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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 50 August 2023 F E A T U R E ANALYZING 10 PROBLEMS BUYERS FACE WHEN LOOKING FOR REHAB PROPERTIES Rehabbing a home for profit can be an extremely lucrative proposition, but only if the project is treated like a business, as tight profit margins leave little room for mistakes. B y S T E V E DAV I S T he processes involved in renovating a fixer-upper into a forever home, and flipping a rundown house on a six-month time schedule are not at all similar, and confusing the two can lead to tens of thousands down the drain and blown budgets. Rehab projects can be extremely lucrative, but only if you treat them like a business, as tight profit margins tend to leave no room for mistakes. Here are the top 10 pitfalls in the space, and what you can do to avoid them. 1. Getting emotionally involved with the rehab property S uccessful home flippers look for "Hair on the Deal"—the hairier, the better. In other words, the ugliest piece of garbage promises the deepest discounts. Flipping is a business, but people treat it like a personal hobby by overbuilding and designing homes they would want to live in. I've seen people who live in million-dollar homes put the fixtures, finishes, and appli- ances they have at home on $400,000 rehab properties. Inevitably, this pushes the budget beyond what the property can stand. 2. Overpaying for the rehab property M any people get into property flipping without the ability to evaluate a prop- erty's value. They say, "The tax record shows the property is worth $400,000, and six other homes in the neighborhood are listed for $400,000, so that means this property is worth $400,000." However, none of that information has anything to do with a property's value. Find out what the last five, six, or seven homes similar to your flip property recently sold for, and base your numbers on the average of those sales. To find accurate data, subscribe to an on- line service offering comparable sales. You can get the numbers from your real estate agent, but remember that agents have skin in the game, too. They can work the numbers to push that average up, and make your rehab property look like it is worth more than it actually is. 3. Moving too slowly on a rehab property G ood deals do not last. When I hear about a deal, I typically make an offer within five minutes. My agent calls and says, "Look, this house is worth $400,000, it needs $100,000 in rehab, and they'll sell it for $200,000." So, I will hang up, run comparable sales, and analyze the numbers. If the average sales price of other similar homes is really $400,000, I call the agent back and write up an offer. To be comfortable making an offer so quick- ly, I embed a five- to seven-day option period into the contract, which gives me enough time to investigate the property. If I find something I do not like, I can get my earnest money back. Adding an option period to your contract costs between $100-$150. You will not get that money back, but it protects your earnest money, and allows you to control the deal quickly. Be ready to move before you even hear about a deal. Get preapproved from your mortgage company before you look at your first rehab property, and have your insurance contact and general contractors lined up and ready to go. 4. Failing to obtain a written bid for the repairs before the contract S ometimes, a seller will not give you an option, no matter what. In this case, your earnest money will be extremely hard to get back from day one, since you will not get it back if you back out of the deal. To move quickly, people take the Realtor's rehab estimate as fact. If the agent estimates $100,000 in rehab, flippers assume that is correct and put up earnest money, but this is a bad idea. Instead, you need a written bid. That $100,000 estimate could easily come back to $120,000, and ultimately, kill a deal. In my experience, an agent's estimate is always low. In a pinch, add 50% to their esti- mate. If that number works, then go ahead with the deal. S T E V E D A V I S is CEO of Total Wealth Academy, LLC where he mentors tens of thousands of people on how to use real estate to build wealth. He may be reached by phone at 855.576.7325 or email at ask@ totalwealthacademy.com.