Why We Didn’t Fully Rehab A House Before Selling It

We recently decided to sell a property without rehabbing it for maximum profit.  This seems counter intuitive for a real estate investor. This is the first time we have done this and I originally planned to do a full rehab on this property when our tenant moved out prior to selling it. Here is why we decided to sell do a very small rehab on this house.

The Backstory

In 2023 we purchased a 3 bedroom 1.5 bath house that I dubbed ” the Brick House”. We bought this property specifically to create an affordable situation for 2 of Mrs. C.’s sisters.  The older one was in our first rental property which was a small 2 bedroom house with 3 children and the younger one just had a baby and needed somewhere to stay.  I felt this property solved both problems.  We bought this house to move the older sister into and then that freed up the smaller house. We did a quick rehab on the property, spending around $7,000 to get it move in ready.

It’s now been 3 years and the younger sister has since moved back to Indianapolis and we re-rented that property out.  We had a larger 4 bedroom home come open and rather than selling that one we decided to move the older sister into it and sell this property.

The reasoning behind this move to the larger house (The tax auction house) is as follows:

• This house has a new roof and a new furnace, so there is less future Capital Expenditure looming. The brick house will likely need both in the next 5 years.
• This house has lower property taxes: I successfully negotiated the property taxes down on this house, whereas I was unsuccessful with the brick house. The brick house is being taxed as being worth $90,000 while the tax auction house is being taxed at $43,000. This amounts to $125/mo in property tax difference.
• This property has better financing: I locked in a 3.65% 15 yr fixed loan on the tax auction house.  Currently only $150/mo goes to interest payments.  For the brick house by the time we had it rehabbed and held it for the required 6 months interest rates had spiked so I couldn’t finance it.  I have held the debt on the home equity line of credit on my personal residence since purchase. This debt is currently at 7.25%. This is roughly $300/mo in interest payments, making for a $150 swing.
• IF we sold the tax auction house instead we would have to pay off the mortgage on it (around $50,000) and that money would not increase our margin currently.  Since the brick house is on our heloc, every dime we get increases our available margin.
• For Mrs. C.’s sister, the tax auction house has several advantages: Much larger, main floor laundry instead of basement, 97% efficient furnace vs 80%, fenced yard, and new carpet.

We moved Mrs. C.’s sister into the tax auction house, but the brick house needs quite a bit of love.  It is mostly safe and functional, however the kids have left it “well loved”. I don’t want to keep this property as a rental because the numbers are tighter than I would like on it and we could use the cash back from the sale to increase our margin.

Ok, so it should make sense why I am choosing to sell this one vs the tax auction house, but why not rehab it?

Running The Numbers of A Rehab:

Rehabs can be a slippery slope.  If we were to rehab this property to make it get the best outcome at a sale as we can do, I would need to drywall patch and paint all the walls, install new tile or linoleum in the kitchen and baths and new carpet everywhere else, replace significant amounts of trim, replace doors, build a fence, and do tons of odds and ends…And likely replace the furnace.  This would add up to around 2 months of solid effort and around $15,000.  From looking at comps the property would likely sell for around $110,000 with all of this work being completed, or it could sell for around $60,000 as is.

That’s a $50,000 difference, so why wouldn’t we? $50,000 is a lot of money…but it isn’t really $50,000.

Well from that $50,000 we have to subtract the $15,000 in rehab costs and that drops us to $35,000.  Then we would likely be selling with a Realtor instead of directly to an investor. Subtract another $6,600. Closing costs will likely cost $1,500 more on a higher sales price.  All of that difference will also require more capital gains tax, which combined federal and state is about a 20% rate. The difference is another $5,500. This gets us to around a $21,500 difference.

Then there is our labor.  If Mrs. C. and I work on this for 8 weeks at around 35 hours per week each this is 560 hours. 560 hours at $25/hr is $14,000.  If we did this we would effectively be buying ourselves a job at $25/hr and we would profit closer to $7,000.

Here it is in spreadsheet form.

Question 1: Would we today buy this house for $60,000 in order to spend 2 months on a rehab and profit an additional $7,000? or even $20,000?  NO. We need time much more than we need money right now.

Question 2: Do we need or want more work right now?  NO.  Since I got laid off in Mid October we have been constantly working on properties as it seems everyone moved out at about the same time. I don’t think we have taken a full day off since then.  We currently have a backlog not including this property of 1 3 bedroom apartment (almost done), 1 1 bedroom apartment, 1 3 bedroom mobile home, and a laundry list of required maintenance at our 7 unit commercial building from the city inspector.  We also have 1 kid launching into adulthood, 1 kid in drivers ed, 1 kid getting married this year, and 2 kids in what seems like every sport and extra curricular activity.  Summer is just around the corner as well. We need time more than money.

How Do We Sell It As IS?

Mrs. C. is in a couple real estate investor groups, so our first move was to clean out the trash from the house and post a few pics and some basic info there.  There have been very few investment houses for sale in our market so there is a demand for something like this.

Although we would have done a large rehab to sell the house, to make the house “rent ready” far less is needed.  The furnace currently works, so it doesn’t have to be replaced.  The hardwood floors are scratched in spots, but are functional.  Far less work has to be done to make it rentable.

This house has a few big bonuses that help make it marketable:

• The house has 1.5 baths: Most homes in this area have only 1 bathroom.
• The layout has the master bedroom downstairs and the 2 kids bedrooms upstairs
• The master bedroom attaches to the half bath which is a jack and jill style that also goes to the kitchen.
• The master bedroom has a large walk in closet.
• The kids bedrooms each have 2 closets
• It’s on a recently redone street: All new sewer/water lines, sidewalks, road, and tree lawn.

