Many people have called me recently and inquired about buying foreclosure properties to "Rehab" (fix up) and sell for profit. Thoughts of real estate profits dancing through their head. The truth of the matter is that you CAN make money that way, but there are some important factors one would need to analyze.
There is an old saying that you make your money when you buy. This means yo MUST buy it right. Pay too much for the property up front and you are doomed. I dont care whether the property you are buying is on the street you live on or Sydney Australia for that matter. Buying it right is essential. So, Jack...How do you buy it right?
The MOST important step is estimating what the property will be worth and eventually sell for AFTER repair. Estimate it right and follow my formula and you will make money. Estimate it wrong and your profit will be in danger.
Step 1 - Hire an appraiser, broker or another seasoned investor to help you (until you become proficient at it yourself) search out sales and COMPETING listings to see where your house will fit in. In a slow market, active or competing listings are important as they are your houses competition. Remember the list prices are just asking prices and each of the homes will most likely sell for less than full price. This number is the AFTER REPAIRED VALUE or "ARV"
Step 2- After you determine market value figure on selling it a little less than market value as to move the property faster. The last thing you need is costly carrying costs. The discounted price (let's say 5-10 % below market) is the ESTIMATED SELLING PRICE.
Step 3 -Hire an contractor to provide you with real estimates for repairs BEFORE you buy the property. Fix the obvious, but dont forget the finishing touches, such as landscaping, light fixtures, towel racks, driveway sealcoating and interior staging. In rehabbing, the profit is in the last 5% of the details! The contractor estimates need to include a 20% Misc cost for over runs. These estimates plus a 20% buffer are your REPAIR COSTS.
Step 4 - In addition to repairs, you will have acquisition costs (Title search, transfer tax, inspections etc), carrying costs (mortgage payments, utilities, heat, lawn/snow plowing) and selling expenses (real estate commission, transfer tax, etc). These items will add up to a lot of money.
Step 5 - Determine your Minimum profit. I would say that given the risk, time and expertise needed to rehab a house, that the profit should be NO LESS than 15% of the after repaired value. This might be on the low side. Your actual profit requirement will vary based on the type of property and your investment requirements. Your profit needs to be factored in BEFORE you make an offer.
Step 6 - What to offer. Here are two formulas for you. The "long" one is as follows
Estimated Selling Price minus (Acquisition costs+Carrying costs+Selling costs+Repair Costs+Required profit) = Your MAXIMUM OFFER
The shorter rule of thumb is:
Estimated Selling Price X 70% less repairs = MAXIMUM OFFER. Within the 70% are all your other costs and profit. For riskier investments use 60 or 65%.
Remeber, Estimate the Final Selling price carefully and factor in all costs.
Oh one last thing.... Don't get greedy, a profit is a profit..
Lastly, I would be remiss if I didn't offer my prediction for the Boston Red Sox American League Championship face out against Tampa Bay.
Red Sox in 6. Series MVP, Duston Pedroia...Take it to the bank!!!