Real Estate Investor · Sacramento, CA · Member since 2009 · 20 posts · 0 votes
I'm working with a semi-experienced flipper (3 years of about 4 houses a year) who is giving me advice (my first two flips flopped). She typically does top-of-the-line for the neighborhood and then prices at median price. She says this sells fast. For instance, if 2 out of 5 houses in the area have dual pane windows, she puts in retrofit dual pane windows. If some but not most houses use granite countertops, she uses granite. If most places have tile tub surrounds, she'll do tile with some kind of border/accent/design. This goes against the advice I've read in books saying that a rehabber should stick with what the average house has in the area.
What level finishes do you use? If 2/5 of houses in the area have dual pane windows, would you replace unbroken single pane windows?
Thanks for your advice! I overdid my last house and I'm so afraid she's telling me to make the same mistake again, but I know I need to trust my mentors.
I work mainly on lower end inventory, 100k and below. Sometimes in rough neighborhoods, and the occasional gang land war zone. In the war zones I have had problems with break-ins and graffiti, but not in the other areas. Even these low-end properties now get all new flooring (carpet and 18†tile with deco dots) new appliances, granite counter tops, new sinks and faucets, dual pane windows, new base, casing and crown molding, new plugs and switches, interior two-tone and exterior paint. This typically runs around 10k for the rehab. If the roof is bad, or the heating or cooling needs replacing, or if kitchen cabinets needs replacing instead of refinished it can go higher. It seems that is about as cheap as I can get it and still look nice. It isn’t much cheaper anymore to do Formica counter tops instead of granite slab. And it really helps for renters or buyers to walk in after seeing a bunch of dated gross properties and say “WOW!†I think it makes your house the next best choice to go pending. I have lived in some of my rentals in the past, so I tend to make them nicer than they have to be. I think I attract a better tenant, and one that tends to stay longer if I have a really cute, stylish place that says “home†not “rental.â€
How fast is she selling her houses versus the market average? How much are your holding costs per month? It sounds like she is selling at median prices, but if your mentor's house is flying off the market then perhaps its worth it.
I would analyze the deal on fixups versus holding costs versus selling price and go with whatever gives me the greatest profit.
Justin: great idea, thanks! She seemed to hold her last one for about 3 weeks before escrow opened, which is much less than average for that area. I pay cash for everything, so my holding costs are really just lost opportunity. I do think the additional sales price she gets is more than the additional cost. You are right, I guess that's what it all comes down to.
Harrison: thanks! It's great to hear from someone that does this same thing in lower/median priced areas like she works in. I didn't know anyone else who rehabbed something higher than the norm. You're right, it's all about budget, whether the additional selling price justifies the additional cost, and in this case I think it does. Thanks!
I'm wondering how to determine the budget. Do you base it on what you have available to spend and start from there, or determine what the median prices of the items/labor are, and build your rehab project list from there?
Also Trudy, can I ask how you pay cash for everything? I'm using HELOCs but can only do one at a time for each new property. Buy, get HELOC on that house, buy again, repeat.
- In this market, to sell quickly, you need to have a house that is at the top of the range in terms of condition, and the bottom of the range in terms of price, compared to competing homes in the area.
- To accomplish the first half of this equation (top of the range in terms of condition), you need to be intimately familiar with competing homes on the market, and you need to do a rehab at least to that level, and preferably a notch or two higher (as Harrison pointed out).
- To accomplish the second half of the equation (bottom of the range in terms of price), you need to be buying very, very inexpensively. It can be difficult to have the nicest house at the lowest price and still make a profit, but it's definitely doable if you're selective.
- Sometimes, in order to stick out above your competition, all it takes is great staging. Two equivalent houses -- one empty and one nicely staged -- are not equivalent at all; the staged house will sell much, much faster, and sometimes at a higher price. So, if you can't afford to differentiate based on finishes, consider staging to serve the same purpose.
- To Aly's question, decide on your level of rehab before you consider cost. Know your competition, and know what you need to do to move your house faster. Once you know what you need to do, THEN figure out the cost and determine if you have a potential deal or not. If you try to back into the deal (determine your budget first and then figure out what you can do with that budget), you'll find that you're talking yourself into deal that aren't really there.
- In terms of building a budget, start with the materials. These are fixed costs that -- if you're working on the same types of houses over and over -- can be priced out ahead of time and will never change. For example, I know that the price for each bedroom fan/light I buy is always $17.64. So, if I walk into a house with 3 bedrooms, I automatically know that I'll be spending $52.92 on fan/lights for the bedrooms. If you price out all your materials upfront, you can figure out your materials cost for a house in about 5 minutes this way.
- As for labor costs, it will take a little while to figure that out, but once you start using the same contractors over and over, your labor costs will become just as obvious as your materials costs.
Hi Aly,
I can pay cash because I'm looking at properties whose cost + repairs are very small. It's not the greatest neighborhoods, but my home town wasn't well off, either, so it feels like my peeps. I've heard opinions from two investors that rehab properties all over the US, and one said "I'm not going to live there, so I don't care what it's like, and the money that comes from the houses spends the same," and one said he's had some severe problem incidents investing in bad areas and it also leads to much lower quality tenants.
