some work in and seeing how much you can get for it. While those are the basic concepts you need to spend time knowing what improvements make sense for the market. A backyard swimming pool may seem like a good idea but it doesn’t work in areas where yard space may be limited. Doing the wrong work causes you to spend money that you won’t be able to recoup. One of the common misconceptions with rehabbing is that if you throw enough money at a property you can make a profit. Anyone in the business knows that this is not the case. Before you do any work you should take a look at what is on the market and what has recently sold. It is not about doing any work to the property it is about doing the right work.

• Going Over Budget. Numbers are the backbone of any rehab project. Before you even make an offer you need to have a good idea of the costs of repairs and your after repair value. It is essential that you have a cushion for the unexpected items that pop up on almost every property. Without this buffer it is very easy to go over budget. Much like when you go over your original offer the minute you go over budget you are in trouble. You have to find a way to recoup the money that you lost. Most rehabbers end up robbing Peter to pay Paul meaning they cut corners in critical areas. This may work out on TV but in real life you may not be able to get your money back. There is no point in forming a budget if you are not willing to stick to it. This requires discipline but is what separates average rehabbers from great ones.

• Listing To High. After months putting your blood, sweat and tears into a property you are emotionally attached to it. This emotion may push you to list your property much higher than the market justifies. Buyers don’t care about the condition the property was in when you bought it. They don’t care about the hurdles you faced along the way. All they care about is the finished product. You may consider this property the best rehab you ever did and your crown jewel but you can’t ignore the market. Listing too high will ruin any momentum you may have. Instead of creating a buzz your property will hit the market with a thud. Buyers and real estate agents will almost certainly not look at your property and if they do they will not make a full price offer. When you finally acknowledge that you need a price reduction you may have missed the market. Trying to list high just to see who is interested will often come back to bite you.

• Accepting The Wrong Offer. Rehabbers have two main goals with any rehab property: sell it quickly and sell for the highest price. It is important that you really look at every offer that comes in before accepting anything. Sometimes the highest price may not be the best offer. If there are excessive contingencies or the financing is suspect this may cause delays in closing or the deal to fall out altogether. Now, instead of closing at your price you can end up wasting several weeks and be right back at square one. A good real estate agent will help guide you in this area. They have the ability to look at an offer and gauge the strength of it. Even though you want to squeeze every dollar out of the property you want to make sure you always take an offer that will actually close.

There is a thin line of success in the real estate world. As a rehabber this is even more pronounced.  Avoid these five critical mistakes at all cost.