Value Adding Rehabs-Anyone doing this? - Posted by Marcus

import · July 15, 2005, 10:45am

Posted by ski on July 16, 2005 at 07:12:40:

It is becomming more difficult to find anything under 150k. Just saw a r/e listing for a 2/1, no garage, frame construction (most here are cbs), built in '71, old t-111 siding, needs work, listed for 190k. Of course, the appraisal wil come back at about 130k. Sorry to say but the realtors are really getting greedy.
Most properties are around the 200k mark for a rehabbed 3/2/1. Most of my rehabs will not exceed 15k in repairs. This includes tile throughout, new kitchens, refurbished baths, paint in & out, new roof, new appliances and a/c. Yes, I buy well below market. Houses here are appreciating at about 2k/month.
I deal with preforeclosures and short sales. The deal I am working on today…Seller wants out. Will take 10k above what his total bills are, which amount to 121k. He needs 25k now and will sign over the property(partner’s money). House needs 5k in repairs (my money). Will sell for 210k in about a week. We split 50/50. Not too bad for a week’s worth of work. BTW he paid 78k for it not quite 3 years ago.

import · July 15, 2005, 10:45am

Posted by Marcus on July 15, 2005 at 10:45:24:

I have a question for all you rehabbers, and please let me know if I am off base in my reasoning here. Do any rehabbers look at bringing a property up to it?s highest best use, as opposed to buying clunkers at deep discount prices and fixing up? For example do any of you specialize in bringing homes up to the conforming standards of the neighborhood, increasing market value by adding a bedroom to a 2/2, in a neighborhood full of 3/2 homes. Or putting a garage on the only home in the neighborhood without one, maybe adding a second unit to a single family home on a lot zoned for multifamily, etc. I guess I am looking at ?fixers? in a different sense of the word, and I guess the perfect storm would be a house you could ?rehab? and also add value by making it conforming.

Is anyone doing this, and is there enough money in it to make it worthwhile? I am thinking you would be less dependent on buying at 65% of ARV like you are with true rehabs, since you would be immediately adding value by making the property more attractive to prospective buyers.

Thanks for any and all responses.

import · October 22, 2005, 4:02pm

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import · July 19, 2005, 4:12pm

highest & best use - rentals - Posted by Frank, WI

Posted by Frank, WI on July 19, 2005 at 16:12:57:

When I think of ‘highest & best use’ I think of rental properties. We have bought 2BR/2BR duplexes and converted them into 3BR/3BR duplexes by adding a wall and a door to the front sitting room or den. This costs us under $2k per duplex and increases the value by $5-10k, and our rents go from $500 for a 2BR unit to $600 for a 3BR unit.

import · July 17, 2005, 12:33am

Re: Value Adding Rehabs-Anyone doing this? - Posted by JD

Posted by JD on July 17, 2005 at 24:33:45:

This really only makes sense in neighborhoods where properties sell for more than $150/sqft. Even at a $150/sqft I would still need a discount at the time of purchase for this to make sense. I don’t look for such properties, primarily becasue they don’t exist in great numbers where I live, but I would guess that at $250+ sqft, paying close to full market and adding square footage might become cost effective.

import · July 15, 2005, 10:26pm

Re: Value Adding Rehabs-Anyone doing this? - Posted by dealmaker

Posted by dealmaker on July 15, 2005 at 22:26:58:

I think I understand what you’re asking, and after reading the other answers I think most of us are on the same track. You’ve got to ascertain the difference between “highest, best use” and improving beyond the neighborhood.

Since I’m a bit anal about the work I do (no one else does it as well as I do so I don’t hire much out) I constantly have to be on guard against improving beyond the neighborhood. IMO, putting a garage in a neighborhood where it will be the only one, may increase salability. BUT IT WILL LOSE MONEY.

The market where I live is kind of a hodge-podge of values. There is the town itself, contains everything from 800 sq. foot “beater” shacks that probably average about $65K or less to $400K nicer homes. There’s a gated, golf course community, with about 50 lakeside homes. Prices run from about $190 off the golf course, to about $700K on the lake. There’s a “destination resort”, now owned by Marriott. Condos from high $60K’s to lakefront houses of $2.5MM.

Obviously in the different markets things like granite countertops (the granite is quarried here) range from completely ridiculous at one end, almost a “must have” in the gated community, up to a matter of “if the granite isn’t exactly the right shade rip all 1500 square feet of it out” on the lake.

Curb appeal
Yard appeal
Front door appeal
Good baths
Good kitchen
Neat, clean, no bad sheetrock, trim etc.

This is where you put your money and effort. I had two agents tell me I should completely gut the kitchen on my current project. I had a cabinet man make a replacement drawer for the missing one, I replaced the handles ($1.79 each X 22) repainted the hinges to match the handles ($2.79, fair amount of effort to remove and reinstall), and tiled the countertop ($55). When the agents saw it they said it was a good thing I followed their advice!

