What look for/look out for when purchasing a rehab house

Question

I'm hoping to get into rehabbing soon, and I just want to know from anyone with experience what are things to look for in a house that is worth rehabbing.  Also, what are things to look out for that make the house not worth rehabbing.

Lastly, what is the maximum one should spend on rehab costs in order to still make a decent profit on the project? Is this determined by a general percentage of the house value, or does it vary depending on the project?

Thanks for the help!

Ryan Webber · Answer

All of your expenses and profit are include in the 70% of ARV except repairs.  Expenses on a rehab (not including repairs) normally run somewhere between 12%-28% of ARV depending on multiple issues but mostly dependent on how many things you do wrong.  As a new rehabber you will usually fall closer to the 28%, and as you become more experienced in rehabs you will get closer to the 12%.

Check out http://forums.biggerpockets.com/viewtopic.php?p=18225&highlight=#18225 for further explanation on rehab expenses.

With 12%-28% on expenses then you will have a potential profit of somewhere beween 2%-18% of the ARV.  Normally you should be around the 15% mark for profit on a rehab.  So getting back to the formula, 70% or .7 of the ARV will factor in all of your expenses and profit for the rehab except repairs.  So after we take 70% of the ARV we subtract the estimated repairs to come up with our maximum offer.  This formula will protect you when you are in your learning curve, and it will profit you when become more experienced.

Ryan Webber · Answer

The ABSOLUTE # 1 factor to look for in a rehab is price.

You can overcome a lot of things but buying a house for too much is not one of them.

Maximum recommended offer in a normal market is 70% of ARV (After Repaired Value) minus repairs.

Things to look out for in a rehab - warzone areas, slow selling areas, repairs that are beyond your scope of understanding or budget depending on if you are doing it yourself or not, overestimating ARV, underestimating repairs, and most importantly the thing to look out for in a rehab above all others is . . . paying too much for the house.

Jim Gordon · Answer

Aaron you are on the right track. Most people figure it as ARV =100k. 
  100-30=70, 70-10(repairs)=60. Your walk away from the purchase price is anything over 60k. Don't try to second guess your repairs and try to use cheaper materials it shows when you are done.

Maria Reese · Answer

Helping me out at some points .. fully informative post.. thanku :)

Ryan Webber · Answer

Leads for local foreclosures can be found for free at your local county courthouse.

As for finding deals, I would recommend reading through the Finding Deals posts at:

http://forums.biggerpockets.com/viewtopic.php?p=18568&highlight=#18568

Also, birddogz.com has a free ebook that gives some good ideas on marketing for properties.

[EDITED BY ADMINISTRATOR - Apparently the site mentioned above is not very responsive in getting back to people (from messages posted on this site).  Please do your homework before working with companies like this one]

The key to any strategy for finding deals is to do it consistently and persistently.  I would also recommend doing multiple strategies consistently and persistently.  Only having 1 or 2 strategies is only going to get you a couple deals a year.  Now you might say well I'd be happy with 2 or 3 really good deals in a year, but I wonder if you will have the intestinal fortitude to consistently and persistently continue your 1 or 2 marketing strategies for up to 10 months before you even get a deal from them.  You have a better chance of getting a deal sooner with a web of strategies working for you (let's say a "web" being at least 10 strategies).  The sooner you actually get a deal, the more belief and commitment you will have for your business, and that will make a huge difference for the long term success of your business.

N/A N/A · Answer

Do you have any tips for a person starting out what is the best way to go about trying to find these deals?  I've already signed up with a local website that gives leads on to local foreclosures.  Is this a good start? Are there any other methods of looking that I should try?

N/A N/A · Answer

Thanks for all the help guys, I've already learned a ton from this website in the short time I've been here!

So keeping this all in mind, I have another question now.  After you determine what your buying price should be (using the 70%ARV - repairs formula), How easy is it to actually find a property that is priced within your requirements?  In other words, are these low priced properties as easy to find by just searching through the MLS directory? Or do you have to have to do some hard scouting or be in touch with real estate agents 24/7 to find such a property?

Ryan Webber · Answer

Creativity and hard work are essential to find deals.  If they were laying on the surface, then this business wouldn't be as lucrative as it is.  Its easy to find deals once you get good at finding deals.  It takes time and persistence, but they are there for the ones willing to find them.

N/A N/A · Answer

Thanks guys, that clarifies everything.  I understand it perfectly now :D

Ryan Webber · Answer

The most accurate way to determine ARV is from comparable sales in the area (comps).  I'd recommend networking with a realtor and having them pull these off of the MLS.  You will need to find the most comparable houses (neighboorhood, square feet, bedrooms, baths, amenities, etc.) that are also located in the same area.

Repairs are best estimated by a contractor.  Get some bids on the project from qualified contractors.  I'd recommend that you quickly learn the basics of what things cost so that you can be efficient with your contractors time.

Also, remember you are NOT looking for a house where the selling price of the rehabbed house is more than the purchased price + rehab costs.  You are looking for a house that is 70% of ARV minus rehab costs.  The 70% factors in ALL your expenses and profit not including repairs.

Check out some of the Crunching Numbers posts at:

http://forums.biggerpockets.com/viewtopic.php?p=18568&highlight=#18568

What look for/look out for when purchasing a rehab house

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