World Wide Property Sales
Prehabbing for Big Cash in Hot Markets
by Steve Cook
I am certainly not going to take any credit for coming up with the term
“prehabbing” or inventing it as a method of 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
investors 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 not advocating the above formulas. This is just my
observations of what I think investors are thinking when they buy these days.
After working through this formula, investors are paying near retail for homes
that need work. 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. That 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. The
auction route, with a good auction company, has proved to be extremely
worthwhile.
An example of a deal that I just did the other day is as follows:
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.
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 market continues to appreciate the way it has been, many investors using
this 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 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.
Bio:
Since 1998 Steve Cook has flipped many 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 and rehabbing houses. Steve Cook is dedicated to helping
others succeed through understanding and aggressively applying his time-tested,
step-by-step approach to flipping real estate.