The difference between a one dollar light fixture at a yard sale and a $300 one at the home decor store doesn’t bring a nickel more or less at sale time, IN MOST PROPERTIES.

dealmaker

import · July 15, 2005, 2:42pm

Re: Value Adding Rehabs-Anyone doing this? - Posted by Steve

Posted by Steve on July 15, 2005 at 14:42:58:

I like your idea and it makes sense in certain markets. Here in DC, land is so valuable the more square footage the more value you can bring. For example real estate sells for $500 per square foot. If you buy a 1k s/f house for 500K and can add 200 square feet for 40K and make 100k you win.

import · July 15, 2005, 1:01pm

Re: Value Adding Rehabs-Anyone doing this? - Posted by Sean

Posted by Sean on July 15, 2005 at 13:01:18:

Your 65% of ARV is 65% of ARV… that includes the value after you do whatever updates and value adding… Your just as dependent on your % of ARV when doing value adds as anything else… your ARV is based on the value after the value adds…

import · July 15, 2005, 11:16am

Re: Value Adding Rehabs-Anyone doing this? - Posted by Will

Posted by Will on July 15, 2005 at 11:16:10:

Keep in mind that every area is very different, so what may be true in my neighborhood in my town may NOT be true where you live.

The only rehab I have done of this nature was in a house that I bought to live in. I added a full bathroom to a 3/1 to make it a 3/2. This was no small project. I didn’t section off some corner of the kitchen or family room to make a bathroom, but instead I took out an upstairs wall (upstairs was not as big as downstairs) and built out over more of the bottom floor. I also made basically a walk-in closet type of storage space.

Altogether, this cost a little over $20K. I moved in five years ago and the house has certainly appreciated some since I moved in. I could sure sell it for plenty more than I bought it for. But how much value did it actually add to the house? Maybe not much more than $20K to $25K OVER what it would have appreciated anyway. And it sure was a hassle!

My very limited experience in this type of endeavor would make me pretty cautious about that type of rehab as an investment tool. For my house in my neighborhood, it’s been a great quality-of-life improvement, but it wouldn’t be the greatest investment decision I’ve ever made.

There is an inherent difficulty to assigning value to something you haven’t seen yet. There are a lot of risks that you are adding to every assumption you make. Every estimate you make on a complex project has more variables that can screw up…and cost you money.

But I’m sure it could work in some areas.

import · July 15, 2005, 11:56pm

Re: Value Adding Rehabs-Anyone doing this? - Posted by Cletus

Posted by Cletus on July 15, 2005 at 23:56:54:

“if the granite isn’t exactly the right shade rip all 1500 square feet of it out” on the lake.

I once had 1500 square feet of granite on the lake…unfortunately I put it all on the starboard side and I still can’t get that boat off the bottom.

Just kidding, nice post.

:O)

import · February 6, 2006, 2:43pm

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import · July 15, 2005, 7:30pm

Re: Value Adding Rehabs-Anyone doing this?-Sean - Posted by Marcus

Posted by Marcus on July 15, 2005 at 19:30:36:

I understand the concept of 65% of ARV including updates and value adding, I am more curious as to the 2 seperate schools of thought when approaching a “fixer”. Some may consider a “fixer” a property that needs a complete overhaul, others may think of a fixer as a property not being utilized to the fullest-think adding a second livable unit to a single family property if zoning permits. I am wanting to know if there are investors focusing on what I have called value adding projects as opposed to complete overhauls, and if they are having success with this method.

Thank you for your feedback, I do appreciate it.

import · July 15, 2005, 8:23pm

Re: Value Adding Rehabs-Anyone doing this? - Posted by ski

Posted by ski on July 15, 2005 at 20:23:51:

I do mostly rehabs. Good business here in sunny SWFLA. For the most part adding a pool, lanai, garage, landscaping, etc. will not add value, it will add SELLABILITY to the property. Whatever you put in you will recover dollar for dollar. When I do a total rehab it will include kitchen ('cause that is where the D/W will live, the bath(s) where the D/H will live, remove carpet and do the ENTIRE house in tile, replace windows, doors (6 panel) install lever doorknobs, new vanities, paint inside and out new roof if more than 10 yrs. old, paint driveway, add walkways, screen or rescreen all windows, new garage door, replace all recepticals and switches with “decor” models, new fridge and range, install or replace dishwasher and disposal, etc., etc., etc.,. I do it right. Most of my deals will make at least 90k.

import · July 16, 2005, 11:45pm

Re: Value Adding Rehabs-Anyone doing this?-Sean - Posted by Sean

Posted by Sean on July 16, 2005 at 23:45:38:

The short answer is YES, folks do it all the time… though instead of “Value Adds” this in my experience is generally referred to as “HIGHER/BETTER USE”… And often it can invole any gammit of things… and not all of them equate to actually building/repairing something… sometimes depending on the situation a Higher/Better use can involve demolition… IE A commercially zoned plot that has a house on it… often the land is worth more with the house leveled than the house repaired…

There are entire branches of REI with folks taking old homes and buildings and turning them into Condos, or multi units, or whatever…

import · July 15, 2005, 8:51pm

Question Ski - Posted by Marcus

Posted by Marcus on July 15, 2005 at 20:51:58:

Ski, thanks for the comments. Just curious, if you are making 90K per rehab what are the market values of the homes after you fix them up? What is your average cost to do the overhaul? Are you buying at substantially below market, or taking advantage somewhat of the blistering appreciation we are seeing in SWFL?

I know these are somewhat personal questions, but the anonymous nature of these boards lends themselves to sharing. =)

import · August 22, 2005, 7:40am

Re: Value Adding Rehabs-Anyone doing this?-Sean - Posted by Niklaus Worth

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