1) Pay a low price..not just to the seller, but good terms on the financing.
2) Spend as little as possible on materials..this does not mean go cheap, but go best quality product for the money.
3) Complete the job as fast and efficiently as possible.
4) Do a quality job...hire people to do the specialties...for it is the finish that makes the difference.
5) When you write contracts to contractors, include a time frame for completion...if they delay the job, let them know you will hire someone else to finish,,,never pay in advance.
6) Before you buy, know the market...what will you be able to sell for at the end of the project?
For a detailed spreadsheet to get you started on a sample rehab project, email me...firstname.lastname@example.org
I appreciate what you are saying, and agree with you for the most part, so maybe I should have been more clear.
What I am really telling Derondal is to look out for people who say this is easily done, and more importantly, easily financed for the average person.
However, regardless of how much profit you think you can make reselling a property (and I know that you are an educated developer), the price you paid is still market value. If you got a good price on a short sale or a foreclosure, that is because no one else offered a better deal for the seller. You paid market value. If you are able to finish/rehab/hold the property and sell for a profit, you made a good investment -- by selling at the current market value. This does not just apply to real estate, but to all transactions. Whatever you pay for something at the moment you buy it is the market value.
Please accept my apologies for arguing semantics.
While I agree with your assesment that carying costs can make or break an investor, I do disagree with your notion that you can't buy property under value.
In fact, if you are an investor, you MUST buy under value. You cannot buy at retail, throw more money into the property, and expect to make a profit.
How do you find properties under value? There are many different ways. I happen to know short sales. While most short sales discount the property just enough to sell it retail, if I am working for an investor - I can and do get discounts of 40-60% pretty regulary. An investor short sale is harder to do and will take longer, but nine times out of ten I will get a lender to heavily discount.
For example, I have a project in Wicker park. Current mortgage is 990K. It is a custom/gut rehab and SFD and is 90% finished. The as is value is somewhere around 675K, and the finished value is realistically around 1M, supported by recent sold comps of lesser or equal properties. Of course the appraised value is 1.4M, but we all know appraisals are nonsense in this market.
Bottom line- I have an approved short sale for 415K
Still don't think you can buy properties under market value? You definately can, you just have to know the tricks.
Carrying costs should be your biggest concern if you are a new rehabber. If you are not familiar with the term, "carrying costs" refer to the monthly expenses (loan payment, taxes, utilities) that you will have to pay while waiting for the home to sell. While a down market actually does provide opportunities for experienced developers, please remember that the successful developers have deep cash reserves and are able to sit on a property until they get their price.
That being said, don't be totally scared off of purchasing property. Some of the other people here gave good advice when they said that you should start with a property that you can live in while doing the work with a monthly payment that you can afford. If you are able to sell it for a nice profit, that's good for you and you can move on to your next project. If not, then you have a nice place to live, and maybe you can sell it for a profit sometime in the future.
One thing to beware of though is anyone who promises that you can buy properties for less than market value. There is no such thing unless you find a seller who is completely uninformed of the market. The price a property sells for IS the market value!!! The idea is to find one where you can increase the value by significantly more than what it cost you to rehab.
1.Never, NEVER pay retail. If you can't get at LEAST 20% off, it won't profit for you in this market. I will not touch anything over 40% discount.
2.Be conservative in your numbers. Calculate out to the penny all rehab and holding costs. Then add 10%
3.Unless it's a complete gut rehab, set a short time limit to finish. 4-6 weeks at max. This is where many people kill themselves.
4.Expect to market for at least 60 days, and don't even think about listing at the top of the market.
If you can do all of these things and still profit, you will be well on your way to success. Better yet, partner with and experienced rehabber and learn from them. There is no shame in splitting a deal to learn this treacherous business.
one more thing,
TURN OFF THE TV! If you are fancying being the next "Flip This House" story, you will fail. (The Trademark guys are good) I buy alot of houses at a discount from wanna be flippers who failed.
My personal opinion is that start with properties that are your home. That way if it doesn't sell it's not wasted money. You also need to decide if you are going to do the work yourself. Is that going to take you away from another way of making more money. Our most successful rehabs were when my husband was unemployed and it was are home. But it doesn't make sense for him or I do to the labor when we have "real jobs."
You also want to keep in mind as an investor that in order to get a good 'flip' deal, you should buy at 20% to 30% less than market value and then turn around and sell at top dollar.
A flip doesn't always require repair and upgrades; you can alway sell as-is, as long as you buy at 20-30% below market!
The north side of Chicago is where I live and work (Lincoln Square), and I can tell you that it is a quickly-developing area booming with new construction, but the market is saturated. As a result, choose carefully, and, as Ian said, know your resale potential and make your timeline/budget BEFORE you buy.
They always seem to forget 2 important ones
-Fed and State short term capital gains
-Lost interest from monies sitting on the flip