Speculative Remodeling

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Housing and the economy may be hurting but remodelers Diane Menke and Dana Priesing made a succession of shrewd moves in the speculative remodeling business, most recently buying and living in a house they are improving as a business investment.

June 01, 2008
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Products List
Project Timeline
The Financials
Company Snapshot
Building Equity

The luxurious kitchen has custom cabinets, high-end stainless steel appliances and granite counters.  After photos by Damon Landry

Housing and the economy may be hurting but remodelers Diane Menke and Dana Priesing are getting richer, and enjoying a handsomely updated home to boot. How? They have made a succession of shrewd moves in the speculative remodeling business, most recently buying and living in a house they are improving as a business investment.

Both women are affiliated with the Philadelphia-based remodeling company Myers Constructs — Menke is co-owner and production manager, Priesing is office manager — but each of the spec remodeling properties is a separate venture owned, financed and managed independently of Myers Constructs. "It's important to keep the businesses separate," says Menke, "for liability protection and financial clarity."

Menke warns that spec remodelers can lose money if they miscalculate an investment property's potential or its turnaround costs. On the other hand, she says many remodelers steer clear of spec projects unnecessarily. "Most remodelers are put off because they think spec remodeling is all cash out. Really, you can finance much of it" with loans against equity, she says. Spec remodels do not always have to be expensive to do well financially, she adds. Menke and Priesing have purchased six spec properties since 2003; the first five were modest houses in downtown Philadelphia that they fixed up as a rental or for a quick sale.

Moving Up

Before

But by 2006 the Philadelphia housing market had changed. The old working class neighborhoods in the city were no longer affordable for young professionals, says Menke. Just outside the city limits, though, was a belt of working class communities chock full of old houses that haven't been touched. Often, buyers can flip them for a nice profit after a few repairs, Menke says. "They might scare traditional buyers but remodelers can roll up to a house and see that it is fixable."

Menke and Priesing asked their real-estate agent to scout out a house in this sleeper market that they could occupy, improve and sell. They researched the sales prices of area houses and must-haves for optimum marketability — features such as a fireplace, a two-car garage, large rooms, at least three bedrooms, a pleasing view and a nice yard with big trees. The team knew what money they had to work with and what the value could be in a year after renovations.

They visited about a dozen properties, looking for a well-priced house that was larger and more valuable than their current 1,200-square-foot row house and was in a quieter, greener neighborhood, Menke says. The 1957 split-level they ultimately selected was basically "in original Sputnik era condition" and boasted an inviting living room. Its tiny kitchen, overgrown yard and pair of separate front entries were turn-offs that could be remedied. The neighborhood, near toney Chestnut Hill, was convenient to the city, offered good schools and had reasonable property taxes — all factors that attract home buyers. At the time, area home prices were falling but the neighborhood and a 2,400-square-foot-home were ripe for a turnaround.

"We created a spreadsheet listing the items the house needed, worked backward from the asking price and the comps, and made the offer," she says. At $355,000 the house cost a bit more than the partners wanted to spend, but new McMansions not far away already were going for almost $600,000. Besides, Menke and Priesing planned to occupy the house for at least a few years while the neighborhood transitioned, and they factored into their decision the value of enjoying a nice residence. They bought the place in May 2006, using a credit line plus some cash, and moved in that June.

The duo designed an airy, two-cook space with a big island and quality appliances and finishes to attract affluent buyers.

Adding Value

To command a good price in the higher-end resale market, the split-level needed a big, splashy kitchen; a master bedroom and bath suite; more light; and a commanding entry. Because the Myers Constructs design department was overloaded, Menke and Priesing hired Philadelphia architectural firm In House Studio to create a space plan and help with design details.

The partners wanted to remodel in two phases. They started phase one — the entry, kitchen and large replacement windows — in late March 2007 and planned to finish it by mid-summer. Working every afternoon, evening and weekend they made steady progress. Menke functioned as lead carpenter, occasionally hiring Myers crews to lend a hand. She contracted the masons immediately to lock them into the timeline, then scheduled all the critical path items such as windows, flooring, plumbing, electrical and cabinets. She and Priesing recorded the time they put into the project, for reference in estimating future projects. "We want to skip doing the work ourselves next time," says Menke.

Separate breezeway and foyer doors in the old house were confusing and off-putting. A central doorway with a wide patio form a new, single entry with focus and style.

In place of the two front doors, they enclosed the old breezeway and built a single entry featuring a double door and a slate-paved patio. They replaced all the windows in the house with energy-efficient units two or three times larger. The modern look, ample views and flood of sunlight made a huge difference in the space, Menke says. Installing the new windows also launched a working relationship with a supplier Myers Constructs wanted to use.

Creating a luxurious kitchen gave the house upscale appeal. At the same time it gave Myers Constructs a showplace to use in marketing to a more affluent, suburban client base. Menke and Priesing removed walls that boxed in the old kitchen, establishing a bright, open eat-in space. It has sophisticated custom cabinets (showcasing the premium level cabinets Myers Constructs wants more clients to specify); high-end, stainless steel appliances (trendy, great to use, and purchased at a contractor discount); granite counters (a buyer pleaser); and an island with two work stations, each equipped with a sink (also winners with home buyers).

