Converting a rundown residential property into a quality home can be very lucrative as long as you avoid these ten common mistakes.
1. Paying too much for a property: You get your profit when you buy a property at a great price, not when you sell it. Focus on negotiating a great price and you’ll have “wiggle room” to make numerous mistakes. But if you pay too much for the property, the slightest unplanned repair can kill your profits. Focus on buying smart and learning to work only with truly motivated sellers or banks. Don’t waste your valuable time with people who are unwilling to accept a rock-bottom price just to end up with the “situation” they perceive as a major problem they want to get rid of.
2. Buying a property that has fundamental structural damage: If a house or building has foundation problems, it’s usually best to move on. Not only is it very expensive to repair, but it can also expose you to legal liability in the future. Unless you are a structural engineer or very experienced in these matters, it is best to avoid properties with foundation or grading/drainage/flooding issues.
3. Not doing the math correctly when estimating repair costs – This is probably the most common mistake new investors make. If you underestimate the cost of repairs, you’ll overspend, eroding your profit margin. Until cost estimating becomes second nature, get bids from subcontractors before you buy the house. Be thorough in your walkthrough and assume everything will cost 10-15% more than you think, just to be safe.
4. Not checking for termites: Get a termite inspection early. Termites are not as easy to spot as you might think and could cause serious problems and cause a lot of liability.
5. Hiring Substandard Contractors – Aside from general laborers who come in to clean or landscaping, avoid hiring unlicensed contractors unless you have complete confidence in their ability to perform and they have insurance to cover their work. There are a number of good licensed providers that will work for a better price than the retailer. Sell them on the idea of repeat business and a long-term relationship.
6. Don’t get quotes from multiple subcontractors: For every repair, make sure you get multiple bids from subcontractors and make sure you let them know you’re getting multiple quotes. When you have your lowest quote, go back to the others and ask them to beat it. The money you save here will go directly to your bottom line. On the other hand, don’t be so stingy that you anger or alienate all the local subcontractors, as you need to build a team of subcontractors you can trust. Ask them lots of questions to broaden their understanding of repair alternatives and why repairs cost what they do. It may be beneficial for you to create a list of repairs and their cost so that you can create a database for future reference.
7. Not advertising the property as soon as you complete it, and not moving the property fast enough – Have a marketing game plan ready to execute immediately after the punch-out work is done. Make sure you stick to this marketing plan. Keep the house in good repair while it is vacant and looking for a tenant/owner. You only get one chance to make a first impression; make sure your property prints.
8. Not Considering Multiple Exit Strategies Before You Buy: Always have a backup plan. If you can’t find a retail buyer, what else can you do to make real estate investing successful for you? Rent it? Lease/opt it? Wholesale? Convert it or rezone it to increase its value? Always have a viable exit strategy from Plan B and execute it immediately upon recognizing that plan “A” is not working too well.
9. Not obeying your instincts: From time to time you may have an uneasy feeling about something or someone. Trust your instincts. Don’t let your profit motive blind you to what your gut tells you.
10. Rehabilitate the property to your standards instead of the buyer’s standards: Remember, you only need to repair the property or upgrade it to the point where it is marketable. These homes are often at the lower end of the price range for your area, and these buyers’ standards may be different from yours. Research other houses on the market in the area of the property in question and see the quality of their fixtures, flooring, etc. Rehabilitation according to the market, not according to your tastes.