Retailing as used in this article is defined as fixing up a property with the goal of reselling it to an owner occupant.
Figuring your expenses when planning a retail project can be difficult. The best rule of thumb for investors who are relatively new to this part of the business is to take on projects that do not require major changes to existing floor plans. Even experienced investors may find it difficult to stay within budget on rehab projects where a second floor or additional room is being added, or walls moved.
Room additions, or changes to existing floor plans will inevitably run into design problems or other delays that are difficult or impossible to predict ahead of time. These types of issues can cause you to exceed your budgeted numbers by tens of thousands of dollars. Such large-scale projects should not be attempted unless you have the experience and an adequate budget.
One of the most common problems among newer investors is starting a project with an inadequate budget, and having too little time to devote to the project. I wish I had a dollar for every rehab I have seen that was for sale by an investor who was bailing out. No more time, no more money, and most likely, no more patience. Retailing is not for everyone. The guys who are really successful at retailing know their market, understand what improvements will provide the greatest return, and don’t let themselves get sidetracked with unprofitable improvements.
I can’t help but think of a good friend of mine who got a great deal on an old 1930’s farmhouse. He bought it and 15 acres of land for only 25 thousand dollars. And to boot, he only had to pay $250 a month on the property while he was rehabbing it. The property was worth about 75 to 85K fixed up. With such low holding costs, a repair budget of 20K and an ARV of $80K, It looked like a dream deal. He was all set to make a fast 35 thousand or so in profit.
His dream deal started out well enough, as the repairs on the house proceeded along on schedule at first. But then my friend started to fall prey to the temptation to fix up all sorts of little things that were less important, rather than focusing on the most essential items.
For starters, the house needed a furnace installed. The old gas heater in the living room was not going to be adequate for today’s buyers. You would think this would have been a no-brainer. But Sam got so hung up on how pretty the house would look with some nice landscaping that he sort of forgot about the furnace.
Then there was that big room on the back of the house that accounted for about 30% of the living space. This room had suffered some pretty severe water damage and had to be gutted. Instead of redoing the room and retaining the living space, Sam decided that this area would make a killer screened in porch. It did, but at the cost of 30% of the square footage that could be counted for the appraised value.
The bathroom was no small problem either. Over the years water leakage from the tub had rotted out the floor joists, causing the need to rip out the entire bath, replace the floor joists and then redo the bath. To save money, Sam decided to hire one of his buddies who would work for beer, to repair the floor. The buddy took so long to get the job done that Sam would have been better off paying a contractor.
To make a very long story short, what should have been a 3 month, 20K repair project turned into a 12 month, 40K fiasco, as Sam flittered from one idea to another, and tried to cut corners by using friends to do the work.
The one contractor on the project, frustrated by Sam’s inability to focus on the important work finally quit in disgust. To top it off Sam had heard that houses painted yellow with green shutters sell more quickly and for more money that other colors. But school bus yellow? Yep, he painted it the same shade of yellow as a school bus, despite the objections of his family, friends, and the painter. It’s now been 17 months, and the house still belongs to Sam. He finally did rent it out, but these classic mistakes pretty much put Sam out of the rehab business. Sam’s biggest single mistake was assuming he knew more than he really did.
There are 4 main components that you must be realistic about:
1. How much profit do you REALLY need to net to make this project worth while? If it takes 6 months to fix up, market and resell, is a $20,000 profit worth the time and effort? For some folks it is, while others can earn more than that working a regular job. Set a minimum acceptable profit goal.
2. What repairs are REALLY going to have to be done to compare favorably with the competition in this area and attract a buyer? Don’t forget to compare the condition of similar properties. Is the quality high, medium or average? Are the bath’s made with imported Italian marble, or just a fiberglass insert? Are the kitchen cabinets going to have to be solid oak or just veneer? This is important information for determining how much you will need to spend on repairs to be competitive with other properties on the market in that specific area.
3. How much are those necessary repairs or improvements REALLY going to cost? And how long are they likely to take? Be realistic about these numbers. And don’t forget about holding costs which will accumulate if your project is not completed on time. Interest, payments, utilities, taxes, theft protection, insurance, etc.
4. Can I REALLY do this myself, or will I need to hire professionals? Do you know how to do the work involved, or were you planning to buy a set of Time-Life How To books? Be sure you have the time necessary to devote to your project.
If you have no experience with rehabbing you need to educate yourself before you take on a project. Read some books, attend some seminars, check out some websites on this subject. I am not a big fan of the expensive courses that you see for sale. Most of these courses are not worth their sales price. Books at your local bookstore will be better to use as a reference manual, at a much lower price.
You could take a contractor to the site before making an offer and have them provide an estimate. And if you will need to hire a contractor, do you know one? Do you know how to find one? How will you check their credentials? Who will be in charge on a day to day basis, you or the contractor? Are they going to be available when you need them? A contractor you can trust and work well with can be difficult to find. There are a number of websites that offer contractor services that have met certain screening criteria. One of those is improvenet.com.
If you want to take a more hands on approach, there is a book called “Home Repair and Remodel Cost Guide” by Marshall & Swift, which is updated yearly. This book allows you to break your costs down into major components, such as Kitchens, Electrical, Windows, Roofing, etc. It can be purchased through www.marshallswift.com, or book stores can order it. The ISBN number is 1-56842-071-4. There are also several web sites that make the book available as part of their educational literature.
And finally, there are expenses to include that many “newbies” overlook. For example, assuming you will not need the services of a real estate agent to resell the property, and therefore failing to include this potential expense in your cost estimate can wipe out narrow profit margins
Not including some extra holding costs for the marketing period can hurt you too. Everyone seems to think that because Atlanta has been blessed with a “hot” market, any house will sell in two weeks or less. I have seen very nice homes in very “hot” parts of town sit on the market for months and months. The interest expense for hard money loans can really add up. If you are smart, you will always include an additional 3-6 months of holding expenses for marketing time in your estimates.
There is good money to be made in retailing houses, if you do it right. Take the time to educate yourself and above all be realistic. Then you will be on your way to a successful (and happy) career in retailing.
Donna Robinson is a real estate investor, author, and consultant located in Atlanta Georgia. You may read more of her articles on her website at http://www.RealEstateInvestorHelp.com or you may contact her by email at drobinson@reihelp.com or call 404 542-9903.
Tags: real estate investing, real estate, mortgage lenders, mortgage financing, real estate financing
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