Flippers - Do you rehab for profit or ego?

One of our customers, Kurtis Squyres, regularly sends out emails to his investor clients. His latest email caught my attention as it reminded me of one of the more significant newbie investor mistakes - over rehabbing. Back in the boom, I would try hard not to roll my eyes when someone started telling me how their fantastic rehab skills had made them so much money on the house they flipped. The math would usually go something like this: purchased for $250k, spent $50k and every free night and weekend on rehab over 6 months, sold for $370k, netted $50k profit. The problem is that they failed to realize that most of the gain was due to the market, so instead of killing themselves on an over-the-top rehab they could have done: $250k purchase, $5k rehab, sell for $330k, net $60k.

Bottom line --- their brilliant rehab skills lost them $10k and months of weekends and evenings working their butts off. It feels good to fix up a house. It feels good to have neighbors thank you for fixing up the former blight of the neighborhood. It feels good to have Realtors compliment you for your excellent taste. At the end of the day, we all need an ego boost. - just be sure that it is a conscious decision - are you rehabbing for profit or forego? Of course, the times are different now, but as Kurtis points out below, watching your rehab costs is more important than ever - just for different reasons. Those of you who are flipping right now know how hard it is to get an appraisal these days. So be careful not to over rehab. Take care of the basics like trash, missing fixtures, and paint, but avoid costly items unless they are absolutely necessary for your market - or for your ego. :-)

Kurtis's email:

Here's some inside scoop for you if you are planning a fix n' flip...Across the board, every one of our professional flipper friends is pulling hair out over hitting appraisals. Basically, the investors are getting killer deals, fixing them up BEAUTIFULLY, and when they put them back on the market they are getting offers right away (I'm telling you, flipping is fun again, Cindy and I have 2 going). However, the challenge right now is that the end-buyers out there are actually qualifying for the loans, but the properties aren't! What do I mean? These ludicrous appraisals keep coming back from the ultra-conservative banks (NOWWW they decide to get conservative, it's probably the safest time to lend in 7 years!). They are comparing freshly remodeled houses against trashed lender-owned stuff and being ruthless. A low appraisal means no loan for the buyer...what's the remedy?

Well, a year ago we said your rehabs had to be really good - top-notch - b/c buyers were sluggish, and they needed a GOOD reason to buy your property over the masses...well, buyers are now out in FULL FORCE, and we are seeing multiple offers on just about every good deal. So, what we are experimenting with, is getting a killer deal of something that is in horrible shape, and doing a clean, adequate job of rehabbing it (you always need new carpet and paint), but don't go crazy with the appliances and higher-end stuff....think clean, not glitz....and put it on the market below the others and shoot for a lower selling price...don't do a bad rehab, just a low end one - mow the yard, don't re-landscape everything, see if you can get away with refacing or painting cabinets versus ripping them out, etc. With all the activity out there right now (be sure and confirm that with your area), you should still be able to sell quickly and make appraisals if you keep your end price down....we'll keep you posted as the market continues to evolve...

Be Happy and Prosper, Kurtis