We have all seen the shows on TV. An ordinary person decides to buy a beat up house and renovate it to flip. They almost invariably take on the work themselves, often with little or no actual experience, but they somehow pull it off and sell the home for big profit. You are much more capable than the people on the show and you are right, there is money to be made in rehabbing and flipping homes.
With the help of my friends Matthew Coates (@realtormatthew), Sheri Moritz (@RealLifeSheri) and Lacey Fisher (@LaceyFisher), I want to warn you of some of the common pitfalls that we see as Real Estate Professionals with rehabbing.
1. Choosing the wrong Realtor®
This one comes from Sheri Moritz, and it the critical first step in being a successful Real Estate Investor. Not all Real Estate agents are qualified to give investment advice. While they may be great at finding you a place to live, many have very little experience with the process of rehabbing, costs of rehabbing, and overall return on investment calculations for investment property. When you are entering the arena of Real Estate investing, pick an expert who has a lot of experience doing this themselves or representing clients who do a lot of this work. The right agent has the knowledge to advise you on the entire flipping process.
2. Overpaying for the Property
It is really easy to fall in love with a deal. This was one of my repeated early mistakes in my Real Estate career and it cost me big time! As someone who worked for a large architectural firm, I would walk into a home, see the potential changes right away, think my ideas were going to sell the place no matter what, and I didn’t fight for a good price. A few deals into my faltering career a good friend and mentor told me “you make all of your money on the buy.” He was absolutely right! If you can buy the property right, it will be easy to get out of barring some huge mistake.
Lacey Fisher reminds us that buyers are smart. They notice when a rehabber cheats. Those of us who sell homes regularly see it all the time. We walk into a home and see fresh carpet and new tile while all the windows leak and the air conditioner is 25 years old. The proverbial saying “you can’t put lipstick on a pig” is true! If a rehabber thinks they are going to cheat their way to wealth, they are wrong! Never cut corners even behind the walls. It doesn’t cost much more to do it right and doing it wrong can cost you everything.
4. Failure to Get a Permit
It is much easier to get a permit than pay what could amount to thousands of dollars in fines. These days with local governments cashed strapped, they have stepped up enforcement of their building ordinances and violations. Also, many lenders and appraisers will note new or rehabbed rooms and search with the municipality to see if a permit was issued. If not, your buyer’s financing could be in jeopardy.
5. Biting off more than you can chew
We have seen this one over and over again. A novice investor decides to do all the work themselves. Only the most experienced tradesman can pull this off, and even those that I know wouldn’t do everything. The two risks in doing the work yourself are that you will make mistakes, requiring you to buy duplicate materials and that it will take you much longer than you planned. After you take into account your hours and the extra carrying costs for not being completed on time, it is really easy to work for minimum wage as a rehabber. I advise only doing the things you can do at the same speed as a professional (i.e. demolition).
6. Underestimating the Costs
Sheri Moritz and Matthew Coates note that failure always occurs when you underestimate the costs. It is really easy to do this! Always, Always, Always have a contingency budget. I recommend 20% of your planned renovation cost. You will miss things and you will find things behind the walls you did not expect. It is just the nature of the business.
7. Pricing the Finished Home Wrong
Matthew correctly insists that the finished product needs to be priced right. Everyone falls in love with the work they have done; you will too! This is another reason it is so important to choose the right Realtor® for your Real Estate investing. An objective Real Estate Agent will tell you the market facts and the pricing to get your home sold quickly. When you overprice the home, interest costs, property taxes, utilities, and tied up equity eat away at a successful deal really quickly. Over pricing will also cost you other opportunities as you can’t use the funds tied up in this project toward your next one. A quick smaller profit is still a profit!
In short, call an expert if you are considering rehabbing and flipping or rehabbing and holding properties. We can help make your Barrington area Real Estate Investing a huge success!
Thanks to my colleagues and friends for contributing to this post. If you would like more information about some markets outside of suburban Chicago, they would be happy to help you:
Matthew Coates is an experienced Realtor® Chandler, AZ in the Phoenix metropolitain area. He is my adviser for investing in Phoenix. livingchandler.com
Sheri Moritz is an active investor, Realtor® and teacher to the Real Estate community. She has taught me so much and earned my deep respect. WakeHomeTeam.com
Lacey Fisher is a premier distressed property expert and Realtor® in Modesto, CA. LaceyFisher.com
Jeffrey Kershner (@jeff_kershner) is the Managing Broker of Silver Crown Real Estate. He has a background in architecture and draws upon that experience in developing and brokering homes and investment real estate in the Barrington area. Jeff has been a leader in design, development and real estate for over 10 years and manages a $1.6 million real estate portfolio.