There is a lot of money in rehabilitation investments. There can also be big losses. The following can help increase the chance of success and minimize mistakes and unfortunate surprises.
- LTV max. 70% – Make sure you have enough room to make mistakes, go over budget for rehab, cover payments for long-term maintenance costs, etc. In many markets you can find deals of around 50% LTV these days. Find great deals, not great deals, great deals.
- Conservatively estimate ARV (After Repair Value): The market seems to change almost daily now. You can’t rely on comparable sales from 6-12 months ago. Try to stay within 3 months, stay within ½ mile of your property and very similar homes. Assets and pending do not tell the story, those sold are much more reliable. And always keep REO sales in mind, not just retail.
- Get Multiple Rehab Offers – At least 3 rehab offers. I know rehabbers who get 7 rehab quotes and then bid on each other to get the lowest price.
- Align your goals: Contractors want to do the least amount of work and make the most profit. Agents want to do as little as possible and earn as much commission as possible. Pay your contractors well and offer them bonuses or profit sharing for finishing on time and on or under budget. Otherwise, penalize them. This will ensure that they give you an accurate rehab offer and make value-added repairs. Also, get your agent involved early. They are experts in the area and know what materials and items houses sell. They can advise you on value-added materials and repairs. They will tell you what will help them sell the house fast and for a higher price. Pay them well, bonuses to performing agents always result in additional earnings. If you give an agent a $1000 bonus to sell on this date and time, these hungry agents will kill to make it happen.
- Reservations and backup plan: there are always surprises, delays, items over budget, additional costs, etc. related to rehabilitation. Don’t run out of money, always borrow extra or make sure you have reserves to cover these problems. So what if it doesn’t sell? It never hurts if the property’s cash is flowing nicely so you can rent and maintain the property. Multiple exit strategies are always good. Other backup plans are lease options, discount and sale to an investor, refinance and retention, etc.
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