5 Rehab Mistakes That Can Ruin Your Next Deal
By JD Esajian on October 8, 2018
Profiting on rehab deals is not nearly as easy as it looks on TV. On your favorite house flipping show there is always a small obstacle that is overcome but in most cases a sizable profit is still made. While there is always the potential for a hefty return, it doesn’t happen unless you know what you are doing. Just one false step can set the wheels in motion for series of negative events. The next thing you know, you are scrambling just to make a small profit, or worse. Even though you probably are aware of what you should do, mistakes are part of the business. Avoiding them can be just as important as finding the right property or nailing your after-repair value. Here are five mistakes that can ruin your next rehab deal.
- Lack of preparation. Right from the minute you know you are going to make an offer on the property you should be thinking about the next step. Even if you plan on paying cash there will be a few days from the offer to the closing. During that time, you and your contractor need to get everyone in line. Whatever you plan on doing with the property should be mapped out and scheduled. If you want to knock down walls or add something to the exterior now is the time to check with town hall to make sure it is a possibility. Whoever you plan on working with on the project they must be contacted, and their schedule should match yours. If not, you should start looking for someone else so there are no delays or overlaps. As soon as you take ownership you should hit the ground running full speed. Playing it by ear and not having a plan is a recipe for disaster.
- Loose budgeting. There are three basic pillars in the world of real estate rehabs. The purchase price, the budget and the after-repair value. If you are off in just one of those areas, your bottom line will be impacted. It is not enough to have a broad budgetary outline and hope for the best. Your budget needs to show realistic work and have realistic dollar amounts attached. Any changes, updates or tweaks you want to make with the property must be accounted for and a dollar amount attached to it. If you aren’t sure what the dollar amount is, always overestimate rather than assume you can get it done on the cheap. What typically ends up happening with new rehabbers is that they assume everything is going to go as scripted. Within just a few weeks they will see that things cost more and take longer than they anticipated. Without an iron clad, conservative, budget you will spend much more than you plan for, causing you to try to make it back in other areas. This leads you down a slippery slope that can be difficult recovering from.
- Lack of flexibility. One of the more accurate items on every rehab show you will watch is an unexpected problem along the way. You can spend weeks ironing out a budget, getting everyone in line and doing your property due diligence only to have it crumble in a few minutes. The best rehabbers are those who can quickly change gears regardless of what they are facing. They don’t pout and bemoan their current situation. They react as soon as a problem hits and make the best out of the problem. If you rehab enough properties eventually you will come across an unexpected situation. Instead of being shell-shocked for days you need to shift gears and deal with your new reality. Those rehabbers who are unwilling or unable to adapt will have a tough time in the business. The more flexible and open you are to change, the more successful you will be.
- Unrealistic ARV. It is important to always take an objective view of the property and the market. There is usually enough data available to help you come up with a realistic after repair value estimate. It is only when you fail to use this information that you will find yourself in trouble. All rehab work is not created equally. You can create a property masterpiece, but if the market is in decline you will be limited in your sales price. Buyers don’t care about all the wonderful work you did with the property. All they want to see is the end result and whether it is in line with the market. Attaching too high a value will cause you to spend more money and ultimately not get the price you anticipate. Instead of shooting for the moon, take a conservative approach with your ARV.
- Not understanding carrying costs. There are several minor costs that can have a definite impact on your rehab bottom line. It is essential that you know all these costs and how that play into the deal. The monthly interest on a hard money loan individually won’t break the bank but added with additional costs can have a real impact. In addition to monthly interest you need to account for utility fees, insurance, taxes, cost for dumpsters and a dozen other innocent expenses. Every rehab you do you should keep a spreadsheet of where every dollar went. At the end of the project you may be surprised at just how much non-accounted for money was spent.
There is a fine line between success and disappointment in the world of rehab investing. Don’t let these five mistakes ruin your next rehab deal.