Proceed with Caution
by Tony Youngs
As I go to various states pursuing distressed property acquisitions, I am finding an uptick in the number of sellers that are willing to sell their off-market properties. These include probate situations, tired landlords, elderly moving to assisted living, vacant properties, bankruptcies, and pre-foreclosures. The problem is, sellers still have the impression their homes are worth a lot more than is often the case. They all remember their neighbors getting multiple offers and selling for above the norm, but that has all changed…somewhat. I live in a high demand area and houses can sit on the market for 30 days before they go under contract. Around other parts of the country that I visit, it can be even longer. Although most of the housing markets are still seeing lower than normal inventory, higher interest rates have had an effect as well as the uncertainty of government affairs.
The reason I say proceed but with caution, is because if you are going to rehab a property, right now, the rehab costs are outrageous. The cost of materials has come down a little from the pandemic but they are still high and I think those highs are here to stay. Businesses know that people are willing to pay and consumers are spending like crazy. However, on the other hand, contractors are charging much higher labor costs. Sheetrockers, framers, painters, plumbers, electricians, and HVAC servicing is much higher today.
I was rehabbing houses all through the pandemic years and I am doing one right now. The costs are much higher than they were even a year ago. We have used the same plumber, electrician, and HVAC guys for years and their prices are much different. When we sit down with them to go over the figures, comparing them to our last few jobs and ask them why the difference, they show us the higher material costs and how their labor costs are more because of the cost of living being higher (groceries, gas, food, clothing, and shelter, etc.). Just to make sure we do our due-diligence, we get estimates from other companies and have found the prices are very comparable.
My point is, as you find property owners willing to sell, make a sensible offer and stick to it. I make offers every week and when a seller tells me it is too low, I say, if you are willing to fix some of the items, I can go a little higher. After researching the costs and time involved, it doesn’t take long for them to see your way of thinking and then you can negotiate. Some sellers refuse to budge but it’s better to walk away than to lose money.
Today, if you do buy a house and begin your rehab, and it seems to be costing more than you thought, nobody can force you to finish it. If a project starts looking like you will lose money or just break even, stop your work and sell it incomplete. There is always someone that will buy it in the condition it’s in and finish it themselves. Especially if they like the location. Homebuyers realize they are here for long term and don’t mind spending money for their long-term home. Even in the recent days of multiple offers, I would fix up a house beautifully and sell it for top price, and then the homeowner would sink more money into it. Why? Because they were so happy that they got a home in the area that they wanted.
When we rehab a house, we make a list of what we want to accomplish this week and then I stay on top of that list to make sure it gets done. I shop around for good prices, I use low-cost labor to do many of the things like demolition, carrying trash to the dumpster, keeping the grass cut, painting, replacing broken glass, applying fire retardant caulking to the holes where new wiring was installed, digging drainage ditches, etc. There are plenty of important little items like those.
We also have a guy who has a full-time job but wants to earn extra money after work. He is an excellent carpenter and installs new windows & doors, installs trim around the windows, puts in attic stairways, etc. Knowing him saves us plenty of money. However, I personally still do some of the work that I can. It keeps the other workers busy when they see me on site working. There are still many more money-saving things you can (and must) learn when doing a project. One thing I learned from my father when getting an estimate; Don’t give the impression that you are rich and successful. Project costs can be higher.
The bottom line is this, proceed with caution and make your offers, but be aware of today’s renovation costs. Learn all you can about estimating repairs.
Tony Youngs has been an investor, trainer and a national speaker for over 32 years. He is the Author of The Hidden Market System and is best known in the industry for his “Hands on In the Field” trainings that take place around the country. Learn more about him by visiting TonyYoungs.com.