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Common Rehab Mistakes & How To Avoid Them (Part 2)

Published on Friday - July 18, 2014

This is Part 2 of the Common Rehab Mistakes series. For information pertaining to Part 1, please click here.

Mistake #6: Missing Hidden Damages

As perhaps the most difficult mistake to avoid, hidden property damage can account for one of the biggest costs you will incur while rehabbing a home. Despite due diligence and even a competent property inspection, hidden damages may lurk around every corner. Black mold, rotted studs and foundational issues are less apparent to the naked eye, but a significant problem none-the-less. While you may not be able to see them, you should at least expect them. Non-budgeted fixes are notorious for showing up in the middle of a rehab, and it is up to you to account for them.

Adding in an inflation cost can help compensate for hidden expenses. This will insure that your initial project analysis is on target, and that you are well within your budget. It is a good practice to allot 5% of rehab costs for unforeseen expenses.

Property Inspections

As an investor, you must take it upon yourself to conduct a thorough inspection of the subject property you are interested in acquiring. Of particular concern, however, are hidden damages. Unfortunately, unforeseen problems can end up costing an investor as much as two or three times more than they expected to spend on repairs.

More often than not, an inspected property can look immaculate at first glance; only to reveal substantial problems when a closer look is exercised. A strategically placed mirror may be all that stands between you and a sizeable hole in the wall. Therefore, you need to make sure you inspect every inch of the property with a critical eye. In doing so, you will not only be able to determine repairs more accurately, but you can simultaneously keep your budget in line with original projections.

While things may appear to be in working order, it is safe to assume that aging houses have their fare share of problems. Conversely, it is dangerous to assume everything is in pristine condition. Just because you can’t see a problem doesn’t mean it isn’t there. This, in particular, is where a large majority of investors find it difficult to project repairs. It is too easy to overlook a problem you can’t even see.

While every house has the potential for hidden damages, there are three aspects in particular that you will want to account for:

  • Lead-Based Paint
  • Underground Oil Tanks
  • Termites

These problems are significant and can completely halt any rehab. Worst of all, they are practically impossible to detect. Due to the severe nature of these problems, investors are advised to ask as many questions as possible before they actually purchase a property. It is entirely up to you to find out as much about the property as you can. Make sure you always get the most thorough inspection you can and do not cease until you have all the answers you were looking for. If you believe the seller to be hiding something, there is a good chance they are.

Mistake #7: Paying A Contractor Before The Job Is Done

Contractors are an integral part of every rehab. However, their work ethic may be as unpredictable as the real estate market itself. Some contractors have worked hard to earn a great reputation, while others have taken advantage of inexperienced investors. It may go without saying, but you never know what you are going to get until you have established a working rapport with a respective contractor. Therefore, it is critical to exercise caution when working with a contractor for the first time. Having said that, it is important to establish a payment schedule. Even more importantly, never pay a contractor until the job is done.

There should be no need to pay any upfront money. This is where most new investors make their mistake. Once you pay a contractor, you lose any leverage you previously had. Furthermore, if the contractor has already been paid, they will have no sense of urgency to finish the project you hired them to do.

Regardless of the excuses you hear, do not give them money before they finish a job. In fact, you want to make it very clear that you do not intend to pay them until the job is done and up to your standards. If a contractor refuses to meet your demands, simply move on and find a new contractor. It is as simple as that. Again, you do not want to pay before the job is completed.

Contractor Payment Schedule

To avoid any miscommunication or misunderstanding, inform the contractor that you have devised a payment schedule. Accordingly, this schedule will break down the subsequent work into milestones, each of which will warrant an individual payment. For every milestone the contractor reaches, inform them that they will receive an agreed upon payment. Make it very clear, however, that they will not receive any money until the criteria are met. Acknowledge that you have no issue paying promptly for completed work. This will serve as added incentive for contractors to finish the job on time.

Mistake #8: Neglecting To Secure A Property

It is important to treat your subject property like the investment it is. Take the necessary precautions to ensure that it is safe and sound. In fact, security should be a top priority, as you do not want your property to become subjected to potentially deal breaking theft or vandalism.

Once you acquire a property, take the proper precautions in securing it. Conversely, leaving a property vulnerable an unsecured is a mistake you absolutely do not want to make. You will want to take the appropriate steps in making sure your property is safe: periodically change the lockbox code, install floodlights, and leave the radio on at night. Each of these deterrents will go a long way in preventing theft or vandalism. There are several steps you will want to take to feel confident that your property is out of harm’s way. The following is a comprehensive list of the steps you will want to consider in securing your property:

1.) Lockboxes

It should go without saying, but you will want to change the locks immediately after acquiring a property. There is no way in knowing who may still have a set of keys to the home you just purchased. Subsequently, install a lockbox, as to allow any tradesmen that you employ to come and go as they wish. In doing so, you will not be required to show up at the property every time a contractor needs to be let in. This is, of course, dependent on the idea that you have a contractor that you can trust. As you near completion, and the majority of the appliances have been installed, you will want to change the code on lockbox. The idea behind the change is to allow only your team access to the finished product. It is never a bad idea to limit the amount of bodies that have access to your investment. Furthermore, it mitigates the risk of losing valuables or vandalism.

