|8 Biggest Rehabbing Mistakes
Buying old houses at wholesale price, fixing them up, and then selling them at retail price
remains one of the easiest ways to make big profits in real estate.
If you are prepared to put in some hard work, property rehabbing remains one of the easiest
ways to profit from real estate.
Unfortunately, would be rehabbers can be easily seduced by the promise of fast money. You see
it's not simply a case of buying an old house, fixing it and selling it for massive profits.
Back in the mid 1990's when I started to fix-up my first investment home, I soon discovered
how easily things could go wrong. The following are 8 of the biggest mistakes you can make when
fixing up houses. How do I know this to be the case? Yep, you guessed it. I've made them all when
BIG MISTAKE #1: THIS IS A 'GET RICH QUICK' STRATEGY
Whilst adding value to property can rapidly increase your wealth, it is not a miracle cure
nor is it a 'get rich quick' scheme. It still requires time, dedication and effort. The results that
you ultimately achieve will reflect on your commitment to these three areas.
BIG MISTAKE #2: A LACK OF EXTENSIVE RESEARCH
Many years ago I worked for a paint manufacturer and learnt a valuable lesson: Painting is 80
per cent preparation and 20 per cent application.
This very same rule applies to buying and rehabbing property. Ninety per cent of your time
will be spent locating and purchasing the property itself. In this instance, your preparation will
be research, viewing, negotiating and more research.
BIG MISTAKE #3: DO ALL THE WORK YOURSLEF TO SAVE MONEY
As rehabbers, we can easily convince ourselves to do the work and save a few dollars. This
train of thought is fraught with danger on two levels.
Firstly, if the level of workmanship is substandard then this can and will affect your
resale price. Experience has taught me one very important lesson: If you're no good at
it yourself, pay an expert to do it.
The second danger refers to time leverage. It is false economy to save yourself $35 dollars
per hour by doing it yourself if you earn $50 per hour.
BIG MISTAKE #4: INSUFFICIENT CASH FLOW
As with any business venture, cash flow is king. There is no point having a potential $50,000
profit up your sleeve if you can't pay your bills. Unless you have sufficient cash reserves, I highly
recommend that you do two or three projects and put the money aside before you rush out and quit your
BIG MISTAKE #5: NO EXIT STRATEGY
There will be times when, despite your meticulous research and planning, the property
doesn't sell. External influences that are beyond your control pop up from time to time. Be prepared
for this with an exit strategy and you'll be fine.
Firstly, never enter a project if you cannot afford any unforeseen holding costs.
Secondly, there is no shame in holding a good property. If the market doesn't agree with you
at that particular time, then rent it out for twelve months.
BIG MISTAKE #6: YOU PAY TOO MUCH WHEN YOU BUY
You make your profit when you buy. Pure and simple! I will always tell my coaching clients at
my workshops that this is the most valuable advice that they will ever receive from me. The added
value from the renovation is the icing on the cake.
Always research your market well and ensure that the potential selling price is achievable
when all costs and profit margins are taken into consideration. Never, ever let yourself be ruled by
your emotions when buying. You must always allow for buying, selling and closing costs. Where possible,
your purchase price must be sufficiently below market value to at least allow for these costs. Even
better, the price should be low enough to allow for closing costs plus rehabbing costs.
The following formula will allow you to assess the real purchase cost of a particular home
that you may have in mind.
Starting with the final selling price, work backwards and deduct selling costs, profit margin,
renovation costs and buying costs. This final figure is how much you should be prepared to pay.
BIG MISTAKE #7: FAILURE TO UNDERSTAND YOUR TARGET MARKET
How often have you walked into a home and been totally horrified by the décor? Yet this is
another common mistake made by renovators. They let their emotions get in the way and decide what is
good for them is good for everyone else.
There are two principles that I apply when renovating. The first is the K.I.S.S. theory: Keep
It Simple Stupid!
The second is to focus on the 'WOW' factor. It is no coincidence that a home sells quicker
and for a higher price when it possesses strong buyer appeal. You're here to make money, not win a
home decorating award. Give the market what it wants, not what you think it wants!
BIG MISTAKE #8: SPENDING TOO MUCH ON THE REHAB
The great temptation of renovating is to do too much. Whilst the 'WOW' factor is critical,
you MUST keep your emotions out of the equation and strictly adhere to your budget.
Nothing goes exactly to plan when renovating, so don't panic if you exceed your budget by
small amounts. Allow for a buffer to cover any surprises (usually 10 to 15 per cent). I certainly
fell into the 'do too much' trap during my early projects.
Always have your costs estimated accurately prior to purchasing a property. Later on I will
talk about contract of sale conditions. One such condition is to purchase subject to having a builder
inspect the property. This will enable you to discover any unforeseen surprises. I encourage you to
renegotiate the price should the inspection uncover any major defects - or better still, walk away.
My budget parameters are 10 per cent of the purchase price for houses. This can be stretched
to 15 per cent if it means that a great profit can be made. These are personal preferences that have
worked for me. They are in no way set in concrete and readers should exercise their own judgment.
There is no right or wrong way in this business.
The percentages that I allow are in keeping with my primary objective of obtaining the
biggest bang for your buck in the shortest possible time and with the minimum amount of money possible.
Conclusion: Understand that things can and do go wrong in this business. Now that you are
aware of the pitfalls, you will be better prepared from the outset. All it takes is a little planning
and there is no reason why you can't join the thousands of Americans who are quietly making huge
fortunes from their Fixer-Upper business.
Download Free Book by Sal Vannutini
Sal Vannutini is the author of
Fixer-Upper Fortunes: How to make big profits from fixer upper properties. New real
estate course reveals how you can safely make a fortune fixing up old homes and quit your job forever.
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