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Diamonds In The Rough – Polishing Properties To Realize Their Real Value
A new story gets passed around each day about someone buying a property on the cheap, revamping it, and make a killing from these simple steps. As a property investor, this is where you make a name for yourself as a real estate maverick. Success in executing this is the ultimate of investment value plays. Getting first wind of such deals may require the help of property agents. But it is what you do to the house after that which makes you the lead character of stories told in folklore.
Investors and common buyers look for properties to buy at prices below what it is worth on the market. You would think that no one who is sane will sell their homes at a loss. So you might be surprised to find that most people who sell their properties below market price are making very logical decisions. Don’t get me wrong. You are not going to find a mansion in tip top condition to buy at $10. But if the mansion looks like it was the receiver of a hardcore bombing, you could get it at 20% off at least. Alright enough about buying at low prices. Let’s talk about polishing that rough diamond you have in your hands to realize it’s value.
When you do find a good buy which requires you to revamp, repair and refurnish, it has to meet one of these criteria to make it a worthwhile investment value play.
1) Big discount on the property value
2) Easy repairs that you can do quickly and sell to potential buyers
3) Easy repairs that you can do quickly and cash out the equity in the property by refinancing
This is a business. You are running the supply value chain and the end user is going to pay market price. This means that each dollar you spend on polishing your diamonds, you should expect to get more back in return. Set your expectations to between 3 to 5 times. So if you have spent $100,000 on replacing the flooring, new painting, sewage work, and remodeling the garden, you should be looking at selling the property for at least $300,000 to $500,000 extra. The end buyer or tenant implicitly understands this and is paying for your added value as part of the deal.
It is about now when you might think why would a property owner sell to you at a big discount when he can do the above and sell at a higher price? The simple answer is that they are not investors and will not go through the trouble. If they are investors, they could be running into cash flow problems or need to focus on other projects. Big properties are also often inherited. So these owners are often interested in easy money and instant gratification without having to put in considerable effort for them. They could be in an urgent need for cash to pay a down payment for a red Ferrari.
To have a serious eye for diamonds in the rough, you have to have some knowledge of building maintenance and repairs. This is because being able to quickly identify the kind of work a property needs will give you a quick idea of how much you will have to spend on them. It translates to the discounts you will ask for. Of course you can hire a professional to conduct an inspection. But time delays can allow another bidder to join the party.
Costs involved for maintenance and repairs differ greatly. Repairs costs a lot more than just maintenance work. For example, you must be able to identify whether the paintwork of a building needs a touch up or a new paint job. Or whether the water overflow is just a simple clog or a sewage problem. Sometimes a crack in the wall may just look like a quick fix. But it can turn out to house an army of termites waiting to bite into your bank account.
Depending on the extend of repairs you have to do, serious work may require tenants to move out to commence. This not only causes you to spend money on repairs, you are going to lose cash flow as well from tenants that have to move. Undertaking such a project requires carefully cash planning. Should you miscalculate and have little buffer, You may have to sell off your property as there is simply not enough money to complete the works. Only finding out about this halfway through the repairs will be a nightmare.
The best way to stay away from these investment nightmares is to avoid buying properties that requires major extensive repair work. The selling price could look like a best buy from Cold Storage. But the costs needed to do up the place can be lethal to your cash flow. To avoid these situations on your existing properties, remember to do consistent maintenance without deferring them. Prevention is better than cure.