This is a guest post by fellow real estate investor and blogger Danny Johnson. As usual, he has done a knockout job of nailing this topic of “fix and flip”.
There is something very rewarding about taking a dilapidated hunk of crap house and turning it into one of the nicest houses on the street. Actually, there is also something that usually comes with it that makes it even more rewarding…PROFIT!
It's no wonder so many people want to start flipping houses.
On the face of it, flipping houses doesn't seem that complicated. There's only three steps, right?
- Buy a house that needs work at a discount
- Fix it up
- Sell it for a nice profit and the knowledge that you helped improve the neighborhood
I'm sure you know there is a lot more involved. If you've spent even just a little time learning the ins and outs of house flipping, you know that each of these steps can realistically be broken down into about 100 other steps. Don't worry I'm not going to attempt that here.
I do want to focus on the part that many people probably don't give a lot of consideration to in the beginning of their real estate investing…the fix up.
The reason I want to focus on the fix up in this post is because it is the point that most people struggle with once they do get a deal. This is the make or break point where a good deal can become a bad deal. It's happened to a lot of investors.
You could do a good job of estimating the repairs for a rehab only to be convinced by contractors that it will cost you much more to complete the rehab.
You could have estimated more than enough to fix the place up only to find that your holding costs have skyrocketed because the job has taken far longer than it should have.
You could have built in plenty of room for a profit only to lose money because your agreement with your contractor didn't spell things out clear enough and you end up giving them a bigger draw than necessary and they disappear.
I think you get the point.
I've been flipping houses for over 10 years now and the thing that gives me the most gray hairs is the fix up.
Of course, I've learned a lot through trial and error and am continually learning more on how to improve my processes so that this part of a flip isn't as much of a problem as it used to be.
This post is my way of helping you to avoid some of the problems I've encountered during this second step of the flip.
Know What Needs Fixing
You don't need to necessarily know ‘how' to fix everything, you just need to know ‘what' needs fixing.
This is obviously going to vary depending on several factors. Lower end houses usually won't require fixing things that are still in good shape, even if they are outdated. Higher end homes will usually require updating with fixtures and finishes that are trendy at the moment.
The middle of the road houses are usually the bread and butter of your typical house flipper. The best way to know what level of rehab is necessary depends on the competition. What do other similarly priced and nearby houses that are for sale look like? What finishes do they have? Do they have granite? Wood floors?
When it comes to knowing whether mechanical systems, structural, roof, or other parts of the house need fixing or replacing is something that you should be able to learn pretty easily by checking out some books on ‘inspecting houses' from your local library. This is how I started. I read a book on inspecting houses cover to cover so that I knew what to look for.
Alternatively, you could rely on a knowledgeable contractor to help you if they are willing to look at houses with you. Might not be a bad idea on the first few you go to look at, or any that may seem beyond your ability to determine what should be done. Other experienced investors are also good friends to have to help you with those decisions.
Know What Repairs Should Cost
The best way to get an idea of what repairs should cost is to find a contractor that does work for a local investor (or the local investor him/herself) and have them break down typical costs for the most common items.
Many items can be broken down to price per square foot or other unit of measure.
You'll typically want to know what the following items cost to replace for the typical house price range you intend to flip:
- Flooring (usually price per square foot)
- Painting (usually price per square foot – floor space (not wall space))
- Roofing (usually price per square 10'x10′)
- Counter tops
- Tile work (usually price per square foot)
- Bath vanities
- Installing light fixtures
- Installing plumbing fixtures
- Kitchen cabinets (usually price per linear foot)
- Fencing (usually price per linear foot)
- HVAC cleaning/repair/replacing
- Sheetrock repair
- Trim work
- Garage doors
- Foundation leveling (especially in places like San Antonio)
When you calculate repair costs for the house, never forget to add a fudge factor. Typically, adding 10% of the job cost for surprises or things missed should do it.
Know What Materials You Want to Use
You should know what materials you will be using for the rehabs, where to get them, and their cost. This is just taking several hours to explore Home Depot or Lowe's and write down (or more commonly, take pictures with your smartphone) the items you want to use. Keep in mind that emotion shouldn't have any part of this business and you need to always remember that you are not going to be living in the house. DO NOT fix up the house as if you were going to live there. You're not. You can fix it up nice and keep your budget small by getting fixtures and finishes that look expensive but are not. That's the goal.
The main things to look for are light fixtures, plumbing fixtures, tile, appliances (scratch and dent places usually best), doors, counters, cabinets and cabinet hardware.
It's best to know what materials you want to use so that you can clearly define what is to be used in your contract with your contractor.