2.) Lighting

Both simple and effective, lighting is perhaps the best deterrent a real estate investor can procure. From beginning to end, lighting can go a long way in preventing anything you don’t want to happen to the property from happening. Unfortunately, many investors neglect this simple step. The addition of a few lights can save your entire investment.

Once the property is yours, install a floodlight in heavily trafficked areas in the front and backyard. These ingenious devices light up when movement is detected. Be sure to make them visible to the average onlooker as well. More often than not, the placement of a floodlight is enough to prevent any trespassing. However, don’t stop there. Be sure to place lights on the inside of the house. Anything you can do to suggest that the house is inhabited is a positive. Investors are advised to place lights with timers in different rooms, as to simulate a family that is living within.

3.) Radio Noise

Radio noise is yet another simple, but effective method in securing a property. It is cost effective and compliments any timed lights you may have installed. The combination of lights and radio noise will simulate a family living in the house. The more you can make prospective criminals believe that the inhabitants of the house are home, the safer your investment will be. The noise and music will deter most thefts that are just curious if the house is vacant.

4.) Alarm System

As perhaps the most obvious way to prevent theft and vandalism, alarm systems are a great investment. Subsequently, you typically get out of them what you put into them. For those looking for extra protection, you can even enlist the services of a home protection company that monitors nearly every aspect of your house. This is particularly beneficial when it comes to variables that you may not have accounted for. Some alarm systems even monitor gas and carbon monoxide leaks, each of which can be harmful to your investment and those within it. If an alarm system is out of your budget, you can even put a sign in your front yard indicating that the property in question is under the protective services of a house monitoring company. Once again, the threat of security is usually enough to scare away anyone with malicious intentions.

5.) Faux Camera Setup

While making the extra effort to secure your house is a priority, it is incredibly beneficial to install intimidating features. While a camera system is certainly capable of preventing a break-in, a faux (not real) camera system may work just as well. The mere presence of a camera is usually enough to prevent anyone from coming too close to the property for fear of being recognized by the equipment. The very real threat of facial recognition is an intimidating threat to most vandals and thieves, even if it is just an empty threat (they don’t know that). Once again, make sure your faux camera system is visible. IT will do no good hidden away. Place it front and center to make sure it scares anyone with malicious intentions.

6.) Beware of Dog

Once again, the simplest deterrents can provide a great return on investment (ROI). Simply placing a “Beware of Dog” sign may be all that is needed to prevent anyone curious enough from scouting out your investment. In fact, you may be surprised to find out hoe effective these signs are in particularly active neighborhoods. The idea of dealing with a large dog is enough to prevent someone from pursuing their interests in your property.

Insurance

While not a deterrent, in and of itself, insurance is the most important step you can take in protecting your property. Essentially, insurance should be viewed as a safety net that is to be deployed in the event your previously mentioned security measures fail. A good insurance policy can place your mind at ease should you become the victim of theft or vandalism. However, perhaps even more importantly, a good insurance policy can protect you in the event someone gets injured on your property.

Mistake #9: Ignoring The Final Inspection

Prior to selling a completed rehab, you will need to schedule the appropriate inspections, as to verify that the work you have done is up to code. While some investors see this as an additional obstacle, it is not to be taken lightly. In fact, many investors are so anxious to make profits that this is where they make many of their mistakes. With the promise of presumably large profits on the horizon, it is only natural to become anxious, and perhaps neglect a few final details. However, neglecting the final inspection is a huge mistake.

The Final Punch List

In a perfect world, investors would trust their contractors to the fullest. In reality, even the best contractors make mistakes or overlook important factors. Therefore, it is absolutely imperative that you double-check everything upon completion. Prior to arranging your final inspection, walk through the home with your contractor and develop a “punch list” of items that need to be addressed. Remember, it is not uncommon for minute details, or large ones for that matter, to be overlooked. The punch list is essentially a final list of tasks that need to be completed. When walking the home, leave no stone unturned. After all, these features will ultimately be the ones selling your home.

It is important to remember the emphasis placed on contractor payment schedules at this time. As mentioned before, you do not want to pay your contractor until the job is complete – that is to say they finished the final punch list and received your approval. The goal here is to have your home as move-in-ready as possible.

Mistake #10: Failing To Maintain The Property After The Rehab

You have completed your rehab and are ready to sell it. All of your hard work is about to pay off. However, now is not the time to let your guard down. There is still work to be done. Selling a home is a monumental task, in and of itself. Sometimes a properly rehabbed property won’t last more than a couple of hours on the market. Market conditions can and will influence the length a property remains up for sale. However, by no fault of the investor, there is a possibility of the home staying on the market for longer than expected. It is in this scenario that many investors make a common mistake – neglecting to maintain the property while it is up for sale. You may have completed the best rehab ever, but it will not sale if you do not conduct the appropriate upkeep. Over time, even the nicest properties can begin to look uninviting. Before you know it, you may have missed the most important wave of buyers.

A good rehabber will spend the majority of their time managing contractors and improving the systems in which they find success. However, in the midst of these priorities, it is important not to forget about the details. The presentation of a property will affect its “sellability.” At the very least, the way in which a home is presented will reflect the bottom line in any business. Maintaining curb appeal is just as important as creating it.

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