What is Rehabbing?

hi guys just wanted to know what does rehabbing mean.

Hi alexthegrape,

Rehabbing, in my opinion is one of the safest and most rewarding ways to make money in RE and is currently the only area I work. It’s a lot of fun to buy a junker house and see it through to it’s finished product. Don’t get me wrong, I am not a handy person. I work with a contractor and just write him a check to do all the work for me. But I still oversee everything and make sure it’s running smoothly.
You should be able to avoid buying a “money pit” if you properly inspect the house and have a licensed contractor go through it.

Let me give you a run down of how a “rehab” loan works. Go through a mortgage broker. My lender pays 80% of the ARV (after repair value). I bought a house this week (REO) for $40,000. It needs $12,000 in repairs. Thats $52,000 total that I’ll need a loan for. The house appraised for in the 80’s. So 80% of $80,000 is $64,000. That’s the maximum they’ll loan me. But I only need $52,000. If I am able to sell the house for $85,000-$52,000=$33,000 profit. I didn’t factor in closing costs and realtor fees but you get the idea. All I had to put into the deal was a $2500 dollar deposit when I made my offer to purchase.Rehabbing is only one of many ways to make money in RE, but it’s one of my favorite. Hope this helped.

Hi Mr.fancypants,

Wow, what a great deal. Yes, it seems like the REOs would be the best investment for me. I also enjoy remodeling homes. Did you do the inspection with your contractor before the earnest money or after? And how did you find out the appraised value for the property?

Yes, I always use my contractor to do a walk-through of the house before I make an offer to purchase. I also get comps from the realtor. I compare the comps and CMA to the tax appraisal that I get at the county tax appraisors office. Mine is online. The key to being successful in RE is doing your homework. And you have to be kind of quick about researching a property, because you need to beat your competition to making the offer. If you offer 80% of the list price and are the 1st to make the offer, you’ll pretty much have the deal in the bag eventually, even if the bank counters.

Hi Mr.fancypants,

How many properties do you purchase a year? How long does it usually take to eventually sell the property and make a profit?

Depending on the repairs needed, the rehab could be finished within a month and put back on the market. But it’s really kind of a crap shoot when it comes to knowing how long the house will sit on the market. My goal is always to sell a house within 3 months after it’s repaired. At closing I usually ask my lender for a repair buffer and I’ll take my monthly mortgage interest-only payments out of this, just to keep out of pocket expenses to a minimum. It’s a pretty safe way to make money. There’s a lot of niches in RE that you can work. But honestly, this is the only one I understand. I am trying to branch out into pre-foreclosures. Good luck.

During those monthly period, are you paying for the monthly mortgage with your own pocket money?

Sometimes yes, sometimes no. It depends on whether or not my repairs are under or above budget. If my repairs are less than what I budgeted well then I have extra money to pay my monthly mortgage. If not, then I’ll have to pay out of pocket. But interest only loans are much cheaper than traditional loans. To make $10k or $15k on a flip I don’t mind spending $300-400 month, out of pocket. Hope this helped.

Thanks it help very much. I dont think I can make anymore mortgage payments that are over $1000. What kind of loan do you use? Are interest only loans higher rates than others? Is it a 15/30 year loan?

You’d be surprised at how much house you can buy with an interest only loan. A lot of normal people who aren’t investors use interest-only loans because for a few years they’re really cheap. This allows them to afford more expensive houses. But if you’re an investor and you plan on flipping a rehab it’s ideal, because you’re not paying any principal, only the interest. My lender, which is a bank, only charges me 6% with no prepayment penalty. Here’s what you need to look for in a loan:

-up to 80% ARV
-no prepayment penalty
-as few points as possible
-no downpayment
-very low interest rate
(some of these criteria depend on your credit rating, obviously)

I probably forgot some stuff. But yah, if you think this is something you want to do, just go to a mortgage broker that deals with RE investors and find the one that works best for your situation. It’s called making money with other people’s money. Have fun and good luck.

Yes Mr.fancypants, I am very excited. I really want to get started on REOs ASAP now. What are some problems you can run into with REOs?Title problems? inspection problems?

