Following renovation, the exterior appeal of the property has been greatly improved.
Investors face challenges with rising material and labor costs, as well as abandoned properties.
Fernando Rodriguez Esteban, president of San Juan-based Alesta Group LLC, which specializes in real estate resale investments, said in an interview with News Is My Business that finding properties to resell is one of the most difficult parts of the business.
“Finding vacant homes whose owners are willing to sell at the right price is the hardest part of the process,” Rodriguez Esteban says. “This is the kind of business that has to be a win-win. Everybody has to win. Homeowners who want to get rid of their homes because they're in bad condition are probably financially unable to fix them, and often it's a home they inherited.”
Experts explained that many people inherit rundown homes that no one in the family is interested in, which motivates them to sell quickly.
“There are a lot of situations and conditions where people want to sell quickly and not go through the process of going to the bank and getting an appraisal,” so they prefer to find willing investors who are willing to buy, often in cash, which shortens the process of checking the title and completing the purchase to just a few days.
Rodriguez Esteban detailed various techniques for finding homes to resell, such as driving around “interesting” areas and “looking at abandoned houses and sometimes talking to neighbors.”
“It can be hard to find an owner, so we ask neighbors. If we find an owner and they're willing to sell to us for the right price,” the resale process involves “buying the property, fixing it up, renovating it, making it beautiful and livable, and reselling it to a family who will enjoy it.”
The slogan “Turning Houses into Homes” reflects the company's mission, but global inflation has doubled the cost of materials and labor to flip a home, he said.
The cost of a home that previously cost around $60,000-70,000 to purchase initially, would cost $25,000 to renovate and then go for $120,000 after resale has risen significantly.
The same property before renovation.
“Now you have to invest $40,000 to $50,000 and buy a house at a high price before you can resell it,” Rodriguez Esteban said. “Before, you were trying to make 30 percent of your investment, but now you're making 15 to 20 percent. There are some cases where you can make 50 percent of your investment, but it's rare.”
Rodriguez Esteban noted that luxury properties are less profitable.
“You might get 10 percent, 12 percent or even 15 percent profit. At the end of the day, it's a percentage game,” he stressed. “More luxurious properties offer lower profit margins, whether it's investment, resale or rental.”
According to Architectural Digest, many home flippers follow the 70% rule, investing no more than 70% of a home's estimated after-repair value (ARV).
“Generally, the ARV is calculated as the current property value plus any added value from any improvements you make,” an Architectural Digest article states. “The basic idea is that for a project to be worthwhile, you need to be able to make at least a 42% gross profit from the sale, and the difference between the purchase price and the final sale price should be enough to cover closing costs, maintenance fees, commission, and other non-improvement expenses.”
Abandoned house
Rodriguez Esteban stressed that many homes in Puerto Rico have been abandoned due to economic problems, and that the island lacks transparent and efficient procedures for municipalities to own and dispose of these properties.
He said what is being implemented in Puerto Rico is a pollution concept in which local governments try to force owners to sell.
The current concept of pollution is “complicated and unclear,” he said. By contrast, the continental U.S. has simpler procedures, such as tax liens and tax deeds, that allow third parties to pay property taxes and ultimately take ownership if the original owner defaults on payments.
“In the United States, they call it property taxes, and a third party pays the property taxes. After two or three years, the municipality can sell the property, under certain conditions, to the person who paid the lien,” he explained. “The tax deeds are different. If someone doesn't pay the property taxes in two or three years, the municipality takes over the property and then sells it. That's why properties don't sit for more than two to five years. That doesn't happen in Puerto Rico, and that's why you see properties that have been sitting for 40 years.”
To address the issue, Rodriguez Esteban called for a process that would allow municipalities to take over and dispose of abandoned properties.
Maria Miranda is an investigative reporter and editor with 20 years of experience in English-language newspapers in Puerto Rico. In that position, she has worked on long-term projects and reported breaking news under tight deadlines. She is adept at data mining from public databases and interviewing people (both public figures and private sector individuals). She is also a translator, editing and translating an economic book on Puerto Rico's financial crisis. She worked as an interpreter for FEMA during the recent Hurricane Maria recovery efforts and earned her FEMA badge.