Chances are, you may not know what a pre-hab is. It isn’t really about rehabbing/restoring, but rather, it entails just smoothing out the rougher edges in order to make the property’s real potential shine through to buyers. If you haven’t figured it out yet, buyers have a hard time overlooking and envisioning things. A neglected house is at the top of the list and that’s where a pre-hab comes in to the picture. Often times a pre-hab may just mean taking a vacated home and hauling out all of the trash left inside and addressing the overgrown landscaping. This strategy should have a quick turnaround time, and doesn’t entail remodeling the kitchen and bathrooms, etc.
There are also a lot of people who gut a whole building, drywall and all, because they know the condition was so bad it would be really hard to sell. When you pre-hab a property, it is a blank canvas for rehabbers. You were just the lucky investor that came across the deal first so you get to pre-hab it for a low cost then turn around and sell it to a rehabber so that they can put their money and time into fixing it.
By simply cleaning up a place before reselling it can make a huge difference in value. Consider that $1k to $5k of clean up could net $3k to $15k or more in your price. Some people, even investors, can’t see past big time clutter, and if you are selling to a potential owner occupant this can make a big difference. There will be times you find a good deal, but it smells like cat urine or cigarette smoke which would deter potential buyers. Just by eliminating these smells you can increase your asking price. The goal of pre-habbing is to get rid of anything that may somehow detract a buyer from having interest in the home.
Here are examples of 3 different classes of a pre-hab:
- Light: Ranging from $500 to $2k- Remove trash, debris, cut the grass and do general clean up.
- Medium: Between $2k to $4k- This encompasses removing or remediating mold in the basement, removal of some drywall, fix and clean up water damage, heavy landscaping/overgrowth removal, fix any broken windows, plus all of the items in the light example above.
- Heavy: Usually costs around $5k to $10k. This entails actually completing all of the landscaping with mulch and possibly shrubs for better curb appeal, full gut of the house down to the studs, new roof, removal of the old plumbing and appliances, etc. This may also involve dealing with mold problems, water issues, etc.
The pros and cons of the pre-hab:
- Wider potential buyer pool and a larger profit margin
- Not as much work involved
- Quicker turn time
- No tough decisions like what kind of fixtures or countertops to choose
- Less opportunity for the project to go over budget like a rehab could
- Have to close on it in most cases
- Investing time and money that could affect your bottom line
- Another deal could come along while you are invested in this one
- Generally, not as much money to be made as a full rehab scenario