For investors looking to pick up and rehab houses for quick resales, the rules in today's tough market are very different from a few years back.

Today's number one precaution, say high-volume rehab investment specialists, is this: Avoid over-improving properties -- or you'll lose your shirt and take forever to sell.

Ed Rooney, a long-time investor based in northern Virginia -- who has his own construction crews of carpenters, plumbers and electricians to renovate houses he buys -- says the key to making money right now is to spend less on fix-ups -- no more fancy kitchens and bathrooms -- and get out quickly.

During the housing boom years, Rooney says he'd typically spend $35,000 to $50,000 rehabbing a property -- installing cherry cabinets and granite counters -- and took anywhere from 30 to 60 days to finish the job.

Now "it's 12 to 15 days and anywhere from $4,000 to $19,000" -- and generally few if any of the fancy extras.

With foreclosures and short sales competing with everything that comes on the market, "you've got to be the lowest (asking) price in the area." Ideally this is by a 10 to 15 percent margin "if you're going to sell fast," Rooney told Realty Times in an interview.

To accomplish that, you not only have to buy low to start, but be highly cost-efficient in the types of rehab improvements you make, your contractors, and your turnaround time.

On the west coast of Florida, long-time investor and author John Schaub, who has bought hundreds of houses since the early 1970s, says it's essential that investors not become prisoners of "reproduction cost" formulas that used to work, but amount to over-improvements today.

"Although reproduction costs are often cited by appraisers and builders," Schaub says smart investors now have to ask a very different question: "Would you reproduce this building in today's (tougher) market?"

"When you look at house," Schaub says in his latest "Strategies and Solutions" real estate advisory, "ask yourself: Is it OVER-improved for the area?" based on what's selling or being built now?

"If a builder today can build a brand new house for $100 a square foot," says Schaub, a house built years ago for $150 a foot (even though it has a fancy kitchen and bathroom) "is now worth closer to $100 a foot" -- at least until buyers are willing to pay a premium again.

Excellent points to keep in mind.

Published: November 21, 2008

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.