Often times when we think of nightmares iconic horror figures like Jason, Michael Myers, and Freddy Krueger come to mind. When you mention the word nightmare I often am reminded of a particular 3/2/2 home with fire damage that I purchased.
This property taught me enough lessons to last my entire investing career. Now read at your own risk about the nightmare entitled the rehabbing experience from the pit of hell.
Rehabbing Investment Nightmare Lesson
This horror story begins with the purchase of a 3/2/2 home nestled in a small town located near the beautiful city of San Antonio, Texas. The neighborhood was perfect, quiet, and a very desirable location for potential buyers. My first thought to myself was self, “You hit the jackpot.
Perfect Scenario: You bought the house cheap, perfect area, and once you rehab this jewel you going to make your bank account swell up!” – NOT – Later on I had to tell myself, “No, you were wrong and where did the money go, it’s kind of empty in here.”
Mistake #1: Now here comes the first mistake made, which was not allowing my contractor I had used for years to renovate the home. My contractor seemed intimidated by the project so the assumption was that he was not prepared to do such a complicated project. I then contacted another contractor I knew and decided to have him take on the biggest rehab of my career.
My mind said to self, “This guy has done commercial jobs so what do I have to worry about? This is going to be great!” Looking back this was a colossal mistake, and it had nothing to do with the contractor being a commercial contractor working on a residential project.
On the other hand, it had everything to do with the contractor not getting to know my goals for the property and quite frankly not caring what the end project needed to look like in order for the property to sell quickly. His only concern was how much and when can I get this job done and put money into my pockets.
Mistake #2: The next mistake was the home was purchased without getting a quote from a contractor before the purchase. Since we were so excited about the home’s potential we declined from seeing how much it would cost to renovate the property before the purchase. The wrong way to enter a rehab is to tell contractors we only want to spend this amount of money.
The contractor usually fails to do the job for your desired request and cut corners or flat out lie to get the job only to hike up prices once the job is started. Again my mind was telling self, “This is such a sweet deal we going to make money regardless of the amount the contractor’s bid come out to be. I mean how much does it cost to repair a home with fire damage. The price can’t be over my projected number.”
The obvious way to handle this situation no matter how sweet the deal appears to be is having various contractors give you their bid and run comparable analysis of the neighborhood to determine if the deal is indeed a profitable venture.
Unfortunately, it takes us enrolling in the school of hard knocks to learn that sometimes the best deal is the deal you walk away from. In hindsight if I would have walked away from this property I could have purchased, rehabbed, and sold possibly two or three less complicated rehabbing projects and made a much higher profit margin than occurred on this project.
Mistake #3: Third mistake in this horrific tale is entering into this deal with a big head. One of the main objectives of this deal was to prove that I could rehab this burnt house and make it bigger and better than before the fire. There is nothing wrong with purchasing a home, seeing its flaws, and making it the prettiest in the neighborhood. The problem occurred when it consumed my better judgment and effected profits. Real estate professionals at the end of the day rehab for one reason and that is to make a profit, and when you lose sight of this pivotal objective there goes the rehab.
Mistake #4: Fourth critical mistake was made in not knowing our market. Our company, JP Homes, has found great success in the $100,000 and below price range. However, this house was not in this price range it was in the $150,000-$200,000 price range. As you go up the economic ladder so should your quality of work and the materials you utilize to renovate the property.
Unfortunately, the same techniques and materials we used from the $100,000 and below price range into this property which caused a holding time of over a year. The windows chosen were outdated and not energy efficient. Potential buyers came into the home and noticed how outdated the windows were and something as simple as windows took away from the positives of the house such as great fixtures, marble tile counters, and custom cabinetry.
A great rehabber should step away from the project and act as the potential buyer would act toward your home. Looking back and detached from the situation I wouldn’t buy a home that had outdated windows. Why would you pay market price and have outdated windows that aren’t energy efficient and would lead to higher electric bills?
Remember that rehabbing is a constant educational process. I often find myself in local improvement stores so while I’m there I am constantly asking questions concerning what people are buying. One of the areas I frequently questions deals with energy efficient products. These products may be a little pricier, but when selling a house is a huge selling point. As the investor we get our house sold faster, get tax credits, and local utilities often give rebates on these items. The buyer of your home can rest assure that their home is not just up to date but energy efficient which equals lower utility bills, and a win-win situation always is a great way to end real estate transactions.
Mistake #5: The fifth mistake was the most terrifying mistake in this nightmare of a deal. The hiring of the contractor was based solely on price and due diligence on the contractor did not occur. The price this profit sucking contractor gave was considerable less than the other contractors that gave us quotes on the home.
Profit on a rehab is all about cutting expenses and sticking to budget, but you get what you paid for and we paid for disaster. The contractor scheduling for the rehab project was horrible. His lack of effective scheduling caused the workers to drag the completed process due to lack of communication. Since permits had to be pulled the inspectors and other city officials urged us to complete the home, this is totally embarrassing when the city thinks you are taking too long.
The contractor of course had other jobs to complete and left our job to fatten his pockets so I had to assume the role of contractor. Assuming this role took me away from locating new deals, managing our rental properties, and just a bad taste in my mouth at the time toward real estate in general. The workers were not getting paid by our contractor and would expect me to pay them. I paid the contractor so why he couldn’t pay them?
The conflicts almost lead to physical altercations on the job site, and even the cops being called out on one occasion. I finally got tired of the contractor and hired my maintenance crew, electricians, plumbers, and other professionals to finally complete the home and right the wrongs the previous contractor caused, After I woke up from my nightmare I paid back my private lender and me and my partner had a big goose egg to look forward to at closing.
My Rehabbing Investment Nightmare- Your Lesson
In conclusion, I would hope you never had to go through the same road I did. I had flashbacks when remembering this time of my life, and must admit this deal sit my business back years and just shook my confidence to the core. I took years off before I purchased another house to rehab for sale.
The positive elements I took from this experience are I learned what a rehab is not supposed to look like and now ask questions before acting always. During my rehabbing sabbatical I visited many new home developments and high end condominiums to understand what my peers are doing and most importantly what buyers are looking for in a new home.
I have had conversations with sale professionals at local home improvement store concerning prices and what are people buying to upgrade their homes. Most importantly I asked people not in the business, potential buyers, and everyday individuals their opinions. Basically, I constantly do my research and am ready to move forward.
Now I am a recovering rehab failure that is excited about buying the next real estate property to renovate and resell for an investment profit. The nightmare rehab had taught me I am not an expert, but a veteran. The lessons learned from this experience had made me a better student, project manager, real estate professional, and ultimately a better person. I’m ready to rehab San Antonio and beyond. As always thanks for reading and successful investing. God Bless!