Profit From Fixers

Profit From Fixers

Often the most logical way to get started in real estate investing is with rehab properties or "fixers" as they are known in the business. Securing a piece of property, then cashing in on sweat equity can be one of the most gratifying experiences a beginning investor will know. Getting started with fixers isn’t hard but does take some planning.

Should you hire out some or all of the work? How big a job is too big? How can you accurately estimate the extent of the work needed when you are evaluating the property for purchase? Where will the money for the work come from?

All of these questions and a few more are important if you plan to turn a profit with your project. In this article we’ll take a look at what you will need to complete a successful project.

The ideal situation is locating a house that needs only cosmetic work. Many of the real estate gurus from days gone by have told their followers to only invest in homes needing small amounts of work, do the work, then put the property back on the market for a nice profit. The cosmetic repairs these experts were speaking of usually amounted to paint and carpeting. The problem with this scenario is, bargain homes for sale needing only cosmetic work are few and far between.

Please don’t misunderstand me. I’m not whining about a lack of opportunity. I’ve gotten my share of cosmetic fixers and done very well with them. But the truth is, they are usually snapped up quickly by astute investors. Does this mean you can't make money with fixers? No! What it does mean is you will need to keep your eyes open to opportunities in disguise.

The Good News
Houses needing extensive repairs are often not candidates for bank financing. Why is this good? Because if a seller wants to dispose of his property, he is left with only two choices. The first is, he needs to make the repairs so the home qualifies for conventional financing, or he needs to offer the house for sale with owner financing. This is a great place for you to step in. If the seller isn’t inclined to make the needed repairs himself, he will undoubtedly have to lower his price - often substantially.

It’s not unusual to be able to get rehab property in good neighborhoods for 40 to 50 cents on the dollar. The repairs needed with such properties will vary from extensive to those elusive cosmetic jobs I’ve mentioned above. As with any project you take on, you need to have a clear understanding of what you are trying to accomplish right from the start. The terms of the seller financing may influence this.

Financing
If a seller is willing to finance your purchase with a long term mortgage, you will probably have more options open to you. On the other hand, I’ve dealt with sellers needing all of their cash within a short period of time and arranged deals like this to be paid with a balloon within a year to 18 months.

The way this works is simple. After convincing the seller that the property needs a lot of work (this is probably no big surprise), tell him you would be willing to buy the home with a small down payment and pay off the balance after the work has been completed and you sell the house.

Be sure to allow plenty of time to get the work done and re-market the house when using this type of creative financing. I stood by and watched as an investor I knew completed a rehab project just in time for the original seller to foreclose because my friend didn’t allow himself enough time to finish the project. Sad but true.

Sell For Retail or Wholesale?
Another important point in planning your project is, what will the finished product be like? If the property is in a great neighborhood and the house has the potential, you might want to spend the time and money to get it into shape to sell for top dollar.

If circumstances are different, you might want to get the house into livable condition then put it on the market. I consider livable to mean clean and safe. Another option open to you comes when you’ve been able to get the house at a very low price. You might then want to turn a profit quickly by selling to another investor at a wholesale price.

As I’ve said in the past, rewards come to those who are able to make wise decisions quickly. When it comes to bargain real estate, you won’t often have the luxury of taking lots of time to decide whether to purchase or not. If you’ve really found a bargain, you can be sure that someone else will soon recognize it as such. Having the ability to come to a decision quickly means you will need to be able to estimate fix-up costs accurately and on short notice. Making a mistake here can spell trouble, so what should you do?

If you have no experience in the trades, I suggest you first find a home for sale needing some work. It doesn’t have to be a bargain. Contact several contractors and have them give you estimates on the needed work. Get itemized lists of the materials they’ll use, and the labor costs. Then compare estimates.

Go to the supply store and price the materials yourself. Become as familiar with the trades as you can. The reason I’m suggesting you first get estimates on a home that isn’t a bargain, is because you shouldn't be planning on buying it. Your purpose with this exercise is to gain knowledge about repair costs and contractors. Chances are good you’ll make some contacts you will be able to use in the future.

Foundation and Roof
I’ve known experienced investors who have gone over budget on projects where the foundation needed more work that was first indicated. The same thing can go for the roof. In both the case of foundation and roof work, have a couple of professional contractors bid the jobs.

They are paid to notice things even the seasoned investor might overlook. When you receive the report on the work, ask specifically what is wrong and what action needs to be taken to correct it. This is how you’ll be learning the trades. Bringing in a pro can save you a lot of time, grief and money down the road. Remember, when in doubt, check it out - or have it checked by a licensed contractor.

Do It Yourself?
This will be a judgment call on your part. If you've found a true cosmetic fixer, you can certainly get the place ready to paint without much trouble. If you plan on installing carpeting, I suggest you strip out all of the old carpet and let a professional carpet installer lay the new carpet. Installing carpet can be tricky.

Many of the real estate investment gurus will tell you that your time is better spent finding deals than doing the repairs once you’ve tied them down. To an extent I agree. At the same time I feel it is important the investor understands what he/she is paying for when a contractor is hired. The best way to gain this understanding is to do the work yourself at first.

If you aren’t willing to do the work, at least keep a close eye on the job. I recently allowed a very competent man to take care of a project for me. He was a licensed contractor with a good deal of experience. Despite his experience, he still managed to go way over budget and then abandoned the job two thirds of the way through, leaving me with the task of finding someone to finish. I should have kept a closer eye on his progress, but I was busy with other things and left him to his own.

Financing
There are several ways to finance a fixer. I’ll touch briefly on the ones I like. The first is to negotiate your best price possible, and offer the seller all cash. Then have another investor finance the sale for a piece of the end profit. If you are buying right, you should be able to borrow enough from the investor to finance the repairs as well as the purchase price of the property and have plenty left over for profit. I’ve used this technique many times.

Beginning investors ask how they can convince cash investors to get involved with their projects. That’s actually a topic for another article, but I can say this: You must first know that the value is there. You must then be able to prove it to your investor. And finally, you must be able to make it worth his while to participate.

It’s up to you as the entrepreneur to figure out how to accomplish these three things, but I can assure you it isn’t that difficult when you are familiar with your market. One small suggestion: when you’ve found a property with a large upside potential and gotten it under contract, advertise in the REAL ESTATE WANTED SECTION of the classifieds for a cash Investor.

Another way to finance a project is with credit cards. You can buy many of the materials you’ll need with them. This is a wise use of plastic. If you don’t have the discipline to pay off the debt when you sell the house, then don’t use this method. Again, before you undertake any investment you must be sure the value is actually in the property.

If you aren’t certain of the after-repaired value (ARV), you can always get an appraisal or a market analysis from a real estate agent. Remember, before going out on a limb with credit or obligations of any kind, be sure to do your homework.

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