Risk Reduction Strategies for New Rehabbers

By
Real Estate Agent with Re/Max 10 New Lenox Illinois

Risk Reduction Strategies for New Rehabbers

By Tod Snodgrass 

If you think education is expensive, try ignorance.

--Derek Bok (past President of Harvard University)


 

Tens of millions of homes in the US are more than 40 years old.  Every year, thousands and thousands of houses are rehabbed because they need it. However, where there is opportunity, risk is a factor as well. If you are thinking about getting into the buy/fix/sell business, hopefully the following will prove helpful.


 

1. Get all the knowledge you can. Attend meetings at your local REI affiliate group. Take courses (local college or online). Ask gurus. Get mentoring. Do an apprenticeship with a rehab pro, for low or no pay. Go to websites where the pros write about their experiences. You may even want to consider getting a real estate license. See the end of this article for a list of online resources.  


 

2. Do some flips first. Getting several successful wholesale contract flips under your belt (three minimum is a good rule of thumb) is a good prerequisite for success as a rehabber. For example, it puts cash profits in your pocket; it also helps you learn the real estate ropes quicker than you might otherwise. Flips can be turned over at much faster clip, and with much less financial risk than rehabs.


 

3. Reverse engineer how much profit you need to earn (say 20% net to you). Then work backwards until you wind up at the price you should be bidding for a property, not the seller's asking price. Profits are made (or lost) the day you buy the property, not when you sell it. Reason: Buyers will pay market price, and not a nickel more for the property you are trying to sell, post rehab. See No. 4 below about cost factors. In other words, do NOT acquire a property unless and until there is a clear path to the profit number you require.


 

4. Fully understand ALL the costs involved: a) Property Acquisition Purchase Price; b) Closing Costs (double ended: when you buy and when you sell in a few weeks or months); c) Liens, back taxes, HOA fees; d) Carrying costs: hard money points and interest, EMD fee costs, gap funding fees if any, holding costs, etc., e) Insurance; f) Contractor fees (if you hire one); f) Supplies and other repair-related costs including paint, primer, tiles, light bulbs, etc.; g) Misc: keys, bookkeeping costs, staging, site cleanup services, appraisal, inspections; h) Major replacement costs: HVAC, plumbing, appliances, etc.; i) Utilities (initial hookup, monthly costs until you sell the property); j) Selling costs (broker's commission, marketing/advertising, etc.); k) Ongoing maintenance costs; l) Permits, architectural, if any, etc.


 

5. Line up your financial resources well in advance of need: This is key. If you don't have the required funds, when and where they are needed, that can make the whole rehab enterprise problematic. As the old saying goes: Money talks and bullsh*t walks; true then; true now. For example, you may have to come up with "skin in the game" cash for say a down payment, because the hard money lender may not front it. You should also have a reserve fund for unforeseen extra expenses; they always seem to arise.  


 

6. Have a team pre-assembled that you will have at the ready when a "hot deal" comes along. These may include: contractor, realtor, escrow company, hard money lender, EMD funds provider, insurance agent, gap funder, rehab guru (if this is your first time at the rodeo), etc.


 

7. Know your market and where it is heading. What is selling and what is not?  Are you better off doing three small projects during the next year, two medium-size or a single large one? You need to anticipate where the market is going, with the help of an investor-friendly realtor for example, and try to have your property finished and ready to go to meet the needs of where the market will be then, not necessarily where it is now. Reading future trends can pay big dividends down the road.


 

8. What type of business structure should you have? Sole proprietorship? LLC? Corporation? Ask your mentor, CPA and others whose opinions you respect. There are risks and costs involved with each. LLCs do establish more credibility with some, corporations with others. For example, lenders may prefer dealing with a business entity vs. a single individual.


 

9. Learn the lessons of others. Too often rehabbers believe their own propaganda. They get caught up in how attractive the property is, how good it will look when they are done fixing it up. Keep in mind that this is a business you are getting into. Done wrong, you can easily lose money in a rehab deal. Profits can be elusive. Competition can be fierce. Before doing your first rehab, go out of your way to solicit the advice of other rehabbers who have "been there and done that".


 

Online Resources:  www.biggerpockets.com http://connectedinvestors.com ; http://crepig.ning.com ;  nationalreia.org; http://realestatefinance.ning.com.

 
 
Sincerely,
Erik Partridge
1st Choice Lending Team
480-326-1118 Cell
We Have Great Loan Programs.
 
erik@partridgepartners.com   email

Call today for Loan Programs 
in your Area  480-326-1118

CTP Funding, LLC, dba  Capstone Financial , 3014 N Hayden Rd #113, Scottsdale, AZ 85251,  Company NMLS # 302645, Mortgage Banker License BK #0926974, CA DBO Finance Lenders License # 603 L504 .  Erik Partridge MLO NMLS 1041044   This is not an offer to enter into an agreement .  Capstone Financial  only makes loans for business purposes and as such, all information displayed is for business loans only. Capstone Financial is not currently licensed in Utah and is not licensed for certain loans in other states. Capstone Financial licensed or exempt from licensing requirements in all other states. Your specific facts and circumstances will determine whether Capstone Financial has the authority to approve loans in your specific jurisdiction Capstone Financial operates out of several locations, but not all locations conduct business in all jurisdictions.
close

This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Topic:
Home Buying
Location:
Illinois Will County Frankfort Prestwick Country Club
Groups:
ActiveRain Network Referral Base
Chicagoland and Northern Illinois Real Estate
MLSNI
Follow Me on Twitter
Linkedin
Tags:
risk reduction strategies for new rehabbers

Post a Comment
Spam prevention
Spam prevention
Show All Comments
Ambassador
872,957
Lynn B. Friedman
Atlanta Homes ODAT Realty Call/Text 404-939-2727 Buckhead - Midtown - Westside -- and more ... - Atlanta, GA
Concierge Service for Our Atlanta Sellers & Buyers

Dale Taylor 
Good advice for newbies.  Have to say, I often worry about the "FLIPPERS" and the two sad possible outcomes:
1.  They lose all the money     2.  They turn out a sloppy job.

ALl the best - Lynn

Jun 08, 2018 07:32 PM #1
Post a Comment
Spam prevention
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?

Rainmaker
217,186

Dale Taylor

Realtor = Chicago Illinois Homes Townhomes Condos
Ask me a question
*
*
*
*
Spam prevention

Additional Information