Buying houses that need a lot of work?

Question

Hi All!

New investor here, have bought two houses in Philadelphia this year, but both in pretty solid condition/only needed a few things that were easy to budget.

I have seen some interesting places in my search though, places that seem to have "Good bones" but need a lot of work, and honestly because of my inexperience, I have decided FOR NOW they aren't for me- but I'd like to learn more about major rehab work for the future.

1. How did you take that step from more or less ready to rent places, to major rehab places? What books were helpful? Did you need a construction background?

2. Contractor screenings- what are your must ask questions when you start getting contractor quotes? How do you structure your payments and deposits to minimize risk?

3. I have found that I learn best by doing! (I think a lot of people do)- throwing it out there, are there any experienced investors who are working on any flips or major renovations for buy and hold  that would be open to going in on a deal with someone new in Q3 or Q4? I don't bring any experience on the construction side to the table, but I am flexible about being able to visit job site, I am a great communicator, can make calls, do research,  and I have the cash to finance the deal depending on budget :)

Would love any feedback/advice from more experienced investors! Thanks guys.

Steve Babiak · Answer

The state of PA does not have "licensed" contractors as much as they are just "registered" contractors - sort of like the difference between a driver's license and vehicle registration where passing a test is only required when getting a license, but registration does not require any testing.

Now, Philadelphia does have contractor licensing, so if Janine is getting properties inside the city then there could be license requirements that the contractor has to meet.

Matthew Paul · Answer

@Janine Covello Contractor screening ........ To put it bluntly , the real good contractors dont do investor or rehab work . Those that may will  charge market rates . And right now its heaven for contractors , the demand is high . Its pick and choose your jobs .  With saying that the labors that you will probably find will be sketchy at best .  Screening is a crap shoot .

Laborers work by the hour ,professional contractors bid the job with a detailed scope of work  are licensed and insured .

You have a very small chance getting burned by a Professional state licensed contractor . They have too much to lose . BUT you will pay for them .

So what ever you thing the job will cost add $$$$ to that estimate . How ever long YOU think the job will take , double it .  If you are going to try to get by on the cheap , you will pay more in the end .

Jeff Wallenius · Answer

@Janine Covello first of all, congrats on buying two homes this year!

When you start getting into major renovations the increased risk goes up for change orders from your contractor. Foundation issues depending on the area your investing can be very expensive, structural defects may require an engineer as well as heavy permitting which increases capital outlay. If your managing construction from afar, it's very easy to be taken advantage of on draws, or with contractors covering up problems that need repaired. Now to directly answer your questions.

1. Over time I took on larger projects and I do believe it's very important that you have a solid understanding of construction which I did.

2. You'll want references and lots of them! If investing out of state it's video walk throughs weekly with descriptions on work being performed. Again this still sets you up for the possibility to be taken advantage of. Release draws as work is completed and do not front rehab money if possible.

3. The only way I learn is by doing, and I've paid for my education with plenty of mistakes. Happy to discuss or help if I can.

Charlie Hampton · Answer

I love full gut job houses.  I was doing contractor work since my early teens as a helper and it afforded me the opportunity to learn many valuable lessons on someone elses dime.  Now I try to find full gut houses because I am budgeting for practically everything already, so there are few surprises to come across.  Plus I am doing most of the work myself (not scale-able, i know) so if I do come across something it is easier to swallow.

Frank Adams · Answer

One problem that many rehabbers overlook is that you run the risk of buying a place at "market value". In economics that is the price agreed upon by a willing buyer and a willing seller, under no duress, agree upon. If the property is "known" in the marketplace there will be enough potential buyers to keep the price from falling to below market.

If you're hiring contractors to do the work you, or any other buyer will pay market rate for that work. If you pay market rate for the property and for the repairs you'll have a property that you've bought for FMV. Where will your profit come from?

That's why many of us work hard to find "off market" deals and either have someone who will do QUALITY work at below market rates;  a skilled handy man or do the work ourselves.

When I was doing most of my buys and flips I had a very good paying, salaried, job. There were weeks I worked 60 hours but it was generally doable for me to arrive late and or leave early, I just needed to be available on short notice. My office and house were six miles apart and everything I invested in was within that radius.

Generally I learned how to do more difficult projects by finding out a simple repair, a small bit of bad sheetrock had a bad stud and window framing behind it, etc.

Despite my job and good education, MBA from a well known school I've done roofs, installed piers under a cracked slab, added a couple of half baths-doing all plumbing myself, installed more ceramic tile floors than I care to count, etc.

Either learn some estimating and construction skills or look for projects that will create a major payoff from small changes.

You're doing great, keep it up.

Patrick Martone · Answer

You can get some of these rehabbed homes for not much more than you'll save buying a home in need of rehab. Run your numbers and see if its worth the stress.

Michael Plante · Answer

have never bought a house in good condition

First one needed lots of work.

Went to the library and got out books on plumbing, Electric, plaster etc.  and used them to fix up and sell

BTW no internet back then

Chris K. · Answer

@Janine Covello

With smaller contractors, probably referrals and references are your best bet.

One item to note is that contractors --- especially smaller ones --- are not always the best estimators. Let's say you find an electrician who is very good and what he does. He is so good that he is basically the electricity whisper. The fact that he is a really good electrician does not mean, however, that he will give you good estimates for what the rehab will cost.

The ultimate goal is for you to get a sense of whether you are paying a "reasonable" price. I think one mistake that many investors make is just taking the lowest bid --- even if they should've known that the bid was unreasonable. Getting a very low bid sounds great until issues inevitably arise. For example, it's not uncommon to see smaller contractors make basically no profit (or even lose money) on a job because they were bad at estimating the labor hours.

I'm not condoning the behavior, but one can at least understand why some contractors decide to simply ditch the project. Sometimes a bad estimate could mean that you end up losing money on a job. And many smaller contractors cannot afford to absorb even a single bad project.

At the end of the day, rehab projects "promise" bigger profit because it's riskier. Unfortunately, there is only so much you can do to mitigate risk. For instance, our company works on construction projects where the owners are willing to spend millions of dollars just for windows and glass. I think we are good at what we do and we certainly do a ton of prep to make sure that the job goes well. But we still need to adjust quickly on the fly when things go wrong. And if the construction world taught me anything, something will always go wrong on a construction project.

Good luck!

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Jay Chopra · Answer

I am a rehabber in NJ. I have done several properties (2 last year) and am GC on 2 right now.

I am interested in JV with you (within 1.5 hour from Edison, NJ)

Thanks

Jay

Buying houses that need a lot of work?

Most Popular Reply