No one in the property investment business sets out to make mistakes. But with any complex project, mistakes can—and often do—happen. Contrary to what we see on television, rehabbing houses is anything but simple. First, you must find the right combination of property, location, and rehab needs. Then, you must budget properly, sometimes without the benefit of having a full idea of what may be lurking behind those walls. Finally, you must complete the work quickly so you can list and sell the property sooner.
One wrong move can cost you thousands and jeopardize your hopes for turning a profit. By taking steps to minimize your exposure to risk, you can avoid large, costly errors that will cause you the biggest headaches. Here are four of the most common mistakes and how to avoid them.
We all know the saying about what happens when we assume. This holds true in the world of investment properties. Do not be so rushed to get a good deal that you miss signs the property has costly issues. Never skip property inspections unless you intend to demolish the structure. A home inspection will find foundation problems, extensive roof damage, and mold. These issues can be financially devastating if not factored into the repair budget. Investors are better off losing the deal than getting into a situation where major repairs come as a surprise after the fact.
Likewise, investors are ahead of the game when they do their due diligence on the contractors performing the rehab work. Contractors play an important role in the overall process. When you have good people working with you, the process runs smoothly. Due diligence in checking references and seeing the type of work product each contractor can deliver may take more time at first, but once you have established relationships with the right people, you will save time and money.
On television, property flippers take a quick tour through the property, throw out some numbers, and get to work. In reality (and behind the scenes on television), investors must spend more time investigating the property needs and consulting with their trusted contractors. Even seasoned pros know surprises can be hidden in the walls and attics. They build in extra padding, so the unexpected does not derail the entire project.
When creating your budget, make a room-by-room outline of work needed and estimated costs. Do this before you make an offer. Having documentation will keep you from acting impulsively and trying to force a deal that may not be in your best interests. The last thing you want to do is overpay for a property that will not ultimately turn a profit.
When crafting your budget, you may be tempted to take shortcuts for the sake of the profit margin. This is a mistake. You do not have to spend extravagantly to get a high-end look. Buyers will notice, however, if the tile looks like it’s falling off the wall, or the cabinet drawers don’t open properly. Part of this equation goes back to the importance of working with good contractors. The other part is in your style choices and attention to detail. Look at where you can save money, and where you need to spend it. For example, shop around for sales on tile that is being discontinued, and then put those savings into better quality light fixtures that make a statement.
Your work is done, and you are ready to list. Your goal is to make money, so you look at how much you can squeeze out of this listing. The mistake comes in going too high with your list price. Look at the neighborhood comps. Have other agents take a tour and provide feedback before the property hits the market. This is yet another case of doing your due diligence on the front end to save you time in the long run. After all, a property that is listed too high will sit on the market for weeks with little or no interest. A good price point will attract more interest, ensuring a faster close.
The common link among these four tips is due diligence. By putting the time into researching on the front end, you will save time on the back end. Saving time means fewer mistakes, fewer delays, and better profits.