5 Key Steps In Evaluating Any New Rehab Deal
By Paul Esajian on April 27, 2018
In the world of real estate investing time is money. The quicker you respond when a new opportunity comes your way the more likely the property will be yours. Over the past few years there has been a surge in the demand for fix and flip rehab deals. As simple as they may look on TV, they can be a nightmare if you do not know what you are doing. Every rehabber should have a plan of attack when a new property presents itself. By going through a checklist, you reduce the chance of oversight and expedite the due diligence process. Instead of getting bogged down in areas that don’t move the needle there are a few key items you should dedicate your focus to. Here are five key steps to help evaluate any rehab deal.
- Assess neighborhood/market. Prior to doing anything else with the property you need to assess the neighborhood and the market. The property may be discounted but if it is in a high crime area or in the middle of a rural section of town it won’t have the buyer demand you anticipate. Ideally you will have a good knowledge base of the market, so you won’t have to spend too much time. If not, you need to do your property due diligence, so you know exactly what you are getting into. The strength of the market determines how quickly, and how much, you can sell your property for. Getting a good deal on a property is great, but if you can’t get rid of it you are stuck with a declining asset. Before you get too far with your evaluation you need to know the strength of the market.
- Cost of repairs. As you walk the property for the first time you should immediately start to assess the estimated cost of repairs. At this point the asking price is irrelevant to you. You are going to total the repair costs and make your estimate based off that. The cost of repairs and the work you do needs to be in line with the market. Simply throwing money at the property will not guarantee a return. If you do work that doesn’t make sense for the market you are essentially throwing money away. With the estimate you need to be as realistic as possible. The truth is that you can fudge these numbers to make them look anyway you want. By dong so all you are doing is pushing off the problem for a few weeks. The more accurate you are with your estimates, the sharper you will be with your offer and the higher your potential profit margin. If you need everything to break right with the property, it may be too risky.
- After repair value (ARV). Your cost of repairs estimates and after repair value usually go hand in hand. The type of work and upgrades you do must be reflected in the value. The goal of any rehab deal is to generate a profit, not to simply turn the property over. If the work doesn’t improve the value you need to assess what you are doing. Assigning value to work that hasn’t been done yet is always a tricky exercise, especially if there are no comparable sales. All you can do is take an educated guess based on the current data in front of you. Like anything else you do in real estate it is a good idea to always take a conservative approach. You may do great work, but the market may be flooded with inventory or the house may not be in the best area. You need to look at as much information as possible to see how you can squeeze every dollar out of the property.
- Offer. There are a handful of formulas that can help determine your offer price. It is important to use these as a guide and not a definite template. One of the most common formulas is to offer 70% of your after-repair value. Your final number must factor in the market, demand and net profit estimate. If you are looking at a property with a huge spread don’t let a few percentage points get in the way. On the flip side if the margins are tight don’t get into a bidding war that will leave you with little margin for error. Before you make any offer you and your real estate agent should always gauge the demand. You never want to bid against yourself or not make your best offer if demand is high. If you really want the property come in strong and be willing to walk away if the number exceeds your comfort zone.
- Assemble team. The minute your offer is accepted you need to get the ball rolling. It is important to reach out to the members of your team to gauge availability. Start with your contractor and continue with your electrician, plumber, painter, HVAC and anyone else you plan on using for the project. If they can’t fit your property in their schedule you need to find someone that can. Even a few days delay will eat into your profits. There will be enough organic delays without worrying abut scheduling. The stronger your team is and the easier they are to work with the faster you will turn the property over and get it on the market.
There are many sub-steps in a rehab project, but these are the five main ones to focus on. If you are strong in these areas there is a good chance you will have success.