Many owners have held onto their properties waiting for the market to change, but the promised upswing is still nowhere in sight. House hunters are looking for values, but may be disappointed when they discover that financing is not readily available for worn and aging homes which were built for families one or two generations ago. There are still many great values available, but they may not be exactly want shoppers envisioned. Smart home buyers choose to look past what presently exists and imagine the new house that they can create through renovations. However, the lack of financing for houses requiring renovations means that all cash home buyers are frequently the only buyer.
Many of today’s buyers are savvy investors and remodelers who pay all cash. These investors have opened up a cottage industry that is providing stability and liquidity to the market. A large percentage of new home buyers may have quality credit scores and qualify for a new purchase but do not have the capital or expertise to purchase a property that needs to be renovated. This scenario restores liquidity to the market while replacing older stock with new.
Banks are reluctant to provide financing to a new buyer for a home requiring upgrading or substantial improvements even at discounted prices. Frequently, the buyer is an experienced professional with the ability to purchase all cash, renovate, then put the property on the market for sale. Banks are much more comfortable providing financing for these restored houses due to the limited risk. The last thing banks want today are risky deals. They are looking for the sure bet.
The most successful investors are experts who have developed well oiled businesses. They typically specialize in a property size, type and defined geographic areas. They require a fair amount of volume to be successful. An investor who purchases 25 properties per year can keep 2-3 construction crews busy constantly throughout the year. Using the same crews and managing them properly removes the guesswork from a remodel.
The all cash investor may be able to purchase at attractive pricing, but price is not the only important factor. To be profitable requires tremendous knowledge of how to add value to a property within a short period of time with the right materials, at the right price. That means knowing where to get quality materials at the right price with a crew that will stay on schedule.
There are many factors that need to go right. For example a property renovated in 12 months rather than 4 months, will dilute the return on investment. What may appear as a winning investment can easily become marginal with time delays.
Construction and material costs are a critical factor. If materials cost 20% more than budgeted, the profitability may be in jeopardy. Additionally overpaying for the property or being overly optimistic about resale price affects the return on investment.
However for those professionals who approach their investment and remodeling business with discipline and focus the rewards can be substantial.