Last week, you may remember, my partners had nixed my first rehab candidate, a small house in North Newark, arguing that the neighborhood was too shaky. (The house is at www.gsmls.com, #2083653; as a non-member of the MLS, you can find it by searching for $175K houses in Newark City in Essex County.)
Anyway, I asked readers to comment on the house – and boy, am I glad I did! I learned more from the dozen e-mails I got than I have in weeks of walking around my target neighborhood.
The general consensus was a) I don’t know what I’m doing; b) the key to a successful rehab is not selling high, but buying low; and c) the neighborhood should be judged not so much by absolute standards as by the direction it’s moving in.
Those points are important enough, I think, to look at one by one.
a) I don’t know what I’m doing. As Paul, an experienced flipper, put it, “you play the game like an amateur.”
There’s nothing I can do, really, but concede this point. I have overseen renovations, but they’ve been in apartments; I have had nearly every conceivable thing go wrong with a house, but I’ve lived in it.
On the other hand, if everyone had to start out a professional, no one would ever change careers at all. So here’s my answer: I’m smart enough to listen to my readers. Thanks to Andrew in the Newark area, who wrote: “I welcome the presumed competition.”
b) Smart flippers don’t make money on the rehab, they start at a discount. From Tom in L.A., who’s working on a high-end rehab: “Ask yourself how much it will cost to rehab and hold, how much you can sell it for and how much profit there is…If you can buy for $175K, put at most $20K in and have holding costs of $10K or $20K and can sell for over $325K, it might be worth it.” And Paul again: “Anytime you expect to make your money through a rehab you are setting yourself up to make a wage at best…Only very skilled and professional people make money on the rehab. We call them contractors.”
These comments made me more eager to contact bank representatives about buying a repossessed home. More about the foreclosure game in a later column.
But the numbers on this house, I think, might have worked. I have been using $100K as a rule of thumb – that I’ll need that big a spread between the buying and selling prices for me to make any money at all, because I have to pay both my contractors and my partners.
Multifamily homes in the couple of blocks surrounding my candidate home go for around $500K, so pushing a renovated single-family home from $175K to $275K certainly wouldn’t have been crazy.
But judging the improvement potential takes a practiced eye. Newark agent Manuel Couto of the Rosa Agency (www.rosaagency.org) pointed out that what makes the multifamilies in this neighborhood so desirable is “the lots are bigger, with off-street parking and tax abatements.” He would have liked this house better “if the lot was the full 100 feet deep for off-street parking.”
c) Judge the neighborhood not by absolute standards, but by the direction it’s moving in. “Don’t impart your standard of living on the neighborhood,” said one West Coast flipper, who noted that potential buyers are coming from nearby, and probably already know the neighborhood. Flippers pointed out I should look at when new builds are going to be completed, what’s happening with nearby shopping, even the mix of cars on the street.
Sandy Frame, the founder of the Real Estate Education Center in New York (www.reedc.com), is someone I had known from my old journalism days. He reminded me that when he’d bought in Manhattan, “one night shortly after we moved in there were three people dead on the other corner.” This horrible neighborhood, it turns out, was the 80s one block from Central Park West – where townhouses now go for a few million a throw.
Which reminds me of that old song lyric from Pippin: “It’s smarter to be lucky than it’s lucky to be smart.”
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