As a contractor and home renovator, I have spent a lot of years fixing up other peoples' properties. I've always found it rather satisfying to transform the eyesore into the aesthetically pleasing, and I was content with doing "a day's work for a day's pay." This philosophy is not necessarily wrong, but it's not particularly lucrative either. I realized that my customers were actually the ones reaping the most rewards from my labors.
A Project
One case in point that really opened my eyes was a job I did a few years back for a customer in suburban NJ. This customer wanted to buy a particular home, and consulted me as to the extent of work that would be required before the house was purchased. The customer used my estimates (worst case scenarios) to negotiate a purchase price that was significantly discounted. The purchase price was $270,000. Other homes in the area (livable, but not recently updated), were selling for around $300,000.
After the customer bought the house, I was hired to complete some rather extensive work on the home. The renovations included were as follows: three remodeled bathrooms, a remodeled kitchen, the installation of new windows in the entire house, the building of a custom ceramic tile sun porch, all new interior and exterior doors, and a complete re-painting of the homes' interior.
A job of this size kept my workers and I busy for four solid months, so we were quite pleased and figured we were doing pretty well.
But when we started to look more closely at the numbers and time spent (figures that have since plagued me over the years), we realized that our customer was reaping a whole lot more of the benefits of our labor than we were.
The Breakdown
1. The work had cost the homeowner approximately $90,000: about $55,000 labor, and $35,000. in materials.
2. Four months after completion of the work, (which was 8 months after the original purchase), the homeowner listed the house for sale.
3. The asking price was $580,000., and we got a good laugh over "how unrealistic" (in our estimation) this price was.
4. After being listed for around 60 days, the homeowner got an offer for $520,000. They negotiated for a few weeks, and eventually settled on $528,000.
The Clincher
Eleven months, and 3 weeks after the original purchase of the property, the owners re-sold it. The original purchase price: $270,000. The amount for the remodel (labor and materials): $90,000. The total invested in the house: $360,000.
* Price the house sold for one year after purchase: $528,000.
* Subtract total cost of house – $360,000.
Homeowner's net profit in one year $168,000.
An Eye Opener
Bottom line: we did all the work, (and yes, received our wages ), but we added value to a project that far exceeded our profit.
Our profit for increasing the value of the house by $258,000 was only $55,000; materials were $35,000. The home owner's profit for simply buying the house, and hiring us was $168,000. If this had been our own project, we would have made $223,000 for the same 4-month work period.
This may seem like an exaggerated example, and you may be working in a much less expensive housing market. Still, taking into account the regional variation in price points, the percentages are the same. Even if the value you add is double, those numbers are nothing to sneeze at. If you're going to make $20,000 on a rehab, then maybe you can make $40,000 or $50,000 doing it yourself. Or, looking at it another way, work half the time for the same money. Either way, it pays to know the numbers.
About the Author: Bob Kmosko has been a full time contractor /re-habber/ investor for over 25 years. His company, TK Homes, is focused on providing discounted wholesale properties to contractors and investors. If you are currently in the market for a wholesale property, or are considering purchasing one the in the future, log on to http://TKHomes.net and let us know what you need!
