Lessons learned from a newbies first rehab

Dennis Norman

Earlier this year I ran across a “newbie” investor and blogger, Shae Bynes, that impressed me for a couple of reasons.  One, I like the message conveyed by the domain name of her website, GoodFaithInvesting.com, and two I like the “mission statement” on Shae’s site which states her purpose is “I simply want to live an enjoyable (and debt free) life that is both pleasing to God and a blessing to others! ”

It’s hard to beat that.  I haven’t met Shae yet, but I like her and her message.  In addition, I think she has written some great articles  that can be very helpful to a real estate investor, and she has been gracious enough to be a contributor to this blog so I want to share another one with you.

Lessons learned from our first rehabbing exprience

By: Shae Bynes

Earlier this year, my husband & I rehabbed and flipped a home for the very first time. To be frank we learned rehabbing by the school of the hard knocks (I don’t recommend it) and we didn’t make any money at the end of the day. At the same time we didn’t lose our shirts either so from our perspective we just paid for a learning experience and were thankful for it. We’re looking for our next rehab project right now and KNOW we’ll get it done the right way and profit big thanks to the lessons we’ve learned plus the mentoring we’ve obtained since then.

Just keepin’ it real. Hope this helps someone else!

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I wanted to post about some very valuable lessons we learned from our first time experience with rehabbing and flipping a home. We will NOT make these mistakes again…we’ll probably make other mistakes, but we won’t make THESE mistakes

Lesson #1 (and most important!): When it comes to calculating Maximum Allowable Offers, Garbage in means Garbage Out.

Simply put, we paid too much for the house. In Broward county the property values have dropped dramatically over the past 6 months. At the time that we made an offer and signed a contract on the property we did not account for significant price reductions in a mere 3 months and a flood of new REOs on the market within less than a mile of the property.

The reason we were probably unable to find a wholesaler buyer is because it wasn’t enough of a deal based on these facts.

Truth is, if we accounted for these facts, we would’ve paid $40K for the house instead of $60K….regardless of exit strategy….and we would’ve been able to wholesale it…and if not, we would’ve made a minimum of $20K (and even more if we avoided some of the other mistakes).

We did use a formula for our maximum allowable offer: After Repair Value (ARV) * .65 – repairs. But I learned something early on about mathematical formulas…Garbage In, Garbage Out. Our garbage? Our assumed ARV was too high and our estimated repairs was too low. We should’ve been much more conservative with our ARVs due to our fast declining market and increased foreclosures….we’ve done this with all of our offers we’ve been making since getting mentors

Know your market! Adjust general formulas accordingly.

Lesson #2: When listing agents say “Give us your best and highest”, don’t.

We’ve easily made over 100 offers since we started on this real estate investing journey at the end of last summer. About 40% of listing agents request “your best and highest” after you send in your offer, claiming that there are multiple offers/substantial competition.

Even if this is true, it doesn’t matter. Don’t give your best and highest that early on in negotiations. That’s what happened with this property…we had a lower offer in the mid $50s and after a request for best and highest we went to $60K. Who knows? We could’ve had this property for $55K. And that small amount of money would’ve been the difference here….we would’ve actually made a profit even with all our other mistakes Either that, or we would’ve lost out on the property and that’s not the end of the world either because there’s always another deal.

Lesson #3: Things always cost more than you think

When we put a budget together for the rehab we did budget for some unforeseeable expenses…but not enough considering it was our first rehab — it was also our general contractors first rehab in Sunrise (he works mostly in Miami-Dade) so he didn’t know some of the insane expenses that would result with regards to permits and inspections.

Here were just a few of the surprises that added up:

(1) When you do a rehab, there’s a lot of trash. Duh. But if you don’t time your roofing work (if applicable) with the other demolition, you’re going to have to rent an additional dumpster and pay to have it dropped off and taken away. I didn’t think this was a big deal but do you know that it cost us nearly $600? Yikes! Costly mistake.

(2) If you have city code enforcement officers who are completely unbendable and potentially even unreasonable, you will have a lot of additional costs for inspections and permits. Long story short, we spent an extra $1700 in this area.

(3) Landscaping. Lord have mercy. We paid too much for this. The work was done beautifully, but if we spent a little more time shopping around for cheaper sod, we could’ve saved another $500.

(4) Materials. We paid for materials ourselves vs. having the contractor pay for them. He was even cool enough to hook us up with all of his discounts and shopped around with us to get the items. Problem was that early on we choose a few things that simply cost too much vs. what we budgeted for – floor, kitchen, and bathroom tile was the biggest culprit but there were a few others. Overspent on materials by approx. $2000.

(5) Holding Costs. Having holding costs was no surprise, but having them for 6 months (when we only expected 3, 4 at the most) cut into our profits. These costs included the interest on the hard money loan (next time, I’m using private money or a lender who has a 6 month no pay option) and utilities (which frankly cost more than I anticipated).

So those were the key lessons we learned….there were also a number of additional positive outcomes from this experience. Namely,

We learned how to run an auction to sell a home — awesome experience that we WILL do again
We have the beginnings of excellent relationships with several vendors
We were forced to talk to local bankers and hard money lenders
There’s probably more, but these were top of mind.

I hope this information is helpful to others who are looking to do rehabbing. If nothing else, I hope our attitude about the experience is a motivation to keep moving depsite obstacles because as many more experienced investors will tell you….it gets easier each time! All things happen for a reason and I’m grateful for this experience and ready to kick some serious behind the next go round!

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