Investors: Avoid Over-Improving!

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The market today is great for investors who can buy low and then resell for a profit. That’s especially true here in Southern California where, until recently, astronomical home prices had made reselling for a profit a very dicey deal.

In today’s SoCal market investors who get one of those fabulous low, low deals need to rethink their strategy. Gone are the days when they needed to add those granite counters and cherry cabinets,  mahogany doors and paver driveways. It’s true buyers love those amenities still, but today’s buyer is focused laser-like on one thing: PRICE.

Investors hoping to make a few bucks must compete in today’s market of repos and short sales. That means getting in and out fast. Clean up the property, provide basic kitchens and baths, make sure the lawn is in and the driveway looks presentable. Then, put it back on the market at a competitive price. Investors hoping to compete must think at least 10% to 15% BELOW the other properties on the market if they  want to sell fast, even though they might be bank-owned properties. The buyers are there, but they are increasingly guarding their wallets as never before.

To accomplish that, investors not only have to buy low to start, but be highly cost-efficient in the types of rehab improvements they make, the contractors, and their turnaround time. It’s essential that investors not become prisoners of “reproduction cost” formulas that used to work, but amount to over-improvements today.

Although reproduction costs are often cited by appraisers and builders, smart investors now have to ask a very different question: “Would you reproduce this building in today’s (tougher) market?”

When you look at house, ask yourself: Is it OVER-improved for the area? based on what’s selling or being built now? If a builder today can build a brand new house for $100 a square foot, a house built years ago for $150 a foot (even though it has a fancy kitchen and bathroom) is now worth closer to $100 a foot– at least until buyers are willing to pay a premium again.

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