Maximizing Profit with a “Prehab”

Flipping houses to fix-up guys or retailing houses in better condition to people who are looking for a place to live is a solid plan that can generate an excellent, consistent income.

If we’re smart, we can take that income to another level without getting involved in rehabbing properties. I hate renovating houses. In fact, I’ve got a two-word formula for disaster–my rehab.

If you’ve never participated in a rehab or are like me and swear you never will again, you can understand my apprehensions. It’s too easy for a rehab to get away from you. You either do too much, spend too much, take too long, or get involved with subcontractors whose idea of “on time” is anytime within a few weeks of when they said the job would be completed.

And frankly, you haven’t lived until you’ve paid someone for materials and instead he decides he’d rather just keep the dough for himself and you never see him again–or even worse, pay for the work only to later discover that it all has to be redone because it wasn’t done properly the first time through.

As for quality, that’s another issue. Do you know I have painters who want to know ahead of time if the property being repainted is going to be sold or turned into a rental? If you screw up and say “it’s a rental,” they paint doorknobs, and that’s not good.

Quality is subjective, but geez, I can’t tell you how many times I’ve been out with my Mikita sander and my spray-on “texture” fixing dry wall dings and dents that weren’t properly repaired the first time by the “professionals.”

Now, I know there are fix up guys who can successfully run rehab crews and control everything that goes along with that, but I’m certainly not one of them. Frankly, I’m just not interested in rehabbing houses. Even though there is money to be made, it’s not the sort of work I’m looking forward to.

“Prehabbing,” though, is another matter altogether.

What’s Prehabbing?

Let me start by telling you that it’s not rehabbing at all. No hammers and nails involved, no kitchen counter tops or bathroom floors to play around with.

Prehabbing involves simply knocking off the rough edges of the rehab job to allow our prospective purchasers a quick look at the property’s potential. If the property is buried in three feet of thicket, then sometimes even those home shoppers with “vision” can’t comprehend what it might end up looking like.

Here’s an example: I used to restore little British sports cars. I’d buy them rough and fix them up to get them sold. Paydays were great, and I’d get a nice check for my efforts, but I quickly realized that check wasn’t much more than repaying me for all my work and materials. To do the thing right took too much time, and you just couldn’t sell for a price anywhere near the amount of effort it took.

I had a friend though, who did make money buying and selling cars. He didn’t do much of anything to them. And repainting? Forget it. He’d pick out one spot on a fender, a spot maybe six inches wide, and he’d buff out a mirror like finish into it in less than ten minutes, tops.

He didn’t sell restored cars. He’d sell fixer cars to people and explain their potential just by showing them “the spot.” Once they’d seen themselves reflected back in that darn spot, they imagined what the car could end up looking like if they put a little work into it.

Now, his paydays were nothing like mine, but his fix-up investment was twelve cents worth of rubbing compound and five or ten minutes of elbow grease, and his profit was real.

We can do that same thing with houses. Prehabbing means we don’t even think about restoring. Instead, we just rub out some of the rougher spots and make the property’s potential shine through. How? By transforming “empty and overgrown” houses into something that looks cared for and lived in, often in just a weekend.

A total rehab entails lots of work and of that work, only a few things really end up making you money. I’ve never figured out a way to take a house that just needs a new roof and dramatically increase its value by putting on the new roof.

Sure, the value goes up, but it goes up by just about the same amount the new roof cost me, so my profit ends up being about the same as that profit I used to earn fixing up cars–zip. A serviceable roof is expected whenever you sell a house, and replacing roofs doesn’t result in making profits.

Needless to say, new roofs aren’t high on my prehab “to-do” list. Same story for replacing fixtures and appliances, or windows or chimneys or foundations or any of that other rehab stuff.

What improvements do pay off?

By far, the number one profit generator is a straightforward CLEAN UP. It took me a long time to understand this. I, like most, assumed I’d have to “fix-up” to make money. Turns out, the profit is not in the fix-up, it’s in the “clean up.”

So whenever I take on a new abandoned property, getting the place all cleaned up is essential to not only realizing its full profit potential, but also essential to getting it sold.

