Consider This Before Starting Your Next Rehab Property
By JD Esajian on September 18, 2017
The most basic concept of any rehab property is to create value and sell for a profit. The strategy you employ for one property in a particular market may not work for another property across town. Some properties call for higher quality finishes while others simply need a freshening up. Knowing what is needed prior to starting often has a dramatic effect on your bottom line. What cannot be understated is that all improvements are not created equally. It is not enough to throw money at a property and expect a sizable return. In some cases, over improving a property can cause you to lose tens of thousands of dollars if you are not careful. Every new property requires a fresh look and an individual approach. Here are five items to consider before starting your next rehab project.
- Target buyer. Rehabbing real estate is not a one size fits all proposition. If you truly want to improve your rate of return you need to focus on your target buyer. Is your property something that first-time homebuyers will find appealing or does the market dictate a higher price point? You can do great work but if it is not in line with your market the property will sit on the MLS unsold and you will end up losing your shirt. On the flip side if you understand the target price point for the area you should do work that is in line with the market. This will help formulate a budget so there are no wasted expenses and you can get the property sold as quickly as possible. What you want to do with a property may not be best for what is happening in the market. Always think about your target buyer before doing any work.
- Avoid trends. Any improvements you make should have an eye on the future. As much as buyers want the property to be updated they don’t want it to be trendy. A hot tub can be an excellent addition on the deck of a moderately priced house but not in the bathroom of a small condo. As crazy as it sounds there are investors who try too hard to put their personal spin on the property and make things worse. You can’t go wrong sticking with the bathroom and kitchen. Nobody knows which trends today will be out by the end of the next decade but if the kitchen is nice everything else in the house feels more appealing. White cabinets and dark countertops are in now and probably will be for the foreseeable future. You can feel safe that you won’t lose a buyer because the kitchen is over-improved. The same is the case with the bathroom. A large hot tub make look great today but will it hold its value if the market changes? You are better off sticking with new flooring and updated bathroom fixtures rather than trying something that can do more harm than good. If your house is too trendy you limit the prospective pool of buyers who may be interested.
- Don’t over improve. Here is where you need to be careful blindly throwing money at a property. There is an adage in real estate that you never want to have the nicest house on the block. By setting the bar too high your value has nowhere to go but down. You can do the greatest work on a property with the most perfect fixtures and amenities but if the market doesn’t support it you are wasting money. This doesn’t mean that you can’t offer the highest quality craftsmanship but you can’t pay top dollar to do it. Instead of amenities that most buyers in the area don’t need, or even want, deliver a better product. Always look at comparable sales and current listings. These are the properties that buyers are going to compare with your property. If they see five sales at $160,000 and your home comes on the market at $229,000 there isn’t much that your home can offer that can justify the price.
- Stay under budget. All work that is done should revolve around the budget. The minute you go over budget you are forced to compensate in other areas. Sometimes this works and you can still manage a profit but other times you directly eat away at your bottom line. A few thousand dollars here and there quickly becomes ten thousand and the next thing you know you a great rehab turns into an average one. If you are too far over budget you will either be forced to over improve and hope for the best or cut some corners and hope you can justify the price in other areas. Neither option is very appealing.
- Target price. You should never wait until after your work is done to determine your list price. Your estimate price should be the focus of everything you do with the property right from the start. By waiting until you are done it is easy letting your emotions influence your decision. You are so proud of the work you did that you think you can justify an extra $30,000 in price. You list higher than you know you should which has a reverse impact on the sale. Instead of generating buyers you turn them off and they look elsewhere. After a month, or more, you finally decide to wave the white flag and lower the price where you should have from the outset. By this time, it may be too late to jumpstart buyer interest and you will have done yourself and the property a great disservice.
Rehabbing a property does not guarantee a profit. The work you do, and how you do it, can make all the difference. Use these five tips before starting your next rehab property.