Rehabbing is the term used to describe the process of purchasing a property in disrepair (therefore at a discount), fix it up and sell it for a profit. In order to rehab a property you must be in a position to financially afford the complete process. That means having the funds to acquire the property, pay for materials and labor to repair, and also pay the holding costs (taxes, insurance, utilities) while the property is being repaired
Television today brings us Million Dollar Listing, Fix or Flop, First Time Flippers, Kitchen Crashers, Flipping Vegas, House Hunters and Fixer Upper to name a few. These shows are meant to take you behind the scenes of the rehab process in which individual or parties make a profit. The programs are obviously entertaining or there would not be so many…but be warned: you get what you pay for!
For the most part, these shows highlight the holy grail of real estate investing. I am surprised there is not a show titled “the Silver Bullet”, as that is what a lot of real estate investors are looking for. Do not misunderstand, it is possible to make large returns on a single real estate transaction. But the cost and expense of marketing, evaluating, making offers, getting purchase offers accepted, performing the rehab, and ultimately closing the sale is time consuming and often costly. These shows rarely show the real cost and effort required to succeed in this business. With that being said, there are plenty of opportunities to be had in this segment of the market.
Learn more about Rehabbing.
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When you find an opportunity you should determine what your primary exit strategy will be. Are you planning on fixing it and immediately reselling it (flipping)? Why not fix and rent (buy and hold, aka become a landlord)? Should you fix, rent, and sell with a tenant already in it (turn key)? Or maybe just sell the deal to someone else, at a slight profit, instead of doing any work (wholesaling)? Have you considered fix, and sell to a new owner using seller financing (holding paper)? These could all lead to profitable outcomes. It is good to have a preferred objective, but most important to have a backup plan in case things go wrong. A backup plan requires knowledge on all of the above scenarios, then the ability and confidence to improvise using your instinct and initiative. These type of real estate transactions rarely go completely as planned.
In real estate, as in all other investments, you make your money on the buy. The first step in the acquisition process is to determine what your maximum offer price will be on a property. You have to work backwards on this, first determining what the After Repaired Value (ARV) of the property would be. Having a great realtor as a member of your team is a smart way to determine this, but you can also use a combination of online tools. These include known websites such as Realtor.com, Zillow and Trulia. This is just the start. The formula every wholesaler shares is 65% of ARV, minus any repair and holding costs, minus the profit you expect to make. A property that will sell for 100K, with repairs estimated at 20% or $20k and your anticipated profit of $15k, your offer would look like:
|Starting Price (65% of ARV)
|Minus Repairs (20% of ARV)
|Minus Expected Profit (15% of ARV)
It is easy to see why most sellers will not accept an offer of 30K on a property they “think” is worth 100K. There are many other costs and factors you need to consider in doing the analysis. It is your job to educate the sellers on the process, and to figure out creative ways to work within this framework to reduce rehab costs and educate your seller to the benefits of working with you.
I am here to help! I have been in the real estate business for over 15 years and have been through this process not only personally but have advised clients throughout the year to successful outcomes with generous profit margins.