Working With A Thin Margin Of Error: A Real Estate Investing Reality
By Paul Esajian on December 8, 2014
If you watch one of the many home flipping shows on TV, you would think that flipping a home is easy. The reality (no pun intended) is that it is much harder than it may appear. There are issues almost every step of the way that can derail even the most seemingly simple rehab. Almost anyone can do some work to a property and put it back on the market, but if you are looking to get the most out of every flip there are a few things you need to do.
The most important step for any rehabber, regardless of experience, is to have a plan with every property. You may have done 100 projects, but if you are not prepared for the next one you could find yourself scrambling to make a profit. Every property and situation can be different, each with a new set of challenges. You need to map out your vision for what you want to do. The more you have planned out before you start, the less chance that you will be forced to handle things on the fly during the process. This is where most rehabbers get themselves in trouble: trying to adjust to a problem instead of avoiding it in the first place.
As much as you may like things to go smoothly, things don’t always turnout how you wish. What makes many of the rehab shows on TV so entertaining is that a majority of the issues rehabbers encounter are real. They may be embellished for TV, but there are things that come out of left field on every rehab that must be dealt with. Along with your plan and vision, you need to write down the worst case scenario for every step along the way. Some of these things are not likely to happen, but you should prepare yourself for how you would handle these in the event they do. Something as simple as your contractor or electrician not showing up when they are supposed to is certainly realistic. If that does happen, it will set your project back several days. If you at least consider what can happen, you will be much quicker in handling it.
Profits on any rehab are obtained in three areas: acquisition price, rehab budget and end sales price. Keeping an eye on the bottom line once you take ownership of the property is the most important thing you can do to maximize profit. This means knowing what you are paying on everything that goes into and out of your property. Some rehabs will allow you to spend differently with the neighborhood and area in mind, but you need to know what you are getting from every expense. If you opt for high quality counter tops or an updated bathroom, you should know that this expense will be justified with an increase in sales price. Spending just to spend will see expenses quickly add up with no real purpose. Ideally, you will have a contractor that you can rely on during your rehabs. If not, you need to get multiple quotes. This process can be very time consuming and draining, but a good contractor can make or break any rehab. Talk to as many contractors as you need to until you are confident you have a good fit for what you are looking to do. Everyone that goes in and out of the property has an impact and is an expense. Take your time to make sure you are comfortable with your budget before you get started.
Like most things in business you need to spend money to make money. You can try to cut corners and sacrifice quality but it will catch up with you when you sell the property. The little things make a big difference with buyers and they will notice the quality of the work and every little thing wrong with the house. You need to know where you can pick and choose your battles with the property and which items will lead to real value. Bathrooms and kitchens often offer the most bang for your buck as most buyers will focus on these two rooms. You will get what you pay for in terms of the quality of any work and the design of the property.
Every seller wants to sell for the highest price regardless of what they are selling. With rehab sales it is important to price the property correctly. If you out price the market the property will sit on the MLS for weeks without any activity. To get most out from your sale you need to create demand. To create demand you need to attract as much interest as possible with the thought of getting multiple people interested. This often means listing at a price that is in line with the market. If you have a good property with high quality the profits will come without having to try to inflate your sales price to get there.
There are profits to be made on every rehab, but they won’t happen without working for them. It is often the little things you do that will have the greatest impact. There is a fine line between rehab success and failure, and it starts with having a plan and sticking to it. There will always be a curve-ball at some point in the process, but if you are prepared you will be able to handle it with ease – just like they do on TV.