Lessons from our First Condo Rehab

Okay, after the first silly post, here is a real post.  This one will be about what we learned from one of the first full rehabs we did on our own, the International Ave property.

This was a condominium that we purchased wholesale from another investor who bought it at a trustee sale.  When we bought this one, we had only seen photos taken during a walkthrough.  The other investor said it would be about $3,500 to rehab the property – just paint, carpet, and cleaning.  We really couldn’t tell much from the photos – the property looked okay, but I was doubtful that it would only be $3.5k to fix it.  Also, there was a non-owner tenant living in the property, so we’d have to give him cash to move out, or evict.

The investor was asking $86,000, and he said it could be sold for $115,000.  Here are the numbers he presented to us:

  • Purchase price:         $86,000
  • Eviction:                     $550
  • Repairs:                      $3,500
  • Closing costs:             $1,725
  • Commission:              $5,468
  • Sale Price:                  $115,000
  • Est. profit:                  $17,757

This seemed like a reasonable deal – put in about $90k, net about $18k, which ends up being around 20% return on the cash put in.  Experienced investors will immediately see that he neglected to include holding costs.  Also, I didn’t trust his rehab estimate, but even with increasing the rehab costs to $6k, and adding in another $1k or so for holding costs, we figured we’d still do okay.

We agreed to the purchase price and bought the property, and the investor agreed to help us with the eviction/cash-for-keys process.  It turns out the occupant was willing to leave and the investor came to an agreement of $1,200 for the tenant to move out within 3 weeks.  Okay, so that $550 to evict quickly turned into $1,200.  Lesson learned: estimate that cash-for-keys or eviction will cost at least 1 month’s rent.

When we met the tenant on his move-out day and did our first walk-through of the property, it immediately became clear that it was going to be significantly more than $3,500 to fix the property.  Just paint and new carpet wasn’t going to cut it.  In addition to carpet and paint, the place needed new kitchen cabinets and countertops, new appliances, a new vanity, new bathroom mirror and lights, a new tub, a new tub surround, new faucets, three new closet doors, new doorknobs, new outlets and switches, a new window, new smoke detectors, new ceiling tiles, new ceiling lights, new vent covers, and probably a few other things I’m forgetting.  It was looking to be at least $10,000.  Lessons learned: Don’t trust photos.  And don’t trust a wholesaler’s estimate for repairs.

Then we started work on the place.  A few days in, the contractor asked us if we knew how to turn off the water to the unit.  No, we did not.  I called the HOA and the person told us that there was one central water shutoff for the whole complex (roughly 250 units).  She said to turn off the water was a big deal because they had to give all the occupants at least three days notice that the water would be off for the specified period of time.  Also, they had to have a specially certified plumber come out when the water was turned back on because there were old boilers and old pipes, so they had to make sure everything was operating correctly and no leaks turned up.  Okay, I asked her when they planned on turning the water off again and she said nobody needed it currently and they usually only do it once 3 or 4 people request it, and I would be the first on the list.  I put my name on the list.  A few days later she called me and said there was an emergency and they needed to shut the water off, so any work we needed to do, we should do it now.  I called the contractor and he did the work quickly.  We were lucky we didn’t have to wait a month or two to change out a couple of sinks!  Lesson learned: Beware of condos and the water supply.

When we finished the rehab, we listed the property at $119k.  My partner spoke with the

investor who sold us the property, and he told her that we’d be lucky to get $110k.  What?!?  When he sold it to us, he presented the retail value as $115k, and that was with only updating carpet and paint!  Lesson learned: Don’t trust someone else’s numbers for anything.

Fortunately, we received a number of offers on the property and we sold it quickly for $122k, so it still worked out for us.

Here is a recap of some of the lessons we learned on this flip:

  • Estimate at least one month’s rent to get an occupant to move out.
  • Don’t trust photos of the property.  Visit it yourself.
  • Beware of condo issues like water supply.
  • Don’t trust someone else’s estimates.  Do your own analysis!
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3 Responses to Lessons from our First Condo Rehab

  1. Brooks says:

    Mike, great lessons. My rule of thumb – the MINIMUM amount that I’ll calculate for repairs is $10k – I don’t care what anyone tells me.
    PS – Water connected to 250 units sounds pretty ridiculous – is that normal?

    • Mike says:

      Yeah, $10k probably doesn’t buy as much here. I think $10k – $15k is a reasonable rehab amount for a condo where we are. For houses, we now generally assume at least $25k will be needed. Almost every house we see needs: paint inside and out; some landscaping; new kitchen (cabinets, appliances); new bathrooms (vanities, mirrors, tubs, shower tile, toilets); new flooring; new lights; new outlets and switches; some new doors and windows, etc. It adds up fast.
      As for it being normal to have one water shutoff for that many units, I seriously hope not. We’ve only worked on one other condo, though, and surprisingly, it ALSO had only one shutoff. There were fewer units for that one, though.

  2. Brooks says:

    Weird – I’ll keep that info in mind when looking at condo units…
    Brooks recently posted..How I made a $5,000 return on my $5,000 investment at an Online Real Estate Bank AuctionMy Profile

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