Rehabbing for Profit - Now is a Good Time

Here is a good article about rehabbing REOS for Profit

I’ve been looking into this locally. REO means bank owned, but the best deals seem to be at the foreclosure auction sales.

The local scene is somewhat different than what is described in the article. Yes, some people rehab rough homes, keep them and rent them, but others people have been successfully buying homes at auction (for less than the mortgage amount), fixing them up and selling them for a good profit on the open market.

This benefits the market, because rough homes which would not qualify for financing do not come on the market and sell for low prices, the fixed up homes command good current market prices and the new owners are pleased to get homes in good, updated condition at those prices.

I was concerned that the lapse of the home-buyer tax credit might turn the market down. It has hit prices a bit, but not significantly. Fixed up homes at reasonable prices are still selling well.

This article is from a foreclosure listing service. I subscribe to a similar service and get search pre-foreclosure, foreclosure sale and REO listings for you.

Rehabbing REOs for More ROI
By Octavio Nuiry
Staff Writer
Attention foreclosure buyers: Plenty of roughed-up repos are yours for the taking. From the hills of San Francisco, Calif., to the sands of Cape Coral, Fla., repo rehabbers are snagging discounted digs before the sector snaps back. Cash-strapped lenders, anxious to shore up their depleted balance sheets, are slashing prices and accepting lowball offers, according to investors and brokers across the country.
As foreclosures skyrocket, a growing number of investors are becoming enamored with the idea of buying up foreclosed properties, fixing them up, renting them out, getting them to cash flow until the market turns or selling them for a tidy profit.

Consider repo rehabber Jeremy Burgess. Burgess, a 30-year old real estate investor from Washington state who moved to Detroit, Mich., in 2007, is finding real estate gold in Southeastern Michigan. Burgess – who started real estate company Urban Detroit Wholesalers with his wife, Jeanna Kiehle, and partner Jared Pomranky three years ago — buys, renovates, then flips properties wholesale to out-of-state investors or rents them to locals. Since 2007, Burgess has expanded his business despite the bust, closing more than 150 deals. He views the downturn as an opportunity to build his real estate empire and distinguish his firm from others. He typically renovates 12 to 15 properties a month, and is working on seven flips right now.
How does he do it?

Rehabbing Just Right
Burgess uses four filters to home in on prime REO investments: First, he clusters all his purchases in just two ZIP codes – 48235 and 48221 – on the west side of Detroit. Secondly, he seeks neighborhoods where homeownership is 70 percent or higher. Third, he looks for areas where 50 percent of the homeowners earn $35,000 annually or more a year. Finally, he searches for communities where families have two or more kids with at least a secondary education or higher.

"This helps me narrow down my investment," claims Burgess, who buys clean, well-kept, foreclosed homes in good or up-and-coming middle-class neighborhoods. "It allows me to cut out 80 percent of the properties I see."

Burgess said he has four or five real estate agents bird-dogging properties for him, and the leads they generate are sent to his assistant, who he trained how to spot repo gems. Asked what makes a top-notch repo rehabber, Burgess said: "First, you need an awesome team on the ground. Second, a lot of people under-rehab, which gets you 30 to 40 percent less in rents or resale value. And don’t over-rehab."

He buys Detroit foreclosures for a mere $12,000 – and pays all-cash. He and his partner then hire a non-profit group, Motor City Blight Busters, to do the rehab work, saving thousands on labor costs. Motor City hires and trains local laborers to work as apprentices on the job, keeping costs down. Typically he puts $13,000 to $17,000 worth of improvements into each home, replacing the roof, windows, renovating bathrooms, kitchens, adding new light fixtures, new doors, painting and landscaping.

"I have 14 rentals right now," said Burgess, noting that his company can get a 12 to 20 percent return on its investment. "Right now 70 percent of my business is wholesaling foreclosures to out-of-state investors. I have 13 wholesale deals I’m working on now."
He said average rents in Detroit are $800 to $900 a month. Rental properties generate $300 a month each in positive cash flow.