Fixer Uppers

Fixer uppers are properties which require repairs. The scope of these repairs or rehab is determined by the end use of the property.

The rehab for a property to be rented is different than a property rehabbed to be sold to a homeowner. If you are flipping houses you must determine the goal of your purchase prior to making an offer to buy a property.

The repairs will be more for a property to be sold to a homeowner, than one to be sold to an investor for rental property. The exception being properties purchased in upscale areas. Whether for renters or homeowners, upscale fixer uppers require the same quality and considerations.

Of course, this will affect your analysis of the deal. So know this before making an offer, to accommodate any extra expenses.

Investors pursuing fixer uppers are certainly negotiating from a position of strength. These properties need work which the current owner does not want to do. Otherwise they would have renovated the property before offering it for sale.

Rightfully, anyone pursuing a fixer upper should expect a bigger premium in the sales price. This premium should be over and above the amount of rehab required.

Properties I purchase at 60% of the value, generally do not require much work to bring them to acceptable standards. But if a property's condition will require renovations of approximately 90 days, I will expect to purchase the property at 50-55% or less. This includes rehab.

For example: If a property is worth $100,000, after repairs are completed (called after repair value or ARV), my purchase price plus rehab costs will not exceed $55,000 or 55%.

This is an extremely important point for those pursuing fixer uppers. Many either forget or just never think of rehab costs as part of their purchase price. In the example above: If you were to buy at $55,000 then spend an additional $30,000 on rehab, your total cost will be $80,000. That is hardly a good deal for us who practice TVREI.

When I give purchase guidelines I mean "all in." Buying at 55% of value means ALL costs are included. Though I did not mention closing costs and points, this is also included.

Please do not forget this point. As you can see above, this could be disastrous.

Always demand additional premium for fixer uppers which require substantial rehab. For me, that means approximately 90 days or better. The longer rehab projects will cost you more money.

Among other things, you will pay more to your lender because you will carry the loan longer. You will pay more in utility bills and insurance. You will also spend more time, so make it worth it.

It is important that you compare the additional time spent on a larger rehab, with smaller projects. If you will make, say, $30,000 on the large rehab in 3 months, but can complete 2 smaller deals in the same time frame for a $40,000 profit, the larger deal is not worth it.

With fixer uppers, rehabbing is the most important task. If you get that wrong, you are likely to face failure. For those who missed our discussion on renovations, in the segment on flipping houses, here it is again.

I apologize to those who read this earlier. However, I must stress the importance of the rehab process. It is the most vital aspect for those pursuing fixer uppers or any approach to real estate investing which requires rehabbing. In fact, most discounted property will require some work.

Again. Sorry to those who read this elsewhere in this website. I must make sure everyone reads this vital information.

Renovation Process. Underestimating the rehab costs can turn a great profit into a substantial loss. Underestimating the time it will take to rehab a home can also significantly reduce profits.

Get, at least, 3 estimates.

As a beginner to real estate investing, I hired property inspectors to comprise a list of what needed to be done to my property of interest. I would withhold that list to check the competency of the bidding contractors. If a contractor did not include something in their bid, which was on the inspectors list, I would ask why. A contractor must know that YOU know what is going on with your property.

Early on, hiring property inspectors was one of my very best investments.

Do NOT assume the lowest bid is the best. Make sure you are comparing "apples to apples." Meaning, make sure all 3 bids have the SAME items included. Sometimes a bid is lower because needed items where left out....you will pay for these items at some point.

Once you accept a bid, add 10-20% to that amount and be conservative with the estimated time for completion. NEVER, NEVER pay for work until it is done to your satisfaction....No advance payments whatsoever. There are probably hundreds of thousands of stories of contractors who received payments in advance of work being completed, who never returned.

Have your property inspector, inspect the completed work, before you release payment.

If a contractor does not have the money to begin your project and receive periodic draws for work completed, then do not hire them. It will bog down your project, lengthening the time and dramatically increasing the amount of money you will spend to get it completed.

Investors pursuing fixer uppers must heed this advice.

Rehab Financing. Obviously, if you have lines of credit, home equity lines, cash or other access to funds, you can fund your rehab projects yourself. This is not the case for most.

For the most part conventional banks will move far too slow to purchase deeply discounted properties. They generally take 60-90 days or more to fund purchases.

Sellers of deeply discounted properties typically sell their property within 3 weeks.

The majority of my peers use Hard Money Lenders or Private Money Lenders to fund discounted property purchases. These lenders fund very fast...anywhere from 3 days to 3 weeks.

You pay a premium for this service. But you make up for it, by purchasing tremendously profitable deals, which you otherwise could not.

They provide enough funds for the purchase and rehab of a property, if you buy at the right price. What's more, most will allow you to buy with no money down, if your purchase price is low enough. Those who practice TVREI will definitely meet this requirement.

Hard Money Lenders and Private Money Lenders are worth the premium they charge. I want to be clear about this. The speed and flexibility they provide, will allow you to confidently pursue your investment property dreams.

There will be a more extensive segment on financing later in this website.

I would invite those interested in fixer uppers to review the segment on Flipping houses. You will have most of the same considerations and should definitely follow the directions on coming up with your purchase price.


From Pt 4 - Fixer Uppers, to Pt 5 - Landlording.