My friend, Jeff, recently found a property that required some work—a fixer-upper for sale. It was listed at a price point that was just within his budget and commensurate with its condition. Area comps indicated that a skillful rehab had the potential to deliver a high return on investment—if he could keep costs to a minimum. Jeff knew that planning the most cost-effective renovations to bring a fixer-upper to market value would be critical in safeguarding potential returns. But the complexities of buying, renovating, and selling houses for profit seemed overwhelming to him. So he came to me for help, and here’s what I told him.
Strategizing Costs When Buying, Renovating, and Selling
The complications that can arise during a renovation may seem quite daunting—I know! It’s essential that you effectively evaluate what needs to be done and plan strategically to realize solid returns on a rehab. You’ll need to carefully factor in the extent and costs of renovation as well as anything that has the potential to adversely affect these costs, including:
Type of rehab.
It’s important to assess the type of rehab a property needs—before you even make an offer—and to spend money only where it counts. A “lipstick,” rehab may include new paint, flooring, a garage door, exterior lighting and attractive landscaping. All these little things go a long way to improve a home’s look and marketability. They can be completed relatively quickly and budgeting for this type of project is fairly straightforward.
A full rehab, by contrast, might include renovating the kitchen and bathrooms or even knocking down walls to create more open space. Windows, roof, heating and cooling systems, plumbing, and electrical may also be upgraded, repaired or replaced. As the complexity of the renovation increases, so does the risk of spending more than you planned.
Dealing with tenants.
Tenants—particularly those who’ve lived at a property for years—may resist leaving. This can force a lengthy eviction process, which may hold up your ability to rehab the house, thereby increasing your carrying costs. If purchasing a house with tenants in place is unavoidable, offering “cash for keys” (CFK)—a financial incentive to vacate the home—can often prove to be less expensive (and easier) than eviction.
Every renovation project holds a surprise, so you’ll need to be prepared to handle all the potential construction-related complications that could impact your budget. For instance, you might discover mold beneath a layer of drywall and remediation costs may exceed your planned budget. So it’s important to evaluate all costs at the outset, while anticipating surprises, and budgeting accordingly.
Cutting corners on a renovation can compound costs and complicate the rehab. A few years ago, I made the mistake of allowing my contractor to cut corners as a cost-saving measure. Then, a storm front moved in and the house sustained thousands of dollars in damage. The extra time and money that it took to repair water damage, replace the (whole) roof, then—finally—finish the rehab, far surpassed what I “saved” by cutting corners. So prioritize your repairs and consider spending the money now to save money later.
Selecting and managing the right professionals to complete the rehab is essential for your success. Inspection by a licensed expert is critical. Only an experienced professional can identify problems and the extent of those problems. This information is vital when attempting to determine a realistic repair cost. If the work is performed by unlicensed individuals, you increase the risk of fraud, poor workmanship, and you may hold liability for any on-the-job injuries that occur on the property. Achieving optimal ROI in the long term depends upon minimizing such risks whenever possible.
Minimizing Risks and Maximizing Potential ROI
In addition to cautioning Jeff about the potential costly pitfalls of rehabbing a house, I also encouraged him to become a HomeVestors® franchisee, with an independently owned and operated real estate investing franchise. HomeVestors’ tools and resources help franchisees accurately evaluate the factors that impact ROI. This had an immediate and very positive impact on my investment strategy when I was a new investor. HomeVestors’ proprietary software ValueChek™, for example, streamlines cost-saving investment strategies by putting solid numbers around repairs and estimating ARV.
Becoming a HomeVestors franchisee kicked my real estate investment strategy into high gear. As a Development Agent for new franchisees like Jeff, I get to mentor others who are just starting their journey as an investor. Spend your time, and your money, where it counts: contact HomeVestors today and start improving your real estate investment strategy.
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