Oh *%#&**! Five Things that Go Wrong with Rehabbing Homes

by Donald Tucker

Everybody I talk to wants to do a Rehab because they are so simple.  After all, we have all lived in a house for years, and we know houses.  Nothing could be further from the truth.  Because I listen to my radio and know how to operate it, does not mean I can take it apart and put a new one together.

There are many places that things can go wrong when Rehabbing the House from picking the wrong color paint or ordering the wrong size fridge.  The main problem that problem people run into is under estimating the research and thought process that goes into a full rehab.  You need to know how and where to look for a house to rehab.  The money or finances need to be worked out.   How do you set a budget for the total project that includes purchase price and rehab cost, and a little extra?   When starting a rehab you need to think the entire process through to selling the house for a profit before you ever start looking for a house.

The process includes:

  • Knowing where and how to find a house.
  • Having all the finances and money lined up before you start looking.
  • Proper analysis of the rehab that is needed.
  • Working with contractors to get the work done in a timely manner.
  • Marketing and selling the house.

The process starts with finding a house that needs work.  You need a budget to know what price range you will be looking for.  Also, who will be your buyer?  You can sell to an Investor who will keep as a rental, or a first-time homeowner, or an experienced homeowner.  The investor buyer will be the lower price point and will increase as you market to the different types of Homeowner.

Let me break this down into numbers.  When visualizing your end buyer, think about the investor buyer who will pay anywhere between  $50,000.00 to $85,000.00.  The first time Home Buyer is looking to spend about $85,000.00 to $125,000.00.  The experienced homeowner spends from $150,000.00 range goes up from there.  The Luxury home buyer will probably be looking at houses from $400,000 and up.  We don’t recommend starting at this top dollar amount.

Find the neighborhood that fits your budget and is good for re-sale.  I never buy in a neighborhood if there are no sales in the past 1 year.  You can find houses on the MLS by using an agent to look for them.  You could run a mail campaign to look for a motivated seller.  Or rely on word of mouth and networking with people in the business.

I recommend staying in a general area, the more you work it the more you gain knowledge of the houses you might want to work.  Pay attention of what the houses sell for and what they are listed for.  Sometimes the selling price is much lower than the listing price.  Always consider the selling price when you are analyzing the house you want to buy.  I take an average sell price of all the sold houses and drop the price a couple of thousands to help price my house.

You must be able to analyze the house and put together a cost estimate for repairs.  This would be a good time to get a contractor involved and have him give you an estimate of what you want to be done.   Prepare a Scope of Work for him to bid off of and walk the house together and get his advice and cost saving ideas.   Remember the 4 numbers you must have is:  the Purchase Price you are paying for the house.  The rehab cost.  The ARV (After Repair Value) or price your end buyer is going to pay.   The most important number is the profit number you are planning to make.

I use a purchase analysis chart (Microsoft Excel) that will equal the price I need to pay for the house.  After putting in the ARV, Rehab cost, the selling price, and the profit I want to make, the equation leaves the purchase price.  In my chart I also input, the closing cost I pay when I purchase and sell, 3 months of taxes, insurance, and utilities, seller paid closing costs for the buyer when I sell.  If all the numbers fall into place, it is time to make offers.  Knowing what you can pay takes a lot of headache, and questions off your plate.

To establish a rehab cost can be tricky in itself.  The Contractor may want to do extra work that can create a bigger pay day for them.  Have a budget in mind, and work within the numbers.  Sometimes you may have to add and subtract different items to be worked on.  I suggest, having a budget and add the Must Haves first.  If you know it needs a roof, or a furnace, or a new Kitchen, and then add that first to the estimate and work backwards.  Believe me there is always too much you can do to a house.  You decide where to put your money to get the most return for your buck.  The more items that are needed to get the house up to a retail value, the lower the price you need to pay.  My best rehabs have been when I installed a new roof, furnace and A/C unit, new Kitchen, and new electrical service upgrade.  Being able to market that all the items listed are brand new will attract many more buyers.

After your contractor has given you a solid bid, also talk about how much time they will take to complete the rehab.   This has been the biggest problem that I hear about the contractors.  Ask how many people will be working on the job, and if they will be there every day.  Get all this in the contract.  DO NOT pay the contractor more that 10% to start.  Some will want 50%, don’t do it.  The way I calculate the payments are I know it will take 5 weeks to complete, which is reasonable. First I subtract 10% for the final payment, and 10% for the first payment.  I then take the remaining cost and divide by 5 weeks.  The contractor will know how much is will be paid each week.

Some people I know, do not pay anything until the contractor has worked a full week.  You have to be the judge on how to start to pay your Contractor.  But the most important payment is the last.  Never pay the contractor before they are done and you have conducted a walk through with them.  You will most likely have a punch list for them to complete.  After the punch list is complete, and you are happy with the results, then you should pay him the remaining money owed.   Don’t be taken back by ”if you pay me now I will get these things done this week”.  Hold your ground on this, you won’t regret it.  It’s all in the name of good business practices.

Treat this like a business, because it is a business.  Another thing is if you have business policies, then you never have to make another decision.   My policy is we pay on Friday morning and I go over this fact during the contract process.  So they know a head of time, what to expect.  When they ask for money on Tuesday, then my answer is already decided.

Get an expert to Market the house when you are ready to sell.  Make sure you are completely finished with the rehab before you put it on the market.   I take about 60 to 80 photos and have flyers made up.  When the sign goes in the yard I have flyers in the flyer box attached to the sign.  I also have a book inside the house with all the details of the house, including the disclosure form, school info, a detail list of all the rehab items that was completed.  I offer a Home Warranty to the buyer and have it paid for and active.

The agent puts it on MLS, and various other web sites to attract buyers.  Some buyers will drive by and call off the sign, be prepared to discuss your house and know what questions to ask them.  Some people will want to get it under contract, only to cancel when they do inspections.  Be careful and find out how strong the buyer is, and if they are an investor or a homeowner.  Most agents will only show clients who are pre-qualified to buy at a certain amount.

I know some investors that will stage the house with furniture and pictures.  There are companies that specialize in staging houses.  The house should be clean and bright and smell like a new house.  When you have an offer and enter into negotiations, be prepared with you chart and know what your profit will be if you decide to accept a lesser offer.  Sometimes a bird in the hand is worth 2 in the bush.

When I get an offer, I can almost always close the deal with some compromise.