​How to profit from the over rehabbed house.

How to profit from the over rehabbed house.

I just had a student call me and ask about exit strategies from an over rehabbed house.  New investors often screw up and over rehab a house.  They look at a home rehab the way that they would want the house if they were to live in that house.  This is a huge and potentially costly mistake.  

To make things clear, and over rehabbed house is one where you spend so much money of the rehab that your break even cost is more than the house will appraise for. I don’t care who you are, you can not get an appraiser to go 50k over any comp in the area. Sure you house might really be worth that much more than all the houses around it, but no appraiser after 2008 will write that in his report. Without an appraisal to justify your price, you can forget bank financing. You are now if the world of creative finance, or you need to change your time frame.

Creative finance works pretty much the same way if you are the seller as it does when you are the buyer. You need to construct a deal that will fit you and the other party. As the seller on creative finance, this is pretty easy. A large number of today’s buyers can’t go to a bank and borrow money. You can help them by taking monthly payments for your equity, or profit in this case. So you break your income into little chunks and collect a bit of it each month. To do this you need to either restructure your original loan (trade your hard money lender for a conventional loan), or you need to be playing with your own cash.

The other thing you can do is to change your time frame. Normally when we look at an exit strategy, we look in terms of twelve months or less. You can turn your over rehabbed house into a market price deal by waiting for the market price to catch up to you. This works better in hot markets, but it will eventually work in any market if you give it enough time. This technique generally requires you to turn your flip project into a high end rental and making debt payments while you wait for the market to rise to the point where you can get an acceptable appraisal number. While you wait for the market to appreciate, you have a tenant paying your loan, and you benefit from debt pay down and appreciation, until you can really sell the property for what you have in it.

Make no mistakes, neither of these solutions is ideal, but they are both much better than losing thousands of dollars because you put too much money into your flip project.

The best way to fix an over rehabbed house problem is to never be involved in one in the first place. In general lenders will check your math well enough to avoid that problem. If you don’t have a lender to help you with the math, and you don’t have the experience to figure it out yourself, there is no harm in asking a friendly investor to look over your numbers before you get yourself in a fix. If you don’t know any other investors in your area, then I suggest that you take a trip to your local REIA club and network with a few.

To your success

Josh