In my first article in this series, I discussed the Subject-To investing strategy. Let’s continue our discussion and talk about rehabbing or probably a more widely used term, retailing. To have the most success with this strategy, you don’t only need to know how to fix up a house, but you need to be able to find a great deal.
However, in saying that, there are many retailers who do nothing but fix houses, they leave the house discovery to wholesalers. It just depends on how much time you have and how much work you want to do. Finding the deal, however, is a topic for a future article in this series.
There are many books that have been written on the subject of retailing, but for our purposes we will take a look at the basics of what a retailer needs to know and do.
- The location of the home is very important: The house must be in an area where people who have a down payment and can qualify for a loan want to live. You have picked the wrong neighborhood if you are afraid to show it regardless of the time of the day. If you do the repairs yourself or hire a contractor, you will probably spend as much or more time keeping your tools and materials safe than doing the repairs.
- Fix up and improve so the house is ready: People in the retail market who have a down payment and can qualify for a loan have choices. They can have their pick of any house in their price range. The objective is to make sure the house is in excellent condition, so your buyers will want your house instead of any others.
- Buying right equals profit: You cannot over pay for the property. If you get into the house paying to much, it will be difficult to sell no matter how nice it looks. If you do manage to sell it, it will probably be at “break even” or at a loss. New investors get excited to enter the market, find a deal that is marginal and pay to much for the property.
- Personal involvement to the closing table: This is an important point. If you find it difficult to follow through to the end, then designate someone who can. You can do everything necessary to get the property fixed up and ready for a buyer and have the deal fall apart at the end of the process. Getting the buyer to the closing table is critical.
Where To Improve
Improvements will probably be needed inside and outside the home depending on its condition. Interior repairs that need to be focused on will be the kitchen and bathrooms. These rooms will be most noticed by perspective buyers. This is where you will spend the most money. Depending on the price range, you should repair the house consistent with other houses in the neighborhood. You have be careful here, you don’t want to over spend. It is easy to get caught up with the repairs and improvements and go over budget.
If you’re not sure what needs to be repaired, you should hire a contractor to estimate what repairs should be done. This will be good money well spent as you will get a good education following him around. If you hire one, be sure to ask questions as to why he estimates as he did.
Moving to the outside of the property you want to pay close attention to the front of the house. The curb appeal will be critical.When Perspective buyers pull up to the house if the curb appeal does not satisfy, they may not even want to get out of the car.
The house will need to be inviting, to draw them in.
Some investors will try to get buy without upgrading the systems. Electrical, plumbing heating and air conditioning are necessary components in the planning to keep perspective buyers happy. In today’s market, it is expected that the house you retail will have all the systems updated and in good working order. Air conditioning especially in the South, is a must. The question to ask yourself is, “Would I want to live in a house without air conditioning”? Any reasonable person would say, “No”.
Finding and Qualifying Buyers
There are several ways to sell once the house is ready. The retailer could require that a new loan be put in place, he could offer owner financing or lease with the option to buy. If he wants to sell for all cash, he will require the buyers qualify for a new loan.This is the most difficult of the suggested financing options. Qualifying for conventional financing, especially in today’s market is a real challenge.
Banks require certain criteria to be met before they will approve a loan. Buyers must have acceptable credit and enough money for a down payment and closing costs. They also must have an acceptable debt to income ratio. These three requirements are critical. It will be important to keep in close contact with the buyers and their lending institution during this process. Open communication is a must. Things can go wrong quickly and the deal could fall through and may result in having to go back to the beginning of the process and look for a new buyer.
My retailing experience has been on houses I have owned for a while prior to any renovation. Some of these properties needed only cosmetic repairs, while others needed extensive work. One advantage that I had was that my contractor was my father-in-law. It was easy to get the repairs completed without much trouble and in a short amount of time. Some investors that lack experience, suffer when retailing. They hire a contractor who does not follow through on their promises, they do less than acceptable work, are away from the job without notice and often go over budget. I was able to avoid these pitfalls. In the end, I kept these properties for some time longer, rather than sell them immediately. I will talk more about that in the buy and hold strategy.
The retailing strategy can be very profitable, however, it can also be very challenging. If you do not know what you are doing, you could end up with serious financial problems. Your house could be way over budget, sitting on the market month after month with no buyers in sight. This strategy should be left to the experienced investor. I would not recommend this method of investing to the new investor. If you will keep reading these articles, I will reveal what I consider to be the better strategies for the new investor.
I will talk to you soon.
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