Saturday, September 02, 2006

Here is why I love rehabbing junkers...

I often have the opportunity to talk with investors from all over the country who are using my software in their businesses.  And I love to hear how people are using different strategies to buy their houses, and what works and doesn’t work in different areas of the country.  And when I am asked what strategy I prefer, I undoubtedly respond with… “I love rehabbing junkers”.

It was an email conversation that I had today with one of my customers that reminded me why I love rehabs, and more particularly rehabbing lower end houses.  The main reason that I like this type of deal is because I get a great deal of satisfaction from taking a complete dump of a house, and turning it into a place I would consider calling home.  Or perhaps it’s the look on my Realtors face when I show him the finished house and he can’t believe that I did it in less than a month, and for less than $10k.

There are some practical and economical factors that make low end rehabs very lucrative. Like for example in most areas of the country “affordable housing” is in great demand. So if you can provide a solution to that problem by creating good quality affordable housing, you will never have to worry about not being able to cash out if your exit strategy is to retail your houses.  I try to keep my houses under $175k when I put them on the market (the average median house in my area is $350k), and I usually have a full offer and several backup offers within a week or so.  Usually there are absolutely no “quality” houses available in my price range, and there is a huge volume of buyers looking for houses in this range.  It’s a supply and demand issue, but completely in my favor.

There are some other simple economical factors like, rehab costs. These low end houses do not require expensive materials or labor to renovate.  I’m not paying a master carpenter to put in crazy crown molding, I’m not installing marble counter tops in the kitchen, and I’m certainly not putting in $1500 stainless steel refrigerators.  I can put an entire kitchen in one of these houses including a refrigerator, stove, microwave and cabinets for $2000, and it’s all brand new.

The other great factor in the low end junkers is that there is less competition.  For some reason there are certain neighborhoods that scare people, and I’ve learned to find these neighborhoods and target them specifically.  It’s easy to find the houses that need major repair in these neighborhoods just by driving around.  I sometimes pay a kid to do this for me and get a list of houses that look like they are ready to be condemned.  These are the ones I love because there not for sale, there not in foreclosure, I know they need work, and chances are the homeowner needs my money.  So finding these deals are not too hard to do.  And I constantly call the “we buy houses” signs and let the investors know that I buy wholesale deals. 

The only downside to these deals is that the profits are smaller per deal.  I average a $25k profit on each one, and the turnaround time is 3 – 6 months depending on if I have to get permits for any of the work (roof, windows, etc.).  But because I can build up a steady stream of inventory, and the holding costs lower, it works out to be very profitable. 

I just thought I would share this because I find that many investors are working hard on the “pretty house” business, and some are finding it difficult because of the competition in their area.  If you are struggling to find deals, and have not previously considered rehabbing “junkers”, then perhaps you have a neighborhood in your area that is ripe with junkers just waiting to be picked, and profits to be harvested.


At 2:00 PM, Anonymous tom schober said...

I do lower end re-habs but I haven't figured out how to do a kitchen for $2000.00. How do you do it?

At 11:46 AM, Blogger J.Schroeder said...

Sorry for the late response...

Basically I use the cabinets that are available from Lowes. They are already put together and cost about $100 per linear foot for top and bottoms (including sink, fawcet, and door handles). I usually just pick one wall to put my cabinets on, and typically stay around 6 feet. So thats $600 - $700 for cabinets.

I get my appliances from Appliance Depot. The fridge, stove and microwave (delivered and installed) cost about $750.

The contractor that I use has a T&M rate of $40/hr, and it takes him about 4 hours to hang these cabinets.

The flooring, painting and trim work I factor separately in my rehab costs. But additional fixtures (lights, shelves, etc.) is about $100.

So all that said adds up to about $1700, then figure in any other problems like wiring, etc.

At 4:53 PM, Blogger Scott said...

You are absoulutly right, the real money is in the real ugly houses in the fringe areas. The average investor is either intimadated by the area or the scale of rehab. If I had a dime for every investor that was looking for the "paint and carpet" rehab in the nice neighborhood i would be retired by now. The money is where everyone else isn't and that is what creates the inbalence in the market place.

"We Buy Houses Too


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