As crazy as it might sound, buying houses to fix and sell is working right now when done properly.  I attribute this to the following reasons: 1) Retail demand has gained momentum from the First Time Home Buyer Tax Credit which will likely be extended past the current November 30^th, 2009 deadline and may even be expanded to provide a larger credit to a broader group of homebuyers (there are a couple legislative proposals currently in the works to do this); 2) Home buyers want a good deal but many don’t want to do the work associated with buying a REO property!  This means if an investor buys a REO/foreclosure house at a great price, does nice work to it, and prices it below market value, then it will likely sell quickly; 3) Because it is hard for investors to get long term bank financing in this credit environment, it makes sense to focus on projects with a buy, fix, & sell game plan.  Along with this point, less long term “landlord” investors are buying houses because they can’t get long term financing, so there are less investors bidding for REO houses (aka less competition). 

Of course, anyone can point to reasons why these projects could be risky (down market, large housing inventory, limited number of retail buyers, etc.), but if approached correctly, this can be a very worthwhile and profitable strategy.  The basic approach to a successful buy, fix, & sell project remains the same in any market but in “up markets” it is easy to become lax with your purchase criteria and rehab execution because you can do so and still make money.  This causes investors to become lazy in up markets and take shortcuts that eventually catch up with them when the market turns for the worse.  In today’s market, taking shortcuts will most definitely hurt you and possibly turn your project into a failure; so it’s time to get back to the basic fundamentals:

1) Have strict criteria for screening potential houses (example: 3+ bedrooms, 1.5+ baths, garage, basement, no “war zone” neighborhoods)

2) Have an accurate repair budget that includes premium upgrades to help your house sell fast.  Do not ignore things like damp basements because buyers are picky.  Make sure you budget to fix everything thoroughly and properly.

3) Be realistic about what the house WILL (not “could” or “should”) sell for and then plan to sell it 10% below that price.  Also plan to pay for your buyer’s closing costs because that is what most buyers demand (this could be thousands).

4) With #2 and #3 in mind, make sure you purchase the property at a large enough discount from where you plan to sell it to allow you to make all budgeted repairs, pay closing costs, and still net a nice profit.

5) Have the time and energy to stay on top of your contractors so work gets done timely and cost effectively.      

 6) Market your house in every way possible.  Your realtor should cover most of this for you, but anything extra you can do can only help.  To name a few: MLS, flyers in neighborhood mailboxes, websites, signs, newspaper ads, Craigslist, and business cards on sight for contractors to give inquiring neighbors.  One thing I’ve noticed is that (skilled) rehabbers who spend lots of time at the job site (either doing the work or supervising) seem to be the best at selling houses fast.  Many times the house is sold to someone who inquires midway through the project.    

What you are reading is not just theory.  Ohio Rehab Loans is actively funding these projects.  Here is an example of a project we funded that just SOLD:

Property Details: 3 Bedrooms, 1.5 Baths, 2 car, 1,580 sq ft split level on Addison Drive in Reynoldsburg, OH

Purchased on 11/28/08     $71,000

Rehab Costs                          $17,000

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Total Project Cost                 $88,000

Sold on 6/19/09                 $124,900

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Gross Profit                           $36,900*

  *Does not account for closing costs paid by seller.

The above is a real life example of what is possible in this “terrible” real estate market.  If you would like to buy, fix, and sell a house please call me at the number below.

Please note that this column reflects the opinion of Chris Knoppe.  Comments or questions can be directed to Chris.Knoppe@OhioRehabLoans.com. For more information about Ohio Rehab Loans visit www.OhioRehabLoans.com or call 614-433-0570 ext 101.