I’ve been redoing houses speculatively in Fayetteville for the past ten years or so. Readers may be familiar with our signs—particularly those in the downtown area. We typically start with a dilapidated single or multi-family house, gut it to the studs, and redo it to a super-high quality standard—and sell it to a new owner who will live there.
Our houses sell at record prices (avg. $244/sq. ft.) and faster than just about anyone else’s. I thought it might be fun (and educational for anyone who watches too much HGTV and wants to try this!) to share some of what I’ve learned:
1. Location is everything. I generally restrict my activities to walk to town and campus locations—and those in the best neighborhoods. When I don’t—I did a house in Bella Vista this year, for example—I regret it. You just cannot do a quality renovation in a sub-prime location and get your money back. The market won’t support it. Everyone says location is crucial, but time and time again, speculators forget this because they “get such a great deal” on a property somewhere else. I get calls and emails daily from people who want me to buy their properties and 19 out of 20 times I don’t even look unless it is in an area I think is worth investing in.
2. The real estate market is made up of many smaller sub-markets. I get really tired of the broad, black brush that so many real estate experts use to paint the picture of the real estate market here in NWA. On top of it, I don’t think they understand the market at all, and tend to look at the residential market as if it is only made up of subdivision houses in a particular price category. For example, it annoys me when I see the “experts” pontificating about the “$250-300K market”—there is NO SUCH THING! I can assure you that the buyers of a redone 1000 square-foot house I am selling for $300K downtown or in the historic district have little in common with the buyers of a new $300K subdivision house. My buyers are generally better-off financially, not here because of a new job, older, and more stable. They can afford a more expensive house than they are buying but live within their means. They want high quality but don’t want to be show offs. There are so many other ways to segment the market beyond price category. Market segments should be defined as groups of buyers with common wants and needs—and that’s so much more than price category of house in a subdivision!
3. Good design sells. Good design involves every decision about every little thing. It is the muntin pattern on the windows, the way the floor boards run, and the shelf arrangement inside the kitchen cabinets. It is also stuff like making sure there’s a wall to put a bed on, lots of natural light in every room, and the ability to move furniture in and out. Finally, my buyers want natural materials like cedar shingles, clapboards, and wood porch ceilings, as well as native stone. EVERY single detail matters. Nothing can be left to chance if you want a quality finished house that looks like an integrated whole. I cannot tell you how many “renovations” I see that involve the wrong windows going in, vinyl siding, fake rock or brick, aluminum soffits, and $2 wal-mart shrubs—then the sellers cannot understand why they can’t get the prices we get. Not to mention too-modern kitchens and baths in an older home that look like they came out of a Florida house built in the last decade. People want good design and will pay for it.
4. Good quality sells. You cannot get good quality by hiring the cheapest labor and using the least expensive materials. Not everyone wants cheap. Some people want good. Very few of our subcontractors ever work on a hard dollar bid. Our team has been together for some time and the majority of our subs are working on a time and material basis. This allows for flexibility if changes need to be made in the field to do something better—it also allows the various trades to cooperate with each other instead of fighting the other guy because he is slowing them down. I also think that the owner/developer has to show daily that he or she cares about quality. That means rejecting bad materials, making people redo things that weren’t done right even when it costs you, or upgrading the specification at no charge to the buyer if it is the right thing to do.
5. This whole business is much harder than it looks and not very profitable. Thankfully, I don’t rely on my income from redevelopment to support my family. I have other jobs and businesses that I am involved with. But the bottom line is the redevelopment business is extremely risky and not very lucrative at all—at least the way we are approaching it with total rehabs. By the time you buy a property, redo it, pay the interest on it over the time you own it, and pay considerable selling charges, many times we come out with no profit whatsoever. And while my business does provide us with a few benefits such as a vehicle, etc., I pay myself little or nothing for doing my job as the investor, designer, program manager, construction manager, marketing director, and financial manager of this thing. I’m convinced that is why we really have no competition for what we do. Thankfully, the difficulty in making money with this business has thus far been offset by the incredible satisfaction I get from seeing our neighborhoods revitalized—one house at a time—as well as proving to the naysayers that if you do things right and give your buyers what they really want you can sell a house in this market!
Mark C. Zweig