We present to you the third of a series of articles about Fix and Flip ("F&F") as a real estate investment strategy. In the first article, we offered our readers some pointers on finding an Fix and Flip property at a discount. This was followed by an article on what to do to get financing fast before someone else does. In this one, we will develop some ideas on how to proceed carefully with repairs.
Fixing up a property requires planning.
One of the basic tenets of real estate investing is that the profits are made when you buy. And we agree with that, but with some caveats. In an Fix and Flip investment, even if you offer 50%, 60%, or 70% of the asking price on a property, it is not a guarantee that you will make a profit on the property when you sell it: you still have to fix it on a budget! That is, you prepared a budget before you purchased it, but know you have to make it work for you.
How do successful flippers go about the renovations?
First, they plan carefully to execute the repairs on time and with the desired quality standards and budget. This implies that you should acquaint yourself with Project Management tools, such as Microsoft Project, to organize the whole refurbishment efforts. Or, use Excel or any type of accounting software to keep detailed and up-to-date records of your expenses. Prepare a Gantt chart to know what needs to be done and expand on it, so you know what materials you'll need and what type of specialized labor you will have to contract to get it done.
Second, seasoned Flippers know what they can and cannot do for themselves. For most investors, doing the physical work on the Fix and Flip property is part of their business model. That is, that's their job. But they should also know when they are getting in over their heads. From day one, a Flipper should plan on which work should be done by others and immediately get a quote and schedule them way ahead of when you'll need the job done.
In this respect, you should know that there are two kinds of contractors: true professionals and cheaper, riskier alternatives. The cheap one will likely cost you a LOT more in the long run. You might be able to get by on a few minor repairs. Still, for anything significant, you will want to hire a true professional. If you do work for which you are not trained or capacitated yourself, you may eventually need to hire a professional to fix your mistakes, which can get even more expensive.
Fixing up a property requires an eye for detail.
What type of issues should you be inspecting from the start to know all is covered?
You most likely walked the property before investing in it to assess all visible damage. In any case, in the absence of a certified home inspector's report, make sure you at least evaluate what needs to be done and budgeted for on the following fronts:
You might need a permit for the following, so quickly start the process of obtaining one:
- Structural and foundation repairs, as needed. Do bring in a licensed engineer to plan and do the repairs.
- Exterior and interior demolition. Budget accordingly to have the demolition materials removed from your property.
- Framing. You might want to get larger, more modern windows or doors, which should be done initially.
- Insulation. In older properties, asbestos removal might be an issue. Be prepared to deal with it. Newer, better-quality insulation will be a great selling point for future buyers.
- Plumbing. This can become a severe issue in an old house but eventually a great selling point (new plumbing means many years of leak-free operations).
Electrical. First, the basics (wiring, panels, breakers) and then the finishing aspects (lamps, switches, smoke detectors, among others).
You can most likely do the following without a permit:
1. Mechanical. Do you need new equipment, or will a significant overhaul be enough and save you good money?
2. Walls and ceilings. Will you be tearing down walls to make the house a better living space?
3. Flooring. Most likely will include some demolition and baseboard replacements. Then you will decide on laminate/carpeting/tiles.
4. Kitchen. It is probably the single most crucial aspect of an F&F rehab.
- Kitchen Countertops and tiling.
5. Bathrooms. Buyers love new bathrooms, which can probably improve the property's final value.
6. Production Crew: painting, trimming, finishing touches.
7. Landscaping. Please wait until the very end but plan to get it done and looking nice.
8. Final Inspection. Budget for one, as this will make the selling side of the process go smoother.
So, take a few or several days to prepare a detailed budget and have professional contractors come by. Have them inspect and quote you on the repairs (so you can pick the best one for your needs). Once you are ready, purchase materials. Many stores will keep them in their warehouse for a few weeks, saving you from having to store them yourself.
Go through the trouble of drafting up contracts.
As with most construction endeavors, there is no such thing as a verbal contract. Make sure everything you expect from the contractor is in writing. If you think it is OK to skip the contract process, at least email your understanding of what the work being contracted includes and ask for a reply. Also, you can use a memorandum of understanding (it is sort of like a written out verbal agreement) to have your back covered. A contract helps you deal with people who are "poor of memory" (since you will more than once hear a contractor tell you: "but you didn't ask for that").
Once you have a written contract drafted, adjusting it to a new contractor and a new budget will be easy and straightforward.
Stick to the Gannt Chart as much as possible
Even if it means working late hours for you, make sure you try to keep up with the project schedule. Remember, you are most likely paying interest on a loan, so the amount you owe will increase as time goes by. Do not anguish about it but do take it seriously.
On this subject, some Flippers adjust their plans based on the following:
- Increase the amount of time the contractor says work will take to get done by anywhere between 30% and 100% of the planned time. Contractors' estimates expect (a) good weather, (b) no sickness, injuries, or unplanned days off, and (c) all their worker's cars to run smoothly and for the workers to show up.
- Contractors have previous engagements that they must complete. Sometimes, when they say they will be there "first thing on Monday Morning," they are unsure that their current project will be completed by then. Contractors want to be paid for their work as soon as it is completed, so it may be best not to show up to your construction site until it is done (and paid for) elsewhere.
Fixing up a property includes planning for the selling stage.
When preparing a budget, be aware of hidden future costs to the novice. Make sure that you have budgeted for items such as:
- Closing title insurance
- Home warranty
- Unpaid property taxes
- A final, professional home inspection.
Then bring in an experienced realtor to help you with the sell-side of the project. Remember, they have tons of knowledge, and it is in their interest to help you. In our experience, every single penny you pay for a realtor commission will most likely be worth it for your chances of making a profit.
Plan accordingly so that repairs happen on time and with high-quality standards. Document work to be done in writing with your contractors. Try to purchase materials in advance and have them stored by your supplier (if possible). Do plan to have a professional home inspector come by at the end to let you know what's missing.
If you have decided to invest in a Fix and Flip property, consult with AMI Lenders. We are one of Houston's fastest closers and could become your financial ally. We fund our loans and can move as fast as the law allows. Borrowers in Houston will also have difficulty finding lower rates for hard money or private loans than we offer. We want our customers to succeed and take advantage of the financial opportunities provided by real estate investments. Visit our website today and fill out an application for a loan backed by an investment property.