The simple truth is a cleaned up property is going to attract more buyers and as a result, get moved more quickly. The results can be dramatic!

Cleaning up properties that need lots of repair work may seem backwards, especially if that repair work means it’s all going to get dirty again. Doesn’t matter, I clean it anyway.

Clean up doesn’t normally mean I’ve got someone in there polishing the fixtures. Clean up is essentially two things that can be broken down into “exterior” and “interior.”

Exterior work that pays off

Exterior work includes all that overgrown stuff that initially led us to the property itself. That means we fire up the weed whackers and lawn movers and get that overgrowth out of there.

Around here, we “bark” everything that isn’t lawn. That means we weed whack all the flower beds or areas that weren’t grass and have all that vegetation hauled away to the dump.

We spray a weed killer over the little whacked off weed stems so they won’t grow back, and then we spread a truckload worth of beauty bark three inches deep. Know what? That’s often enough to transform the place!

Costs? A truckload of bark is a hundred fifty bucks (that’s not a pickup truck, that’s a twelve yard dumper). And the cost of that run to the dump is going to depend on how much stuff ended up being hauled away.

Often, it’s a huge pile, and that’s typically somewhere around one or two hundred bucks for my trash hauler guy to come out and drag it all away.

Figure another hundred bucks for a couple guys to weed whack and spread the bark, and the weekend ends up costing somewhere around five hundred bucks.

Do you think we increased the value? You bet we did, but the big question is, did we increase the value by enough to actually make a profit.

Again, in nearly every case, we transformed the appearance of that place and turned it from an eye sore into an eye catcher.

This clean up weekend often results in a three, five, or even ten thousand dollar increase in the perceived value of the property. Even better, a property that simply would not have sold for anything, but at a “fire sale” price suddenly becomes marketable.

Sure, we could have just flipped this thing to a fix-up investor at that fire sale price and made a few bucks if we bought it right, but why would we ever consider doing so when we know how easy it is for us to maximize our profits by taking care of the little things that generate the big returns?

Had we just flipped “as is,” our investor friend would have worked that prehab weekend and earned that quick profit for himself.

Inside work that pays off

Inside, it’s more “addition by subtraction.” Anything that subtracts from the property’s value, I want it out of there. Tops on my list of things to haul to the dump? Again, the previous owner’s junk.

I want it bare to the walls and if that carpet stinks even just a little bit or is showing wear, I want it bare to the floors as well. Old drapes go right on the trash pile too. The idea here is to get rid of virtually everything that might somehow detract.

Most people don’t really get off on having to go through the previous owner’s garbage, so get it all out of there.

Sometimes they leave old furniture or shelves in the garage or some things that really aren’t halfway bad. Sometimes the stove and refrigerator are a little on the beat up and dirty side but are still serviceable.

Forget ’em . . . junk it all!

I’m also going to install mini-blinds whenever possible. They’re cheap, quick and easy to install, and they really dress up the place.

Most importantly, you stick a plant on the window sill and close the blinds, all of a sudden that empty place looks lived in, and lived in beats the heck out of vacant.

Now that you’ve got it all cleaned out, there’s one last step . . . you’ve got to get it all cleaned up. But don’t go crazy here. I’m not talking pristine.

Just get the jelly off the counter tops and vacuum the bugs out of the window channels. Shampoo the carpeting. Maybe spend a few hours tops getting the windows halfway cleaned and the garage swept out. You know the sort of things.

End up with a clean palette

Ideally, we want to end up with a clean palette here. We want our prospective buyers to view this place and see gobs of potential, and we don’t want to spend more than a few days putting it into that kind of shape.

When we’re through, we hope to end up with a nice little shell that’s ready for that new roof or new kitchen and bath or new foundation.

This is where I generally step off and let the rehabbers come and take a look. Since the place is no longer an eye sore, I can even retail it to “fixer” types who are looking for a home of their own and enjoy doing the “rehab shuffle.”

Had I not cleaned it up, they’d drive by, take one look, say “oh yuck” and never even slow down. Not only has the value increased, but a place that simply could not be sold is now able to actually attract buyers.

By CREOnline Contributor

A content contributor to the original