I added a new blog to my Blogroll today – “Bigger Pockets”, a blog about real estate investing. They put up a great post called “Putting Lipstick on a Pig.”
Who hasn’t had the rehabber’s fantasy? Let’s buy that run-down house, fix it up and make a fortune!
Yeah, good idea! I see this all the time – and I see it especially in houses that are marketed as short sales (pre-foreclosure) or as REOs (bank owned properties, where the bank has already foreclosed). It’s a sad, but classic tale: someone buys a pig of a house, usually pays too much for it, then sinks too much money into a rehab job, and then tries to sell it, again, for too much. And the terrible thing is, the house has to sit vacant while the rehabbing is going on, and will almost always be vacant while they are trying to sell it. So, every month, the hapless rehabber is pouring thousands of dollars into a mortgage payment.
It’s also true that many people seem to have no clue that you don’t want to rehab a property to the point where it becomes the nicest house in the neighborhood. When I was out looking at property this weekend, I saw that a couple of places, where people had just over-upgraded their houses way beyond the norm for the neighborhood, and were asking prices way out of the neighborhood range.
I touched on this in a blog entry I made a few months back, about a property that was being sold at auction. Same problem – too nice of a house for the neighborhood. What you want to do is buy a home that you can buy far below the median price for a neighborhood – and to do that, you’ll usually have to low-ball the sellers and negotiate aggressively. Then, rehab it to the point where it will sell just a tad bit below the median for the neighborhood. Doing that is tricky – you have to know which parts of the house to rehab, and you have to keep a tight eye on costs.
I do see successful rehab projects, and I do know people who have made money at it. It seems, though, that for every success story there are two or three stories of folks who got burned by their rehab project. Don’t let that be you.