This month is renovation month at Atlanta REIA and I for one am super excited. For the past 19 years I have managed to perform just about every type of real estate transaction there is. Everything from notes, wholesale deals, lease options to subject to deals. I’ve used every buying strategy known to man and every creative technique to sell my properties. But, no technique has made me more money than the good old fashioned “rehab” fix and flip. People often ask me how they can make lots of money in real estate. You would think that answer would be wholesaling because you don’t need a lot of money and it is quick and sometimes painless. Well the truth is, the fastest way to wealth in my opinion is to “Find ‘Em, Fix ‘Em and Flip ‘Em.”
When doing a rehab or renovation successfully it requires tools just like any job well done. If you have the proper tools in any job, the job goes much easier, faster and most efficiently. Rehabbing is no different. There are six steps to successfully performing any renovation of any size or shape.
The first step is PLANNING. Making sure you have the proper tools is essential to your success. Things that you should have with you at all times will make your job easier. These items include, Inspection forms, Camera, Flash Light, tape measure, graph paper, lock box and “”We Buy Houses” sign. These tools allow you to initiate the first step in any rehab. In my opinion you also want to invest in a design program so you can “Mock Up” what you want your rehab to look like. If you have an iPad my recommendation is an app called Tap Glace. It allows you to measure and create that vision on paper before you ever touch anything inside the house.
The second step is SCOPE OF WORK. Everything starts here. During this phase your responsibility is to create a “scope of work.” A plan of exactly what you want to do to the property to improve its value. This is where a good inspection list comes in handy. A good inspection form will help you identify what needs repaired or replaced. Your goal is to fix things that give the property value. Some of the biggest bangs for your dollar are going to be mostly cosmetics, like new paint, new carpet, new kitchens and bathrooms. Things that the end buyer will walk in and say “WOW, I gotta have this house!”
The third step is HIRING YOUR CONTRACTOR. This can be what seems like an overwhelming task if you’ve never done it before but if you follow a few simple rules and take a few simple steps it becomes a very easy task. There are 11 ways to find good contractors. Here are just a couple. One of the biggest ways to find contractors is to network at your local REIA meeting. You should tap into the vast knowledge of others that have already paved the way. Referrals are extremely important because you get first hand knowledge of how well the contractor performed. Performed is the operative word here. You want to talk to people that have used them before and have had a positive experience. Another way is to go to the large BOX hardware stores like Home Depot and Lowes. Go to their professional desk (Pro-desk) and strike up a conversation with the people behind those desks. Tell them what you are doing and what you are looking for and ask if they know of anyone. You will be surprised at the information you will get from them. Once you find them then it becomes just like a job interview. You will ask the contractor questions like, “How big is your crew?” or “What items do you sub out?” Another one might be “Do you have any references?” These are all questions to get to the root of whether this person will show up on time, do what you ask and do it in a manner to your satisfaction.
The forth step is MANAGING THE REHAB. Now comes some choices. Do you hire a licensed contractor versus a non-licensed contractor? What order should I do the renovation? How do I pay the contractor and what happens if we find something that we didn’t plan for. These are all questions that must be handled in this phase of the renovation. The choice to hire a licensed contractor versus a non-licensed one is a personal choice, but here are some things to take into consideration that may help. If you are just doing paint, carpet, tiling and some basic stuff you may be ok with hiring an unlicensed contractor. However, if you are doing things like new construction, enlarging, moving walls, major demolition, major changes to electrical, gas, mechanical and plumbing, then those will require a permit and it is probably necessary for a licensed contractor in order to pull those permits. . The order in which you perform your rehab should, for the most part, start at the top and work your way down. Here is an example of the order of rehab you would use. You start with permits, then turn on the utilities, then Demo the house. The only deviation from the top down method would be foundation. Next comes any foundation issues. You must fix foundation issues before doing anything else. If you fix foundation issues after you fixed the roof or siding, or windows then when you go to fix the foundation you may crack whatever you just fixed because the house will shift. Once the foundation issues are fixed then you can continue with roof, rough plumbing, rough electrical, HVAC and duct work, insulation, exterior, dry wall, interior Paint, Cabinets, finished electrical and plumbing then stage and clean. This is a typical order of work. Paying your contractors is also an art. The best method is to put your contractors on a draw schedule. What I mean by that is you only pay them on certain weeks and only when specific tasks have been completed. Most investors use a 3, 4 or 5 draw system depending on how large the job is and how long it will take. Change orders are another thing that you will run into. A change order is when your contractor finds a repair that wasn’t on the original scope of work. It is in addition to what he or she was contracted to do. An example might be opening a wall and finding termite damage. That wasn’t planned for in the original bid because you couldn’t see it. When this happens make sure you document it and pay using a check. I can share more with you on Saturday and Sunday.
The fifth step is called the PUNCH OUT. This is where you are getting to the end of your project and it is almost finished but you may have a few minor details to button up before you put it on the market. In this stage you will need to walk through the house and mark or identify any areas that need that little touch of TLC before you pay your contractor their final check. This is where you verify your punch list is complete, all the permits are signed off and all lien waivers are signed. Once this is complete you can shake your contractors hand and say “I’ll call you when I get my next deal.”
The sixth and final step is STAGING. To be honest, I have always staged my home to a certain degree but it hasn’t been until the last several years that I really put an emphasis on this aspect. Research has shown that staging a home properly sells a home 73% faster than a home that is not staged. According to the Real Estate Staging Association there are 10 benefits to staging your homes. Due to my limited article space I am only going to give you my top three. The number one reason is faster sales time. Homes staged properly sell 73% faster. Higher sales price is another. People tend to perceive a greater value when the house is staged. They can envision themselves living there. The last one is a biggie. Staged homes often get better appraisals. Often times the appraiser will overlook minor flaws because they are impressed with your finished product.
If you want to make and average of 40k per deal and you can follow these simple steps, I am completely confident that anyone can rehab successfully. If you are interested in more information about rehabbing you have several opportunities this month at Atlanta REIA. I will be hosting the “Onsite Renovation Group” and I will be teaching a two-day “Find ‘Em, Fix ‘Em and Flip ‘Em” Bootcamp and bus trip November 19th and 20th. I really hope to see you there. Happy Investing.