Why Property Investors Sell Half-Finished Renovation Projects

Every smart property investor knows that a property desperately in need of a refurb is usually an excellent profit generator.  But in the hands of a novice, albeit a well-intentioned novice, it sometimes turns out to be the fastest way to drain your cash and end up out-of-pocket.

Over the last year or so more and more half-finished projects are coming up for sale.  When you go in some of them have been stripped back to the bare bones – or in property terms the floorboards and bricks.  No carpets or floor coverings, no plaster and often still with tools, workbenches and materials purchased but left discarded in the property.

Going into these properties can feel a bit like the Marie Celeste – everything is there, ready to use, but nobody is in sight (or on site, if you’ll excuse the dreadful pun!)

Who owns these properties?

They fall into two categories:

Rookie property investors who have spotted a ‘project’ - They probably watched a number of these TV makeover shows, where it all ends with a profit made despite some hairy moments along the way and thought ‘how hard can it be?’.  People do makeovers all the time, it just needs a bit of time and dedication to renovate it and sell at a profit. It also needs an understanding of how to budget for a renovation.

There’s one thing they’ve forgotten – money!

Well, the right amount of money at least. They’ve set to work, stripping out the old, ready for installing the new.  Often, they will actually purchase some of the units and fittings needed, but then they run out of cash.

As it’s likely that they’ve stretched their credit to its limits to purchase the property in the first place, now they have nowhere to turn.

They haven’t factored in that they can’t do everything themselves – electricians, gas engineers and plumbers don’t come cheap.  Even their enthusiastic basic DIY skills have reached their limits too.

So, where does that leave them?

If they’re working on it as a live-in project and camping in a couple of rooms, roughing it – the answer is ‘homeless’.  But even if they still have a comfortable home, a half-finished (sometimes not even half) project is a millstone.

One of my mentees acts as a keyholder for auction properties; showing people around properties prior to auction.  Every day viewers come to view and many of them think they’ll get a mortgage for problem property – and that the mortgage can completed in the 28 days auctions give you to complete a purchase!

The second category are people who have inherited a property, but it’s desperately in need of renovation.  They’ve seen the TV programmes, they’re on many channels, whether in the UK or in the US – there are people who make a good living out of renovating down-trodden properties.

They have bags of enthusiasm and a hazy idea of how much a new kitchen and bathroom will cost (about £10K – right?) – and decide to ‘tart it up’ and sell it for a much higher price, but they’ve bought into a false narrative.

They don’t know what they don’t know!

Having got started, ripping out all the old stuff, they begin to realise the enormity of what they’ve taken on.  They’ve revised their guesstimate about redoing the kitchen and bathroom, because they hadn’t counted on rotten floorboards, dodgy plumbing and out-of-date electrics.  So now the renovation costs have risen sharply. 

Just as they’re about to put away the calculator, they also realise that carpeting or laminate flooring costs more than they’d thought too.  And that rotten window frame needs replacing – oh, and the boiler doesn’t work properly.

It’s like they’ve bought an old car and taken the engine apart, but they don’t know how to put it all back together again.  It’s not the simple ‘put in a few shiny new cabinets, a new bathroom suite and slap a coat of paint throughout’ situation.

One night they wake up in the middle of the night and realise that this nightmare isn’t a dream they can wake up from.  Their resources have run dry and they now have a property that is worth less than when they started out.

‘I give up’

Ripping it apart is easy – putting it together again is a different story, with skills required – usually ones that they either don’t have or can’t afford.

The enthusiasm and the money have both run out.  Regardless of how they got into this in the first place, they now have a property that is not only in a worse state than it was when they bought or inherited it, but also unmortgageable, which reduces their pool of potential purchasers.

They’ve hung on and become attached to an unrealistically high price for too long and now they’re stuck.  They have a choice – put the project on hold until they can afford to finish it (and how long will that take?) or sell at a loss.  Eventually, they know they’ve just got to get out – and take the hit – but it takes a while to arrive at that point.

There are properties – or ‘projects’ – like this all over RightMove and Zoopla.  But they are ‘cash buyer only’ territory.

Surely, these are ideal for a local builder to pick up?  Not really, most of them are busy on bigger projects – that’s where the money is.  They don’t have time for small, self-funded projects like this.

If you’re viewing a project property it’s not unusual to find kitchen units still in their flat-packs, bathroom fittings in their packaging, but not fitted, even new flooring ready to be laid, once the plumbing/electrics have been completed.

If you’ve got the skills or better still a little black book full of reliable trades contacts – and the funding based on a realistic estimate of the cost and you relish managing project – they can be a great buy! 

If you have the cash to buy these ***CASH BUYERS ONLY*** type properties, you are really in a strong position to pick up a great deal at the right price.

Not got that much cash? You can still win; I have been training people for more than a decade that you can play in this market by leveraging bridging finance to replace the big pile of cash you don’t have.

With smart bridging finance in place, they definitely do have profit built in – but only if you know exactly what you’re getting into and have the resources (skills and money) to complete the project.