Builder Wonders: Is There Better Money In Rehabing Or Building New?

I’m a new home builder in the Portland, OR metro. Now and then I come accross houses that would be prospects for rehabing but really wonder if it’s worth my time once all is said and done. I can make 7-10% on a new house which ends up being 50-70K on each house before my overhead. What kind of profit can you expect on a typical rehab? New home sales are starting to slow just a little so I’m keeping this in mind as a back up plan just in case. Also, I assume you’ve got to find houses with some serious equity to make a rehab project work. With the frenzy of refis over the past 20 years it’s hard to find anyone with that much equity to really make a deal work…as I’m not super interested in short sales at this point. The biggest challege I have in building homes is finding dirt. Other than that, it’s pretty much a slam dunk once you clear that hurdle. What advantages do you seasonsed rehabers see for someone in my situation when it comes to taking on a project? Thanks.

My personal opinion is that you are now in the softest, easiest side of the business. You can used licensed subs each step of the way, pull permits and build everything according to code…and still make $50K to $70K per house? Wow!

You may find a few rehabs that will feed you, but there will be very few.

Most rehabs cannot afford licensed contractors and use Jack-of-all-trade guys to do much of the work. It is almost impossible to get firm quotes on rehab work. The story “It all depends what I find underneath” precludes firm quotes.

Then, you end up depending on peiple usually paid houly wages, and a boss needs to be on the job or close by to be the decision maker. How far do we go? What do we fix and what do we cover up?

I’d suggest buying a property that needs rehab and trying your hand at it. It may be a lot more complex and require more of your personal participation than you are wiiling and able to give. Then again, you may like it!

Just my $.02.

I have a recent post on my blog: www.BayAreaREI.com* that deals with this question in more detail. Sorry for the blatant self-promotion, but I thonk you will find the post relevant to your question. There is certainly money to be made in flipping houses, but much like what you described with new construction – finding the deal is the hardest part, and is where the money is made. Here is an excerpt from the post on my blog:

I often get asked what I look for in an ideal flip house. Rather than take the obvious approach and simply say “buy the ugliest, most neglected house in the best neighborhood”, I want to explain how I quickly look at the numbers to see if the house is worth the time and effort. I have a nasty Excel (proprietary model, I might add) model that cranks out every excruciating detail of the flip financials, but the chart below will suffice to explain what I look for in general terms.

First, I pull comps from MLS (this is where having a broker license comes in handy). I pay particular attention to the comps to make sure I am selecting similar quality to my proposed finished renovation with the same school district, similar bedroom and bathroom count, lot size, etc. I then plot the comps against my tentative purchase and exit prices to see if everything looks reasonable before doing any further analysis. As you can see above, I am purchasing significantly under the market, and plan to sell right at the average of my comps based on the Log-fit from the model. I never want to project a sales price over the average – even though I know from experience that I will sell above the average. I want to be pleasantly surprised from the sales price rather than have sleepless nights about the sales price if the renovation costs run high or the project otherwise goes sideways.

I generally look for a house that is a starter home in an exceptional neighborhood with excellent schools. In my experience, schools drive my local market for starter homes, so I give the school district a lot of weight in determining value. Closing costs (on both the purchase and the sale) eat up a lot of money, so I don’t subscribe to the theory of finding a home that can just be painted and carpeted and sold in 4 weeks. That does not work in my market where the average sales price is something like $700,000. So, I am looking for a house that I can purchase for at least $225,000 less than the average price of the home’s comps in the area. As you can guess, this means that I am purchasing a house that is a disaster area (I almost got sick from walking in the Lafayette house – that’s when I knew I had a winner). A house in this condition generally needs $60-90k in work, and will take somewhere between 2-4 months to renovate.

I plan to discuss my approach in more detail later, as I feel this is an area neglected by all of the ‘flipping’ books I’ve read, and to me seems the most important part of analyzing a potential project. Large real estate developers certainly don’t initiate projects based on a back-of-the-envelope calculation, so why should individual investors expect to put their life savings on the line with even less forethought?