Making the Right Rehab Choices
I talk to a lot of first-time flippers who ask the question: “When rehabbing a house, how do I know what level of finishes should I use?”
Generally, when people ask this question, what they’re really asking (or should be!) is, “What should I be doing on my rehab to maximize my profits while minimizing my budget and the number of days my property sits on the market.?”
Specifically, there are some very specific rehab decisions flippers need to make for every project:
- What type of flooring should be used (carpet, tile, wood, laminate, etc)?
- What type of countertops should be used (laminate, granite, etc)?
- Should I replace the cabinets with new or just refinish the existing?
- Should I include appliances in my sale?
- What other amenities should I upgrade (tiled shower, jacuzzi tub, double vanity, etc)?
- For my lighting and plumbing fixtures, how high-end should I be considering?
So, how do you determine the answers to these and other rehab questions?
There are a lot of factors that will go into your rehab decisions, but here are some of the biggest ones to keep in mind:
1. Meet or slightly exceed your competition. Before buying a house to rehab, you need to do your homework. And part of that homework is knowing all the other houses in your area and price range that are listed for sale or have recently been sold. These houses are your competition, and knowing the design choices made by your competition will go a long way towards helping you make good choices for your flip house.
The goal should always be for your the finishes in your house to be at least equal, and preferably slightly better, than your competition. For example, if every competition house has carpet in the living area, then *new* carpet in the living area is probably perfect; that would be enough to allow you to stand out. Or, if competing homes have laminate flooring, upgrade to real hardwood; again, one step up makes a big difference.
Using finishings that are just slightly better than your competition will allow you to maximize your opportunity to make a sale (remember, you’re better than the competition), while minimizing the impact on your budget. While putting a gourmet kitchen in a house where the competition doesn’t even include appliances will certainly attract attention from buyers, the huge extra expense is not necessary to make a sale, and can even jeopardize your sale (see #3). Just putting brand-new, low-end appliances in your kitchen will allow the house to stand out from the crowd, without breaking the bank.
A lot of people think that they should always be several notches above the competition, but there are a many reasons why that’s not necessarily true (keep reading).
2. Be prepared for the appraisal. The main reason why you don’t want to overdo your rehab is that your house will likely have to appraise during the sale. Remember that if your house doesn’t appraise for the selling price, you’re either going to lose your buyer or have to drop your price. If you add too many high-end features and then try to sell for above market price (because clearly your house is the nicest on the block and you can command more $$$), you may have appraisal issues.
While the appraiser will take into account the condition of your property and increase the appraised value based on the rehab you’ve done, the increase in appraisal value will rarely exceed the cost of the renovations. For example, finishing a basement could cost upwards of $20K, but will likely only add $10K to the appraised value of the property. Not only will you not recapture that additional $10K from your buyer, but you run the risk of having your appraisal come in below the now-increased purchase price.
3. Kitchens and baths provide the greatest ROI. If you’re going to splurge on upgrades to attract buyers, do it in the kitchen and bathrooms. These parts of the house tend to provide the greatest return on each dollar spent. If you have to choose between building a workshop in the unfinished basement and putting a jacuzzi tub in the master bath, the decision should be obvious — go for the tub! Not only will the tub add value to the appraisal (where the workshop likely wouldn’t), but the perceived value of the bathroom upgrade far outweighs the perceived value of the basement upgrade.
There’s another reason to focus on kitchens and baths — these are the areas that the women tend to spend the most time, and therefore will offer the greatest selling points to the woman buyer. And remember, the woman is always the buyer. Women tend to make the final purchase decision when it comes to a home, so appealing to the woman’s preferences is never a bad thing.
4. If it’s in the budget add a “sizzle feature.” If you can afford it, adding one big “sizzle feature” to your rehab is a great way to wow your buyers. What’s a sizzle feature? It’s anything that your buyers wouldn’t expect in a house at this price range, and makes them feel like they are buying a house in a different price range.
In a low-end neighborhood, a sizzle feature could be on-site finished hardwoods, a jacuzzi tub, a double vanity in the master bath or stainless steel appliances. In a middle-income neighborhood, a sizzle feature could be a gourmet kitchen or a “media room.” And in a high-end renovation, a sizzle feature could be something as big as a swimming pool or movie theater. The point of the sizzle feature is to differentiate your house in one major way from the competition, and make your buyers feel like they are getting something that they previously thought was out of their price range.
With sizzle features, you probably won’t see a full return on your cost, but the house will sell faster and you’re more likely to get your full asking price.
5. Nicer rehab equals faster sale. It’s obvious once you hear it, but too often, rehabbers forget this simple point — if you want (or need) to sell your house quickly, be prepared to do-it-up nicer, even if it means less profit in your pocket. There are a few occasions when this point is extra important:
- If you have other investment opportunities on the horizon and you need to extract the cash from this project, consider doing a nicer rehab to generate a faster sale, allowing you to free your cash for the next opportunity;
- If the market is looking as if it’s going to downturn, focusing on a higher-end rehab at a lower sales price may cut your profits, but will save you months of frustration and stress when you’re trying to sell;
- If three other houses on the block were just purchased by other investors and will likely be coming on the market at the same time as yours, you will need to stand out to avoid having your property sit (while the others sell). Be prepared to cut your profits, if necessary, to ensure a quicker sale than your competition.