HOW TO PURCHASE, RE-HAB & PROFIT FROM DISTRESSED PROPERTIES
This is a business technique Real Estate Professionals have used for years to expand their wealth base and provide an income. The fact that the idea has recently been spread to the general public does not make it an easier business plan to complete. If anything, it makes it harder, as more people seem to be searching for a limited amount of “good deals”.
This publication is intended as a general guide to anyone considering embarking upon this type of project. As always, everyone’s individual situation is different. So the actual implementation of this, or any other plan, should be carefully considered and guided by the best advisors possible.
THE PLAN has three distinct sections: 1) The Purchase 2) The Re-Hab 3) The Sale.
1) THE PURCHASE
Many professionals say “You make your money when you buy”. This means, essentially, getting a great deal on the property you intend to re-hab gives you the best possibility of turning a profit. So finding and purchasing the property at the right price is essential.
How do we find the property? Certainly, your REALTOR is going to be your best guide in this area. The types of properties to look for are:
1) DISTRESSED PROPERTIES – these are properties that have obviously been neglected (for a variety of reasons) and the seller is unwilling or unable to fix the property.
2) 2/1 to 3/2 CONVERSIONS – traditional, the pros look for 2 bedroom/1 bath homes to which they can add a master suite, significantly increasing it’s value.
3) FORECLOSURES – There are two types here to consider: Pre-Foreclosures & Foreclosures. The Pre-Foreclosure is a scenario whereby you acquire the property before it actually gets foreclosed. This is a very tricky and dangerous proposition and should only be attempted by the most experienced investors. Once a property has been foreclosed and it is offered on the regular market it can turn into a very good deal for an investor. But there are other details in this scenario a good REALTOR should be able to handle for you.
How will you pay for the property? There’s been a lot of talk recently about buying with “little or no money down….” Be aware that, in the re-hab business, this is almost impossible to do. One of the best loan vehicles for a re-hab seems to be the “construction loan”. This is a loan that gives you the money to buy the house plus the money to re-hab it and there may be no payments for 6 months or more. However, most banks require at least 20% and great credit and assets to pull this off.
2) THE RE-HAB
Now that you have acquired the property it’s time to turn your vision for the house into a reality. But there are a number of things to consider.
1) Have you checked with an authority to see if your vision is in keeping with the current market? In other words: is what you are planning on doing actually salable? The best bet is to check with your REALTOR during your planning stages. A good REALTOR is in tune with the market and will be able to give good advice as to what the potential buyer is going to want and expect out of the house.
2) Will you be doing the work yourself or hiring it out? Most pros try to do the work themselves. If you do the work yourself, please make sure you get all needed permits and make the changes according to code. The NC RE Commission is making a point of advocating investigations of permitting and code violations during the sale process. Don’t get caught. If you hire it out or partner with someone for this work, make sure they have a proven history of doing the work well & on time.
3) What will be the costs involved? Keep in mind this is a business venture. You’re not doing the renovations for your personal enjoyment – as a homeowner would. Make sure you’ve run the numbers and the investment required is within the budget of the enterprise. Don’t over spend or over renovate. For example, many neighborhoods don’t need granite countertops in the kitchen to get top dollar. There is a point of diminishing returns.
3) THE SALE
Once the property has been fixed up, we have a big decision to make: sell right away or hold for best value? At this point I have to recommend my Clients consult with a good tax attorney/accountant. There can be serious tax implications for selling too soon and the details and requirements surrounding this change constantly. As a general rule, it seems that holding the property for at least a year is recommended. So do we rent it for a year or so before putting it on the market? This is a business & economic decision.
With that taken into consideration, it must be pointed out that selling a property has its expenses and hurdles. I try to warn Investor Clients to expect to spend about 8 or 9% or the projected purchase price in marketing, taxes and sales expenses. And, just like selling your personal residence, the property must be in its best possible shape before hitting the market. Don’t try to pull the trigger too soon – a property that’s not finished is much harder to sell. Once again, a great REALTOR is essential for this phase of the project.
So, all in all, a complete plan must be developed and applied for each property an Investor is considering. Run the numbers first. Try to foresee all possibilities. Consult with all the experienced professionals in all fields you can find. Don’t go at it alone.
At Team Armand we have a lot of experience putting together these plans for specific properties and Clients. Call us today and let us help you develop a plan for your property.