I'd be interested in hearing other experiences with rehabbing in bad areas. I was thinking I'd have someone I trust stay in the house during the rehab, to "guard" the place. Assuming the trustworthy individual wouldn't have to be evicted, is that a stupid idea? The last house I did I got so fed up with people stealing stuff that I often slept there myself.
Thanks Trudy. I pay cash as well, through HELOCs. I plan to refinance the last house I bought with HELOC money, to replenish the fund.
My rentals are in low income areas too. Not war zones, but not places I would live. The houses have needed a several thousand in repairs, they weren't gut rehabs. So far my contractor hasn't had any problem with theft...I hope I don't jinx him!
I don't know how comfortable I'd be having someone live in the house even temporarily. Getting them out could be a bigger problem than theft.
I work mainly on lower end inventory, 100k and below. Sometimes in rough neighborhoods, and the occasional gang land war zone. In the war zones I have had problems with break-ins and graffiti, but not in the other areas. Even these low-end properties now get all new flooring (carpet and 18†tile with deco dots) new appliances, granite counter tops, new sinks and faucets, dual pane windows, new base, casing and crown molding, new plugs and switches, interior two-tone and exterior paint. This typically runs around 10k for the rehab. If the roof is bad, or the heating or cooling needs replacing, or if kitchen cabinets needs replacing instead of refinished it can go higher. It seems that is about as cheap as I can get it and still look nice. It isn’t much cheaper anymore to do Formica counter tops instead of granite slab. And it really helps for renters or buyers to walk in after seeing a bunch of dated gross properties and say “WOW!†I think it makes your house the next best choice to go pending. I have lived in some of my rentals in the past, so I tend to make them nicer than they have to be. I think I attract a better tenant, and one that tends to stay longer if I have a really cute, stylish place that says “home†not “rental.â€
Thanks, Derek! That's very interesting, granite countertops in war zones. My mentor here also puts granite in everything because she says it's so cheap. It's great to know that someone else has been so successful without sticking strictly to the nice areas.
Aly, excellent point, yah, that's my biggest worry, about having to evict a person I thought I could trust. I already had to do that once, at a duplex I had. I guess in general I am too trusting of riffraff and I need to get that through my head.
Thanks, J! That sounds like a great alternative to an eviction, I'll try it.
I'm putting slab granite in the one I'm doing now. It should come in about $120K once fixed up. I didn't plan to do this initially, but after looking at retail houses in the area, they're almost all granite. Mostly granite tile, which is quite inexpensive. But I'm only paying about $1500 for slab, installed. I only have about 12', but up to about 16' would have been the same price. I could have done the very cheapest grade for about $1200. The cheap pre-formed formica would have been $300 just for materials, and probably another $300 to have them installed (which I would not have paid for.)
Summerhomes, I can't believe you rehab to this level in bad neighborhoods. I recently had a break in at one of my units, they damaged both front and back doors beyond repair( nice metal ones). They did me a favor by stealing all the old dirty stained carpets.(saved me from having to pay to do it.) Unfortunately they also stole my furnace. I'm certainly glad I had not finished the remodel with appliances in place or I'm sure they would have disappeared also. Just a word to the wise to not overdo it in these neighborhoods. Jim
I'm amazed too, although my fiance frequently jokes about how future tenants will be requesting granite countertops and stainless steel appliances! Our rentals are in low income neighborhoods but not war zones.
And Trudy, being trusting isn't a bad quality but will usually get you burned by professional tenants. I trusted my first tenant and now it's strictly by the rules with her.
Some of you guys really go the extra mile. I'm not sure that I got the reasoning behind this down.
In a lower class neighborhood why would you go out of your way to put granite countertops? I can see why a rehabber would do this in a middle class neighborhhood to make their property stand out, but in war zones!
Somebody help me understand this side of the business.
Some of you guys really go the extra mile. I'm not sure that I got the reasoning behind this down.
In a lower class neighborhood why would you go out of your way to put granite countertops? I can see why a rehabber would do this in a middle class neighborhhood to make their property stand out, but in war zones!
Somebody help me understand this side of the business.
The key is to maximize profit, and the way to do that is going to be highly specific to the location, the house, the market of buyers, etc.
For example, given a house, if you can make $20K profit by doing a $10K rehab on it or a $10K profit by doing a $30K rehab on it, the answer of which to do should be obvious.
Likewise, given another house, if you can make a $20K profit from a $10K rehab on it or a $20K profit from doing a $30K rehab on it, the answer should also be obvious.
I can't speak to the specifics of the rehabs above, but clearly the people doing them have determined that they can maximize their profits by doing a higher level of rehab than is standard for the neighborhood.
This isn't true in the neighborhoods where I rehab, but every location and house will be different, so you have to be comfortable with whatever numbers you come up with for your projects.
I go a notch or 2 above the neighborhood, if there are other rehabbers in the neighborhood you have to step it up a notch. I try to always put at least granite tile in the home, if its selling for over $50k (which is 98% of everything in denver for SFH). It gives a wow factor that homeowners are impressed with (though you and I know its as cheap if not cheaper than decent laminate). Hardwood floors or new carpet (a step or 3 above the contractor grade most investors put in their units).
The best part is, most investors are lazy and cheap, its not too dificult to do a much better job than them. I can sell my home for more, with an agent (paid at least 2.5%) and move on to the next project faster. Dont skimp on finishes, and dont go overboard. Its a fine line!