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4 steps to evaluate a rehab project

Ginger Dean

June 12, 2013

By: Ginger Dean, Home Finance Specialist

In: Finance and Legal

Rehabs are expensive and quite demanding on time, resources and money. But when done right, they can be financially rewarding. To successfully carry out a profitable property rehab project, the following steps are necessary:

1. Schedule a walk-through

Unless you have partners you can trust, put your eyes on the property. It's your money; know first hand what you're getting into before signing any paperwork. This is where you get to see the property, do a rough estimate of how much damage you need to repair and how much you need to touch up. It also shows you the state of the property as is. That way, you get to see if it's something you'd like to take on or something to back away from and move on to the next deal.

2. Determine strategy: hold or flip?

Decide whether the property is one you want to fix and hold or fix and flip for a profit. This will largely depend on your ability to spot the potential profit from either holding or selling immediately after fixing it up. It also helps if you already have a plan in mind before even seeing the property. Whatever the case, both strategies are good and profitable. Your exit strategy will largely be determined on the numbers. Some decide to buy and hold because they believe in the long-term potential for profit, whereas others are interested in reducing their exposure to the risk of holding a property and opt to flip -- sell quickly -- instead.

3. Research comparables

Comparables aren't just about measuring the square foot of a property and making your estimate based on that. You need to compare a few other data like geographical compatibility and location, price trends, price of neighboring properties, amount or number of foreclosed properties within the area and the number of property listings around. This can help you make an informed decision regarding property pricing and valuation.

4. Calculate financials

After researching comparables, you need to calculate how much you would have to spend on the property to bring it up to the after-repair value (ARV) based on market comparables in the area. You will need to factor in acquisition costs (how much the property costs), how much you'd need if you decide to hold (holding costs), how much it would cost you to carry out repairs and fix the place up (repair estimate) and ARV, which is important for both third party financing and helping you determine your profit margins.

That said, it is left to you to do your due diligence. If you need an accurate assessment, you may want to enlist a local Realtor who is familiar with the neighborhood and area to guide your decisions.

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