| Retailing as used in this article is defined as fixing up a | | | | it out, but these classic mistakes pretty much put |
| property with the goal of reselling it to an owner | | | | Sam out of the rehab business. Sam's biggest single |
| occupant. | | | | mistake was assuming he knew more than he really |
| Figuring your expenses when planning a retail project | | | | did. |
| can be difficult. The best rule of thumb for investors | | | | There are 4 main components that you must be |
| who are relatively new to this part of the business is | | | | realistic about: |
| to take on projects that do not require major | | | | 1. How much profit do you REALLY need to net to |
| changes to existing floor plans. Even experienced | | | | make this project worth while? If it takes 6 months |
| investors may find it difficult to stay within budget on | | | | to fix up, market and resell, is a $20,000 profit worth |
| rehab projects where a second floor or additional | | | | the time and effort? For some folks it is, while |
| room is being added, or walls moved. | | | | others can earn more than that working a regular |
| Room additions, or changes to existing floor plans will | | | | job. Set a minimum acceptable profit goal. |
| inevitably run into design problems or other delays | | | | 2. What repairs are REALLY going to have to be |
| that are difficult or impossible to predict ahead of | | | | done to compare favorably with the competition in |
| time. These types of issues can cause you to | | | | this area and attract a buyer? Don't forget to |
| exceed your budgeted numbers by tens of | | | | compare the condition of similar properties. Is the |
| thousands of dollars. Such large-scale projects should | | | | quality high, medium or average? Are the bath's |
| not be attempted unless you have the experience | | | | made with imported Italian marble, or just a fiberglass |
| and an adequate budget. | | | | insert? Are the kitchen cabinets going to have to be |
| One of the most common problems among newer | | | | solid oak or just veneer? This is important information |
| investors is starting a project with an inadequate | | | | for determining how much you will need to spend on |
| budget, and having too little time to devote to the | | | | repairs to be competitive with other properties on |
| project. I wish I had a dollar for every rehab I have | | | | the market in that specific area. |
| seen that was for sale by an investor who was | | | | 3. How much are those necessary repairs or |
| bailing out. No more time, no more money, and most | | | | improvements REALLY going to cost? And how long |
| likely, no more patience. Retailing is not for everyone. | | | | are they likely to take? Be realistic about these |
| The guys who are really successful at retailing know | | | | numbers. |
| their market, understand what improvements will | | | | And don't forget about holding costs which will |
| provide the greatest return, and don't let themselves | | | | accumulate if your project is not completed on time. |
| get sidetracked with unprofitable improvements. | | | | Interest, payments, utilities, taxes, theft protection, |
| I can't help but think of a good friend of mine who | | | | insurance, etc. |
| got a great deal on an old 1930's farmhouse. He | | | | 4. Can I REALLY do this myself, or will I need to hire |
| bought it and 15 acres of land for only 25 thousand | | | | professionals? Do you know how to do the work |
| dollars. And to boot, he only had to pay $250 a | | | | involved, or were you planning to buy a set of |
| month on the property while he was rehabbing it. | | | | Time-Life How To books? Be sure you have the |
| The property was worth about 75 to 85K fixed up. | | | | time necessary to devote to your project. |
| With such low holding costs, a repair budget of 20K | | | | If you have no experience with rehabbing you need |
| and an ARV of $80K, It looked like a dream deal. He | | | | to educate yourself before you take on a project. |
| was all set to make a fast 35 thousand or so in | | | | Read some books, attend some seminars, check out |
| profit. | | | | some websites on this subject. I am not a big fan of |
| His dream deal started out well enough, as the | | | | the expensive courses that you see for sale. Most of |
| repairs on the house proceeded along on schedule at | | | | these courses are not worth their sales price. Books |
| first. But then my friend started to fall prey to the | | | | at your local bookstore will be better to use as a |
| temptation to fix up all sorts of little things that were | | | | reference manual, at a much lower price. |
| less important, rather than focusing on the most | | | | You could take a contractor to the site before |
| essential items. | | | | making an offer and have them provide an estimate. |
| For starters, the house needed a furnace installed. | | | | And if you will need to hire a contractor, do you |
| The old gas heater in the living room was not going | | | | know one? Do you know how to find one? How will |
| to be adequate for today's buyers. You would think | | | | you check their credentials? Who will be in charge on |
| this would have been a no-brainer. But Sam got so | | | | a day to day basis, you or the contractor? Are they |
| hung up on how pretty the house would look with | | | | going to be available when you need them? A |
| some nice landscaping that he sort of forgot about | | | | contractor you can trust and work well with can be |
| the furnace. | | | | difficult to find. There are a number of websites that |
| Then there was that big room on the back of the | | | | offer contractor services that have met certain |
| house that accounted for about 30% of the living | | | | screening criteria. One of those is |
| space. This room had suffered some pretty severe | | | | If you want to take a more hands on approach, |
| water damage and had to be gutted. Instead of | | | | there is a book called "Home Repair and Remodel |
| redoing the room and retaining the living space, Sam | | | | Cost Guide" by Marshall & Swift, which is |
| decided that this area would make a killer screened in | | | | updated yearly. This book allows you to break your |
| porch. It did, but at the cost of 30% of the square | | | | costs down into major components, such as |
| footage that could be counted for the appraised | | | | Kitchens, Electrical, Windows, Roofing, etc. It can be |
| value. | | | | purchased through or book stores can order it. The |
| The bathroom was no small problem either. Over the | | | | ISBN number is 1-56842-071-4. There are also several |
| years water leakage from the tub had rotted out | | | | web sites that make the book available as part of |
| the floor joists, causing the need to rip out the entire | | | | their educational literature. |
| bath, replace the floor joists and then redo the bath. | | | | And finally, there are expenses to include that many |
| To save money, Sam decided to hire one of his | | | | "newbies" overlook. For example, assuming you will |
| buddies who would work for beer, to repair the floor. | | | | not need the services of a real estate agent to resell |
| The buddy took so long to get the job done that | | | | the property, and therefore failing to include this |
| Sam would have been better off paying a contractor. | | | | potential expense in your cost estimate can wipe out |
| To make a very long story short, what should have | | | | narrow profit margins |
| been a 3 month, 20K repair project turned into a 12 | | | | Not including some extra holding costs for the |
| month, 40K fiasco, as Sam flittered from one idea to | | | | marketing period can hurt you too. Everyone seems |
| another, and tried to cut corners by using friends to | | | | to think that because Atlanta has been blessed with |
| do the work. | | | | a "hot" market, any house will sell in two weeks or |
| The one contractor on the project, frustrated by | | | | less. I have seen very nice homes in very "hot" parts |
| Sam's inability to focus on the important work finally | | | | of town sit on the market for months and months. |
| quit in disgust. | | | | The interest expense for hard money loans can really |
| To top it off Sam had heard that houses painted | | | | add up. If you are smart, you will always include an |
| yellow with green shutters sell more quickly and for | | | | additional 3-6 months of holding expenses for |
| more money that other colors. But school bus | | | | marketing time in your estimates. |
| yellow? Yep, he painted it the same shade of yellow | | | | There is good money to be made in retailing houses, |
| as a school bus, despite the objections of his family, | | | | if you do it right. Take the time to educate yourself |
| friends, and the painter. It's now been 17 months, | | | | and above all be realistic. Then you will be on your |
| and the house still belongs to Sam. He finally did rent | | | | way to a successful (and happy) career in retailing. |