This week I was reading an article over at money.cnn.com titled "Buffalo's $1 homes aren't as cheap as they seem."
These homes are being sold by Buffalo's Urban Homesteading Program,
requiring that buyers fix any code violations within 18 months and live
in the home for at least three years.
These aren't fix and flip,
rental or wholesale investors, but the experiences of these buyers can
be good education for investors.
The immediate reaction of an investor
could be elation when they find they can get a home for a tiny price,
and it's hard to get any lower than a buck. Our first clue that dirt
cheap may not be the ultimate deal is that fewer than 10 of these deals
close each year.
An overview with dollar amounts for finished homes in this program tells us:
• $55,000 in renovation for one home, including all plumbing, electrical wiring, heating/cooling, and a new roof.
• Just removal of demolition trash on that home was a $2,000 bill.
• One buyer, in the process of spending $78,000 in renovations to their
$1 home, became a licensed electrician training to do as much as
possible without hiring others.
• One couple just getting started are using a lot of friend volunteer
labor, have only spent $5,000 so far, but they expect to spend $30,000
before they're done.
Rehab Profits are High for Good Reason
Fix
& Flip investors, wholesalers, and even rental property buyers who
do rehab all know that they can greatly increase their profits through
rehab. Instead of just buying a ready to rent home at a discount, the
rehab phase of the project can add a large profit component.
Someone
is going to profit from rehab work, and the more work necessary the
greater the potential profit. However, too many investors let their
potential profits flow down to their contractors and repair companies.
There are predictable reasons for this:
• Poor negotiation skills when seeking contractors.
• Allowing contractors to buy and mark up materials.
• Poor project management skills, going over budget and/or completion dates.
• Expensive project financing.
The first consideration is whether
or not you want to be a hands-on project manager. It is certainly
acceptable to put the entire job into the hands of a general contractor,
but they will realize the bulk of the profits available from the work.
The more you can take over, or the better you can negotiate, the fatter
your ROI. You can improve the results if you offer the general
contractor a bonus for coming in under projected costs if you don't want
to be involved that much.
If you want to maximize your profits,
you'll take control of some of the materials purchasing and
sub-contractor hiring. Some proven profit-enhancers include:
• Get builder accounts at Lowes and Home Depot type stores.
• Select your materials and get price breakouts, do your own ordering and just have contractors pick up materials.
• Check out liquidators, companies and stores that buy in bulk materials
from completed building projects. They often have what you need at
deep discounts to even builder prices at the big stores.
• Using contract terms, keep projects on schedule, as holding costs can rip a hole in profits.
• Do your own hiring of sub-contractors, and get multiple bids. Hone
your negotiation skills, but the low bid is often one you should throw
out.
• If you need transaction funding to get through the process, do your
research to find the lowest cost solutions. Sometimes it's friends,
associates, or relatives, rather than transaction lenders.
You can
do all of the above perfectly right and still have a poor result if you
buy wrong. This is a two-part process. If you're wholesaling or doing
fix and flip, you must have a good buyer list and know what a willing
buyer on that list will pay for the home. If you're rehabbing to
convert to a rental home, know your market and prevailing rents.
Run
the numbers to know what you can sell or rent the home for. Then do a
thorough preliminary budget for the rehab, BEFORE you buy. Once you
know rehab costs and ultimate sale or rental income, negotiate a
purchase price for maximum profit.
Source: Dean Graziosi Huffington Post
Make sure to check out Dean's most recent Huffington Post articles:
2/24/15
Self-directed Retirement Accounts and Turnkey Rental Investing
2/17/15
Enthusiasm for 2015 Housing Markets
2/13/15
Trulia Asks: 'Are We Past the Flipping Point?'
2/5/15
Is Multi-Family Worth a Look for Your Portfolio?
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