Mr. Dennis Roberts, attorney, and the real estate agent is director of Programs and Property Management for Cleveland Ohio’s Cuyahoga Land Bank. A land bank is a governmental or nonprofit entity established, in part, to assemble, temporarily manage, and dispose of vacant land for the purpose of stabilizing neighborhoods and encouraging re-use or redevelopment of urban property. In his role, Roberts & team have facilitated the renovation and disposition of over 1,145 single-family homes throughout Cuyahoga County. Roberts’ expertise, knowledge of the local real estate market, and understanding of acquisition, renovation, and sale process help municipalities, nonprofits and citizens solve vexing real estate challenges. He gave us his insights on the pitfalls of rehabbing properties.
RW: Landbank programs have allowed thousands of individuals and companies to acquire homes for rehabilitation. What would you say is the success rate of those who acquire homes in terms of finishing on a project?
DR: More than 50% of the projects are not finished on time.
RW: What about rehabbing in terms of doing an excellent, good, fair, or poor job?
DR: Once a land bank property is purchased for rehab, the goal is for the property to be renovated satisfactorily.
Satisfactorily means the home must be up to code regarding things such as electrical, plumbing, drywall, floors, etc. Upon completion, the home must be livable for the occupants. Also, a rehabbed home is considered satisfactory when it meets the local rules and laws for rehabilitation of property and meets the land bank’s requirements: permits pulled and inspections carried out to approve the work.
ADDITIONALLY, HERE IS A LIST OF FIVE PITFALLS THAT BUYERS AND INVESTORS TEND TO OVERLOOK:
They Under-capitalized, meaning they don’t have enough money to complete the job. Both investors and buyers may underestimate the costs involved in renovating homes.
Don’t do adequate market research. An investor may overestimate the resell value by not considering the location, other appraised values in the areas, what’s going on around the property. As such they may find that projected selling prices diminish to just barely breaking even or sadly they may realize a loss.
Citizens tend to underestimate how much work the project will be and how long it would take. To forego an underestimation like that, it is advisable to do detailed research of the property itself, and also get estimates from vendors like electricians and plumbers. In addition to a time quote to complete contracted jobs.
Citizens misunderstand the nature of their workforce. This pitfall goes hand in hand with how much work the project will cost. Citizens must be armed with the right questions for contractors. For example, an electrician the owner employs gives a price for work to be done. Once the electrician gets to the property it’s an older property that requires more work and time. That fact alters the original timeframe and the quoted cost for the job has to change.
Like citizens, investors can make bad assumptions about a project without researching the facts. A quick walk-through of a property that seems not too bad on the surface shows a lack of understanding of problems that can’t be seen on the surface. For example: When I go to a house the first thing I look at are the downspouts. If the downspouts are not plugged in to the ground that probably means that there’s a problem. My experience is that people pull downspouts out when they have some kind of clog under the ground. Underground problems are expensive problems. To avoid costly assumptions investors really need a good general contractor to scrutinize the properties and help the investor understand the true nature of the upcoming rehab.
RW: How important is a good general contractor?
DW: A general contractor or a residential general contractor is worth the investment as that person has knowledge of the price for intended labor he can coordinate the other professionals hired.
Hire a contractor when if the job: (1) takes more than a week; (2) requires several different pros; (3) requires permits.
Lastly, capital reserves play an important part in the rehab process. From my experience, 10 percent is a decent amount of capital reserves.