Clear title should be easy to establish, because the house is fully owned by the bank. But your lender will still require you to carry title insurance (usually less than $500). But if you want to do REO’s the only good deals your going to find are those houses that are run down. All other REO’s will be sold at FMV. If you find an REO that needs rehab, be sure to get as low a price as possible to allow for repairs. As far as inspections go, just include the phrase “contigent on acceptable inspection” in your contract to buy. That way if you pay your earnest money and find out the house needs $80k in repairs, you can back out of the deal and get your money back. In RE you’ll find that every deal is a little different and will require seperate judgement. Hope this helps. Just get out there and start making offers.

Wow that first reply to such a general question was one of the BEST replies I’ve seen. Thanks for such a clear, spelled out approach to what sounds like a great way to invest in properties.

I too would like to add my thanks for such great responses Mr. Fancypants.

A couple more questions that are burning in my brain if you don’t mind:

  1. What resources do you use to identify bank owned property? Are some more effective than others?

  2. How did you go about finding good contractors that you can rely on?

Thanks for the insight!

Hi shielke,

There are some pay websites that supposedly offer current REO listings. I had very poor success with those starting out. Plus, they were expensive. Now I search listings on the MLS and then take that address to my on-line tax appraisers office. If it says “foreclosure” on MLS, then you know it’s been repossesed by the lender. If you see a banks name under where it says “owner” on the tax appraisal, you know it’s been repossesed. Those are my 2 tricks. Also, check out REONETWORK.com. Just email all the realtors you find there and tell them you’re an investor that buys reo’s. The more realtors you work with, the more will want to start selling you houses. If they know you want reo’s, they’ll show you reo’s. Hope this helped.

Hello everyone! I was away all last week so I am catching up on posts this weekend. Mr. Fancypants has got the goods on this one and we have been discussing loans that help rehabbers. True rehab loans also help with the problem of seasoning issues when selling the property, conventional banks don’t want to finance flipping! But when you purchase a bank owned or distressed property the rehab loan helps you get from point A. (purchase) to point Z (sale) without seasoning issues. During the renovation phase it will require inspection of progress and title updates which will allow you to sell legitimately at a much higher price. Also good rehab loans will allow you to escrow Mortgage payments so that you don’t pay a dime during construction.

Hey Fancy,

Do you mind sharing which financial institution you’ve been working with to get your 80% ARV, no down pymt, low interest rate and no prepayment penalty. I have a pretty strong debt to income ratio, solid credit history and nice amount of cash reserves and the companies I’ve talked to act as if I’m speaking a foreign lang. when I start mentioning the conditions of the loan I’d like. I’ve only talked to 4 institutions so far but they all act as if these terms are impossible and I’d like to save myself any unnecessary wheel spinning. I realize that your experience in the market prob has your lender comfortable w/ extending you these terms and that a newbie like myself will prob have to settle for a little less but I’m just trying to find a company that acknowleges that these kinds of terms exist and one day, when I’ve proven myself as a savy REI, will extend them to me as well. Thanks in advance!

Bring out the “ole dog and pony show”. On my first rehab, I laid out my plans for my REI. It also helped that I had a standing offer on the table for a property with 2 rehabs on it. Bankers Like to know that you are serious. My first 5 rehabs were with the same banker. We had never met before my first visit. I laid out in detail what I wanted to do to the properties and how I was going to do it. I also gave him an itemized cost “gestimate” sheet. It also helps if you do your best to sound confidant and secure in your plans. Hey, I was really nervous the first time. Now me and my banker are on first name bases and I value his opinion on my projects. I hope this helps!

Mortgages/Mr. Fancypants,

I’m capable of doing very nearly all work on rehabs myself (elect. plumbing, heating I won’t do myself). The lenders that I’ve been working with say they want licensed contractors to do the work. Is that standard operating procedure or are there lenders who will let me do the work myself? Do I need to get a license or is there a way to work around that?

I’ve heard lenders say the same thing. My thinking is that they do it that way for risk protection on their loan. Any joe-blow could run a scam. The thing I recommend is to buddy up with a contractor. I use the same guy on all my deals and we’re informal partners. Hope this helps.