Lesson Learned: Rehab as Move-In-Ready or Fixer-Upper, Not Half-Way

When you first look at a potential rehab house deal one of the key things to consider is your rehab budget.  This quickly brings up questions about whether to remodel the kitchen, baths, floors, landscaping, etc., and to what extent.  The marketplace has taught me a lesson about how much to put into your rehab effort.

When building your rehab budget first decide whether you will be targeting the HGTV move-in-ready home buyer or the bring-your-tool-belt-fixer-upper home buyer.  Those are your two options.  Note that the sort-of-fixed-up-house buyer is missing from that choice.  So, the choice is big or little, but not the middle.  We actually did a test on a fix-in-flip property in Denver where we started with the "middle" option to see how it would work.  In short, it didn't.

We completely remodeled two bathrooms and about 60% of a third bathroom.  We painted the main level of the interior and replaced the main level interior doors.  And we put in new carpet in the basement.  While that is a fairly healthy lipstick rehab, it was not enough.

Once listed on the MLS we had dozens of people look at the house.  It became apparent that they were not happy with the kitchen as-is and the wood panel walls in the basement made it feel like a dungeon.  After waiting a few weeks and dropping price a couple times, we sensed the buyers felt shortchanged due to the kitchen and basement finish.  So, we kept the price constant instead of lowering again, put in a new tile floor and granite counter top in the kitchen, painted the basement wood paneling, put on a new front storm door, and touched up the landscaping a bit in the backyard.  That did the trick.  Offers began coming in and we were under contract within a couple weeks.

In hindsight, we should have done the more complete rehab from the beginning -- including new kitchen cabinets and appliances.  From our perspective it was a matter of spending a dollar and raising the price a dollar, with concern for a price ceiling that hinders ROI.  This was also during an appreciating market so we started with a reach price to feel out market pricing.

If a lot of people look at the property the pricing may be in the ball park.  Or, there may just be limited inventory and buyers will look at anything within a certain locale.

The move-in-ready home buyer is looking to have everything they want and bundle it in with one slightly larger mortgage payment.  By creating a more desirable property that has minimal future incremental cash cost, you are able to increase the price without inhibiting demand.

The fixer-upper home buyer is looking for a good deal in exchange for having to put in sweat equity with incremental fix-up cost.  It may be possible to make your target profit with this approach because your cost is so low.  Maybe you spend a little to "pre-hab" the house (clean and repair only, no remodel).  At some point every dollar you spend is balanced by increasing the price by a dollar.

One last point to consider is your price. If you try to reach for the top price, you may get it at the cost of more time.  If you lower your price a bit and sell sooner, not only do you save any financing cost, but you also have more time to compound your profit on future deals in the next year.

Hope this helps.