Unfortunately we did not get a serious buyer from the discussions within the real estate investor community so we decided to talk to our Realtor and see what we could do with him.

Partial Rehab:

We walked through the property with our Realtor and it was a bit rougher than I had remembered. The property had been sitting for three weeks while I finished up another project and someone was squatting in the house. Thankfully she left when asked to leave.  We walked through the house and our Realtor pointed out a few major issues we should try to address.  This included replacing the bathroom vanity, installing some electrical covers, and replacing a couple cracked window panes.  Effectively this would be around $250 and a day or two of work.  He suggested a list price of $65,000.

As I started on this list some of the disrepair started eating away at me and I questioned, how much better could I make this house with 1 week of dedicated time and $1,000?  If I self limited the rehab to this even if I couldn’t sell the property for more, I would likely sell it faster.

I started by repainting the boys bedroom. There were two young rambunctious boys in this room and the walls really needed some love.  Once I painted this the hall looked pretty bad. Then when the hall was finished the stairwell certainly needed to be painted.  I was going to be done painting but then my touchup paint for the master bedroom was bad so I needed to paint that room.  I ended up painting the whole house except for the bathrooms and 1 bedroom.

In addition to painting I:

• Replaced all the door locks and deadbolts
• made 2 cabinet doors to install where 2 were missing
• Deep cleaned the house
• Installed an additional light in the basement
• Installed trim around 3 doors
• Replaced broken blinds throughout the house
• Fixed the fence that was broken leading to the alley and the fence against the neighbors yard
• Reinstalled downspouts
• painted the front door
• Installed a new stove and fridge
• removed an old range hood that was broken

I ended up about $100 over budget and 4 days over budget. Part of being over budget on time was due to our commercial building getting hit by a car, so I had to spend more time on that situation.  I suppose I spent closer to 9 days of actual work on this property. Way better than 2 months! This was also 95% just me. Mrs. C. worked on this house for maybe half a day total.

The big thing this did from my perspective is changed the buyer demographic from likely 90% investor 10% owner occupant to closer to 60% owner occupant 40% investor.

Rough expenditures:

Appliances: $947 (I didn’t include these as part of the rehab price. I bought these on a great sale as part of a bundle knowing I would need them at some point. We took advantage of a Lowes “Buy More Save More” promotion that maxed out at 5 appliances.

• Fencing $333: I built a fence facing the alley and repaired the existing fence adjoining our neighbors that had fallen over. I also fixed our neighbors fence that was facing the alley for them.
• Trim and Paint $262: We saved some money on paint here by reusing some existing paint from previous projects.
• Bath Vanity: $221
• Blinds/Light Bulbs: $154 LED light bulbs seem to have gotten more expensive recently. I replaced all the damaged blinds, which I think was around 10 total sets.
• Plexiglass $78: We had 3 pieces of plexiglass cut to replace broken window panes.
• Door Locks: $68

Our Realtor recommended listing the property at $15,000 more than we had originally discussed. If we could actually get $15,000 more for this property with $1,100 of investment and 1 week of work then that’s an excellent ROI.

Selling The House:

The house was listed for $82,000. In the first week we had tons of activity online and we received 2 offers…except they were both fake. The first offer was an out of state buyer who wanted to purchase it sight unseen for full price.  The second offer was for $75,000. The first buyer completely ghosted us and the second buyer requested to come back to the property to test the floor drain, since historic pictures of the property showed some water in the basement. The inspection happened, the floor drains worked, and he then reduced his offer to $60,000 with wanting tons of credits, which really made it $52,000.  We went back and forth for a while but we didn’t get close enough.

We dropped the price at 14 days to $74,900.  A few days later we had 3 offers on the table, including the one from above who came up in his price.  We went under contract at $75,500 with us paying the 3% buyers commission.  This should have ended up with us after all closing costs and taxes with around $61,000.  Here’s a breakdown below comparing the 3 selling options of a full rehab, nothing, and the results of the minor rehab.

Another Buyer Fallout:

The buyer we were under contract with backed out when we were very close to closing. Everything had looked fine, we got past the inspection without an issue.  Thankfully our Realtor had a backup buyer ready, who was a cash buyer. That buyer put in an offer for $70,000 and we closed 2 days later than our original contract with the previous buyer.  This buyer is going to be an owner occupant. We ended up with the numbers being very similar to the previous offer, even with it being for $5,500 less. This was due to some cost savings from our Realtor being a dual agent and from us paying lower total closing costs than I had originally anticipated.

Closing Thoughts:

I don’t regret buying this house, even though I’ve wanted to sell it for most of the time I’ve owned it. It allowed us to solve important problems for people we cared about. When it comes to the house itself I love the layout, I love the brick, but I don’t love the numbers. I was hoping that interest rates would go back down but they never did. We experienced the fasted rate increase since the 70s. The property tax issue was also huge. I appealed the property taxes twice and failed.

In the big picture of our total real estate holdings this 100% was the right move.  We now have acquired plenty of real estate that acquisition is not our top priority and we need to prune our portfolio to reduce overall risk. The recent car crash into our building highlighted the need for more risk reduction and having more of our money accessible.  Removing debt on our heloc is very important.  Prior to the sale of our last property our heloc was maxed out and we had acquired around $30,000 of credit card debt.  Not a good place to be.  My current goal is to pay off the heloc in its entirety over the next 12 to 18 months.