Re-Habbing Secrets Revealed!

Knowing When To Hold ‘em

and When To Fold ‘em

...Sometimes the best ‘Tool’ is a Bulldozer!

I get a dozen calls a week from “investors” who want to buy “fixer-uppers” so they can do the repairs and then re-sell them for a profit. While the idea is a great one; the reason I put those two words in quotation marks is because if you don’t know what you are doing, you are likely not an investor and if you don’t know what to buy you’re liable to buy a property that ought to be “bull-dozed” rather than “re-habbed”.

Unfortunately this is a topic that is too broad to provide all the answers I know in one article, but I can share some ideas, a couple warnings and a formula that will at least, help you steer clear of trouble or at best, direct you toward profitable projects that will fit your strategy for personal success.

Speaking of strategy; that’s a great place to start. What is your investment strategy? Are you looking for single family homes under $35,000 that you can invest $10-15,000 of repairs and re-sell for $60-65,000 and net a $10-15,000 profit? Or do you want to work in a more affluent market? Or are you interested in buying multi-family property, improving it and then holding it as rental property? Or is commercial property really the thing you have in mind? Do you see yourself developing a run-down strip center into a vibrant piece of revenue generating real estate? One of the quickest ways to lose my interest in helping or partnering with you is to say “yes” to all the above. My first tip: “Pick a horse and ride it!”. Figure out what interests you and then put blinders on. Focus on that and that only. Stay focused! Become the best you can at this specialty! Remember, Specialists get rich while General Practitioners just make a living.

If I just hurt your feelings; that may be good. At least a good segue. Emotional behavior is for amateurs. This is my first warning to you. Do not get emotionally involved in a project. In fact you should always have a figure in mind for what it would be worth to you to walk away today. And, as much as you may like to see a project to the end, you need to be willing to do exactly that! What’s your ‘walk-away-today’ price? If you find yourself unable to part with a deal at any stage of the deal; you are in trouble! Seek help. Get an experienced professional to consult with or partner with you. It’s worth saying again. Do not get emotionally involved in a project.

Formula for success. Now that you know you need to be focused and approach your deals with an “It’s not personal, it’s only business” attitude; the key is to have a simple formula that will allow you to do an initial evaluation of a property. You can adjust this formula to fit your strategy. For now, I am going to ‘adjust’ it to specifically target the type of re-hab project I am most often asked about: the “single family homes under $35,000 that you can invest $10-15,000 of repairs and re-sell for $60-65,000 and net a $10-15,000 profit” strategy that I mentioned earlier.

Begin with the end in mind. For this you will either need to know the market yourself, have access to the courthouse records or to a real estate agent that knows what they are doing and is willing to help. Know (a) what the property will logically sell for in a short time on the market (preferably 30 days or less. This will be a longer period if you are working with higher priced homes, multi-family or commercial property). From this subtract (b) your marketing costs. (I would use 5 to 10%). Now you have (c) the amount you believe you can net from the sale of the property once it is repaired. From this, subtract (d) what you estimate the repairs will run. (If you don’t have an eye for this, you will want to either partner with someone who does, hire an inspector or work with an agent who knows what they are doing.) Also subtract (e) the amount you want to make on the project. The answer, (f) is the maximum amount you should pay for the property as it sits. So, the formula looks like this:

(a - b) = c - (d + e) = f

Providing that you have accurate market information, realistic repair estimates and have approached this; a project that fits your target strategy, with a non-emotional business-like attitude; you now have a solid idea of what to offer. Due to the nature of real estate, I would suggest offering slightly less than you are willing to pay. This will allow the seller to present a counter offer or two and feel like they have done their best.

Don’t be scared! Two fears that keep want-to-be investors from becoming investors are: 1) “What will the seller think if I offer such a low price?” and 2) “How do I know that I can do those repairs for what I estimated in my formula?” First, this is America and in America real estate is truly a free market product. It is worth what someone is willing to pay. No more. No less. Second, if you know what you are doing or are working with an agent who does, you will protect yourself in your contract with contingencies, such as “Contingent upon acceptable property inspection by buyer and/or buyer’s representatives”. (For more on this, see the “Real Estate Articles” section at Middle Man Magazine’s web site: www.Commercial.4T.com)

The key is to stick to your formula, your strategy and your business. If another “investor” is willing to pay more than your formula says a property is worth; let them! There are plenty of deals. Plenty!

Do not get caught up in a bidding war with emotional buyers. The winner will be a loser.

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Randy Lee is the author of the best selling text book for real estate investors "Short Sales: The Secrets & Strategies of Pre-Foreclosure Investing". Randy is an active investor and a licensed real estate agent in the states of Alabama, Georgia and Tennessee. In TN & GA he is an Affiliate Broker with ERA/Central Real Estate of Chattanooga and in AL, Randy is an Affiliate Broker of Keller Williams in Huntsville.