Priesing monitored the budget continually. Early on she could see that the $80,000 remodeling budget was too low. Confident that the market would recover a larger investment, the partners raised the budget to $110,000. For months, though, their former residence was a financial drag. It languished unsold, with mortgage and utilities costs draining the house's construction fund. But the row house finally sold in August 2007 for about $350,000, and the increased value yielded windfall profits that the partners channeled into the construction fund. Refinancing a rental house that summer fueled the rest of the remodel.

With phase one of the remodel complete, the house appraised at $530,000 in October 2007. The partners refinanced at $417,000, paying down their credit line and putting $34,000 in the kitty. That money can go toward phase two of the remodeling project: the master suite and other improvements. More likely, it will be used to seed another spec venture, an office building that Menke and Preising are looking to buy and remodel. Myers Constructs and other tenants would lease the space.

This shift in priorities represents an important feature of speculative remodeling: keeping your options open. Menke and Preising love their house and are content to stay put. In spec remodeling, though, staying put is a relative term. After all the remodeling is finished and the real-estate market is right, they will sell the house no doubt at a very nice profit.

 

Products List

Accounting software: GnuCash Cabinet hinges: Blum Cabinet legs and pulls: Haefele Cook top, ovens, refrigerator: Viking Disposers: Insinkerator Dishwasher: Fisher & Paykel Exterior doors and windows: Weather Shield Faucets: Danze Outlets, switches: Lutron Pendant lighting: Flos Sinks: Franke


Project Timeline

2006 Stage of Project
May Property purchased
June Move into remodeled house
2007 Stage of Project
February Sell previous residence; complete remodeling design
May Refinance rental property; dig foundation for front addition and patio; frame addition
July Phase one substantially completed
October Refinance home; pay down line of credit
2008 Stage of Project
May Complete phase two of design
2009 Stage of Project
Spring Begin phase two of remodel
Summer Scheduled project completion

The Financials

"Real estate is a very local economy," says Diane Menke. "Investors need to be nimble with the spreadsheets, stay disciplined and train themselves to see opportunities."

Before buying any investment property, she and Dana Priesing analyze the deal carefully, asking themselves several questions: "Are we buying to flip or to rent? Are we buying because we see good potential cash flow in a rental? Are we buying to develop equity? What cash will need to go into the deal? What carrying costs? "Every deal needs to work in multiple ways," Menke says. If we can't sell because of market flux or seasonal downturn, we want to be able to rent at positive cash flow."

Priesing manages the finances for each property and the spec business as a whole. She uses double-entry accounting because it "forces precision" in monitoring income against expenses, she says. She inputs bills and receipts weekly in each project's chart of accounts. "I assess the actuals against the pro forma p and l," she says. With this tight control, "We've never lost money on a flip."

Budget History can be seen in the June issue of Professional Remodeler.


Company Snapshot

Myers Constructs 
Owners: Tamara Myers and Diane Menke
Location: Philadelphia
2007 volume: $900,000
Projected 2008 volume: $960,000
Web site: www.myersconstructs.com 

Speculative Remodeling Partnership
 
Partners: Diane Menke and Dana Priesing
Years in business: 5
Properties purchased: 6
Biggest challenge of this project: Doing so much of the work themselves and in their spare time


Building Equity

Diane Menke and Dana Priesing's first foray into the spec business was in 2003, when first-time home buyers flocked to downtown Philadelphia and home prices appreciated steadily. Menke and Priesing bought a sound if unattractive three-bedroom, one-bathroom house. They redid the kitchen and bathroom, added cosmetic improvements and flipped the house for a nice profit in 2004. They bought another house and did the same thing, flipping it in 2005. On both houses Menke and Priesing did most of the remodeling themselves to save money, hiring Myers subcontractors at client rates as needed.

Each sale improved the partners' cash positions, enabling them to pay off debt and polish their profile as borrowers. The ventures also allowed the partners to solidify constructive relationships with their banker, commercial lender, real-estate agent and accountant.

Using loans plus cash rolled over from the two sales, the partners bought two more houses that they are managing as rentals. "In our area, you can still buy a nice small house for $60,000 to $80,000 in an upcoming, still-rugged neighborhood," Menke says. "That's $6,000 to $8,000 plus closing costs to get started owning a small rental house than can bring $300–$400 per month positive cash flow. That's at least a 45 percent cash return on cash out every year, not even counting equity growth in the property."

In 2004, Menke and Priesing paid $60,000 for a big, plain-Jane, four-bedroom house near the city center. With simple renovations designed to maintain appeal for six to 10 years (when the house may be sold in a more favorable market), it generates $17,400 a year in rent from students and now is worth $178,000. The next year the partners bought a five-bedroom, two-bath house. This one cost considerably more, $155,000, but was in move-in condition. It delivers $22,000 a year in rent and has increased in value to $200,000.

"Now a lot of property is coming on the market as a result of bad loans being foreclosed on," says Menke. "In our area, there still is good demand for good houses near good amenities. We are having an easy time finding lending for purchases and construction loans. It's a good time to buy."

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