On one of my first rehabs, I did not tell the contractor which fixtures to use and they installed the cheapest brass fixtures throughout the house. They looked awful. I had no recourse as I never specified what I wanted. It was my mistake. You don't have to make it, unless you really like brass. 🙂
Know Who to Hire
There are probably thousands of contractors in your area. How do you find the ‘right' ones?
Maybe you thought you would just get online and search for contractors. That's what I did when I was looking for someone to paint a historic house we were rehabbing. The bids were all over the place. The guy that rolled up in a Hummer had bid $56,000! Mind you, that was just for painting the exterior!
If we consider who we want working on our jobs, we come to the conclusion that it is probably best to hire someone that has worked for other investors. That's what I've found to work for me. They already know that we might not pay as much as regular homeowners wanting a home renovation, but we do provide a lot of work for them.
So how do you find these contractors that have experience working with other investors? One way that works well is to drive the areas that you are considering flipping in (places where rehabs are taking place of course) and stopping at houses that have trailers or dumpsters full of construction debris in the front with the front door wide open. Go up and introduce yourself as an investor and let them know you are looking for contractors. Get their business card.
While you are there, it's very important to talk with them for a little while to see if you might be compatible. Trust me, if your gut tells you there is something you don't like about them, go with your gut. Better to avoid them now than before you get married to them on a rehab.
Check their work
Take a look around. Is the job site clean? Are people working or just standing around messing with their phones (nothing bothers me more than this these days…)? Does the transition of paint from the baseboards to the wall have a neat and nearly perfect line? Or is it sloppy and all over the place? These things matter and give you an idea of how much they pay attention to detail.
Once again, spend the time now checking how they handle their work. People are not likley to change their ways, don't think you will be able to change them. That's a huge life lesson that I've been learning over and over again. I think it's finally sinking in.
Know How to Hire Contractors
The most important thing here is the contract. You are hiring these guys as ‘Independent Sub-Contractors' and NOT employees. You must have a contract that spells out EVERYTHING.
So what exactly is ‘everything'? Good question. I'm glad you asked.
Here are the main points your contract should cover:
- Who you are hiring
- The start date
- The completion date
- What happens if not done by completion date (can charge penalty per day late)
- All change orders are to be in writing with time and cost before being done
- The total cost of all work (including materials is recommended)
- Statement that they will keep jobsite secured and clean
- Payment schedule stating when and how they will be paid (use milestones)
- Cancellation notice (giving you right to cancel without compensation for tasks not completed)
- Warranty – Contractor should provide at least 1 year warranty on work
- Something specifying that the contract is the ‘Entire Agreement'
- Scope of work laying out exactly what work is supposed to be done by the contractor
- Material specification stating what paints colors to use and materials to use
- ‘Time is of the essence of this agreement' statement (contract mumbo jumbo)
- Contractor and your signatures
There might be some other things and a quick talk with an attorney will probably be well worth the cost.
Of all the things that are involved in flipping houses, the thing that has the most potential to drive me crazy (and most other investors I know crazy), is dealing with the rehab.
If not handled correctly, rehabs have the potential to ruin your day, week, month or even your life if you're not careful. In the short term, repair work done incorrectly, jobs going over budget or over deadline, wrong materials being used, people not showing up to work on time, leaving early, going missing for days or weeks at a time is a real pain in the ass.
Do not keep a contractor that is making you miserable because you don't want to spend the time to have to find another. Trust me on this.
Most of the problems I've had in the past with rehabs could have been avoided had I been honest with myself about how things were trending. I thought I was saving time by just continuing to use the same contractor that already knew exactly what I always wanted done at each house that we were flipping. It's tempting to think the time is better spent finding our next deals, and it is. The problem though is that I wasn't really saving time. I was wasting time and getting frustrated.
If a contractor is not working out, don't be afraid to fire them or at least not hire them again. It sounds obvious but can be tempting when it takes a while to find a good contractor.
The final thing I can recommend is to spend as much time as it takes to find a good contractor. Don't settle. I think most people will meet with 3-5 contractors and want to just settle on one of them even if they are 100% about it. Not good. This has probably been the single biggest mistake I've made…over and over again.
Hopefully this post will help guide you so that you will be well prepared to handle that fixup for that flip that will make you a lot of money.
If you have any additional advice on rehabbing or tips on finding good contractors, I'd love to hear from you. Simply leave a comment below. I will be looking forward to and reading all of them.
Danny Johnson has been flipping houses with his wife, Melissa, in San Antonio, TX for over 10 years. Danny has blogged about EVERYTHING he did in house flipping business for a 34 week stretch on his blog FlippingJunkie.com – A House Flipping Blog which he turned into a best selling book on Amazon called ‘Flipping Houses Exposed: 34 Weeks in the Life of a Real Estate Investor'.
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