By: Stephen Cook
I am certainly not going to take any credit for coming
up with the term “prehabbing” or inventing it as a method
of real estate investing. However, I do want to share
with you what I have been doing in this super hot real
estate market in Baltimore.
As of late, I have seen a huge frenzy of people buying
just about anything. It was only a few short years ago
that homes which needed a little bit of work would sit
on the market for quite some time if they were not priced
right. In today’s market, I see fixer uppers selling
within days to homeowners and real estate investing
individuals alike for top dollar.
As an investor who buys properties to be profitable,
I’m amazed at what people are paying for properties
that need work. I attend auctions, but really don’t
know why I go because I know that I’m going to be outbid!
Before I can even raise my hand, the bidding passes
the amount that I was willing to pay. I get a kick out
of it and normally wonder how the buyer, who in many
cases is an investor, intends to make money.
I’m convinced that this is the formula that investors
are using today to buy properties:
ARV + 20% (appreciation by the time they sell) = ARV
to be used to determine purchase price. Then they use
this formula to buy: ARV (the inflated one) x 80% -
Repairs = Offer.
NOTE OF CAUTION: I’m definitely NOT advocating
the above formulas. This is just my observation of a
dominant formula I believe many investors are using
when they buy these days. After working through this
real estate investing formula, investors are paying
near retail for homes that need work.
Honestly, I don’t get it. I’m still buying well below
market value in this hot market and don’t even need
to rehab the property to make a nice profit. Instead,
I’m “prehabbing” the property.
What's "prehabbing"? Basically it means I’m simply
cleaning the homes up, cutting the grass and laying
some mulch, then selling “as is”. I’ve sold many of
these “prehabbing” homes by listing them and having
auctions. In fact the auction route, with a good auction
company at the helm, has proven to be extremely worthwhile.
Here's an example of a deal that I just did the other
day: The home was in a $230,000 neighborhood and needed
about $20,000 in repairs. I bought it for $151,000 (after
all costs). Three weeks after taking title and doing
some prehabbing work, I auctioned it off for $202,000.
The terms of the auction required the purchaser to put
down 10% in certified funds and buy “as is” with no
inspections. Additionally, the buyer has to pay 12%
interest to me on the unpaid portion of the property
up until the day of settlement. After all expenses this
deal will net right at $39,000.
Now if the investor who bought this property from me
used the formula that I’m guessing he did, his numbers
would look as follows:
$230,000 + 20% ($46,000) = $276,000 x 80% = $221,000
- $20,000 repairs = $201,000
Even if homeowners had purchased this property, they
would have received a fair deal. They could have fixed
up the house to their taste and still been into the
home for a little bit below fair market value. If the
real estate market continues to appreciate the way it
has been, many of investors using this real estate investing
formula will come out OK. They won’t do great, but they’ll
get by.But if the appreciation just stalls a bit, I
believe many investors will be hurting.
The moral of this story is that you don’t need to do
much along the lines of rehabbing in a super hot real
estate market. Will I ever rehab again? Sure I will!
When the Baltimore market changes and investors need
to offer the best house to get the most money, then
I’ll rehab again. But for now, I’m going to do as much
“prehabbing” and not rehabbing as possible.
About the Author: Steve Cook
Since 1998 Steve Cook has flipped hundreds of
houses as an active Baltimore-area real estate
investor. Steve’s unique specialty is the “flipping
homes 1-2 punch”, a proven system of real estate
investing that powerfully combines wholesaling
houses. Also the founder of www.FlippingHomes.com,
Steve is dedicated to helping others in this thriving
online community succeed through understanding
and aggressively applying his time-tested, step-by-step
approach to flipping
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