How to fix houses that you flip
Who should do the work, how to estimate cost, how much work should you do, how to find contractors, and other best practices.
We’re back with another installment of our six F’s of real estate investing: Find, Finance, Fix, Fill, Flip, and, our favorite, Fun. Today, we’ll be covering the third F: how to “fix” properties!
You’ve found the property, financed it (or bought it in cash), and now it’s time to get to work. In this piece, we’ll cover:
- Who should do the work
- How to estimate project cost
- How much work you should do
- Finding and working with contractors
- Other best practices
Let’s dig in!
Who does the work?
After you’ve figured out the “what,” it’s time to figure out the “who”, as in who will be managing and executing on the work you’ve set out for the project. Take a look at the chart below to get an idea of the team you’ll want to put together. In this chart, the X axis represents the complexity of the project and Y axis — the number of units affected by the project.
Let’s start at the bottom left. If you are making relatively simple renovations to a small number of units (say, one unit), you’ll likely be able to manage the project and a team of subcontractors yourself. When we say “simple renovations,” we mean rehab projects in the under-$25k range, with a few specialized subcontractors (paint, carpet, tile, etc.) taking on specific parts of the project. If the scope of the project is small, these subcontractors do not necessarily need to be licensed.
Taking point on managing a renovation project will also be valuable experience moving forward. The more you scale your business, the more you’ll find yourself delegating, and first-hand experience is a prerequisite to effective delegation. Managing a project yourself will help you build essential skills, such as:
- Quick estimation (we will cover this below)
- People management
- Problem solving
- Design eye
- Time management
Moving up to the top left quadrant, if the renovations are relatively simple, but you’re taking on several units at once, you’ll still likely be fine with just subcontractors (as opposed to a general contractor). That said, it’s probably a good idea to hire a project manager who can keep track of all the moving pieces, and make sure everything is on-track. Otherwise, you may see timelines slip and/or budgets missed — bad news for your profit margins.
On the bottom right, once the complexity of the project moves up but you’re still working on a low number of units (one, maybe two), you’ll probably be fine managing the project yourself but will want a licensed general contractor on your team. First of all, more complex projects (garage conversion, swimming pool, foundation work) will legally require a licensed contractor and often the issuance of a permit from the municipal government. Secondly, general contractors bring their own team of subcontractors who know each other and work well together. If you were to separately hire multiple subcontractors, they could get in each other’s way, be operating on conflicting timelines, etc. A general contractor’s team will be well organized and coordinated.
Finally, in the top right quadrant, is a project or group of projects that are complex in nature and involve multiple units. Given the complexity and need for permits etc., you’ll want a GC on your team to take point on the execution of your project(s). And, given the many moving parts you’ll need to keep track of, you will want a project manager on your staff to handle the day-to-day bookkeeping of how everything is progressing. Make sure you’re prepared when approaching these projects!
Quick cost estimation
When you’re sizing up a home rehabilitation or renovation, being able to quickly estimate the cost and timeline of a project is a critical skill in house flipping. Here are a few tips:
Start by splitting the house into interior and exterior. When taking inventory of all the mini-projects in your rehab, first split the house into interior and exterior, and then take inventory of the specific parts of the house you’ll likely need to work on. Here’s an example of a typical property:
- Entire house: paint (two tone), windows, electrical, plumbing, HVAC
- Divide into rooms:
- Bedrooms: flooring, casing (floor+doors), doors, fixtures
- Bathrooms: flooring, casing, doors, fixtures, shower enclosure, cabinets (new vs paint), countertop, sink
- Kitchen: flooring, casing, doors, fixtures, cabinets (new vs paint), countertop, sink, appliances
- Garage: paint, cabinets, epoxy, floor, garage door
- Paint (2-3 tone)
- Landscape (front/back)
Calculate rough cost by doing the following: Square footage x Price per square foot of material (varies by quality). When pricing out the cost of a specific renovation, an easy rule of thumb is the equation above. There will likely be a low, medium, and high price per square foot, depending on the quality of the material. Let’s take carpet, for example.
|$2.00 / sq. ft||$3.75 / sq. ft||
$6.00 / sq. ft
Say you have 3 bedrooms, each at about 100 sq. ft, and a living room of about 300 sq ft. If you pick a medium-grade quality carpet, you can expect to spend (3 x 100) + (1 x 300) = 600 sq ft. Then 600 sq ft x 3.75 $/ft comes out to an estimated grand total of $2,250 for carpeting. Substitute that with a high quality carpeting, that takes your total to 600 x $6 = $3,600.
You’ll gain an idea of these prices with experience. At scale, it’s common to have two color palettes and predetermined high, medium, and low materials for every aspect. So, it becomes as easy as telling your project manager or contractor, “Let’s do the medium-grade beige for this one.”
Major systems aren’t visible = potential major surprises. Some of the biggest potential costs in a project are the least visible ones. We’re talking about HVAC, electrical, plumbing, etc. — big issues here can lead to big surprises, and not of the happy variety. Make sure you do your due diligence here, whether that’s going into the attic, going to the circuit breaker, checking out the ventilation ducts, or inspecting the air conditioning system. If you don’t know what to look out for, find someone who does.
Timeline: $1000 = 1 day. A very quick estimate you can do to help figure out how long a project is going to take is to assume you can do about $1,000 of work per day. In other words, if you have a $50,000 project, you can assume it will take 50 working days to complete. Note that we are talking about working days here — contractors and subcontractors don’t work every day! (They also don’t necessarily work every business day, every team varies.)
Rightsizing the project
A very important question to ask yourself is, “how much work should I do on a given house?” Or, how heavily should I rehab the property? Let’s discuss.
Know your audience (landlord vs. homeowner). Are you going to sell to a landlord who is going to rent out the property, or to a homeowner who is moving his/her family into the house? Typically, rental properties will need less flashy/expensive features, given the short-term stay of the occupants. You may want to make the materials more durable, so they can last for several tenants.
Comparables. As we’ve mentioned in several other pieces, comparables, or “comps” are very important in determining the sale price of your property after it’s fixed, but also in assessing the level of rehab your property needs. If the surrounding neighborhood isn’t that nice, there is no need to go too crazy with the project. Use Google Map street view or get creative (some investors have used drones*) to determine house and yard quality in your area, and how much you need to bite off with your project.
* Drone use is not often legal for non-licensed operators. Make sure you follow state and federal ordinances.
Do your research. Use your comps, Zillow, Redfin, and any other resources to figure out how much an extra bedroom, bathroom, or pool will add to the value of your home. With the right team and the right neighborhood, some of these additions can be big wins and really help your margins. Remember, your goal when flipping a house is to get the biggest return on investment possible.
Are you building a brand? Once you start to get a lot of flips under your belt, you’ll want to consider your brand. Do you want your flipping business to be known for any particular features or design aspects? If so, what are they? One of our most experienced in-house flippers always finished off his projects with granite countertops and a red door. When people saw the red door, they knew who did the work and, given his reputation, that the work was well done. Think about what touches you’d want to differentiate yourself with. They may be a bit more expensive, but building a brand takes investment! Over time, building a brand in the community can help give you early access to new deals on the market and help solve your sourcing projects for you.
Finding and working with contractors
We’ve dedicated an entire post to finding, managing, and working with contractors, so we’ll just go over a few major bullet points here.
Project managers and contractors can be your biggest asset or liability. There is a ton of risk associated with finding and choosing these team members, so pick carefully. There is risk from a legal perspective if the work is not done properly, and these people have access to your properties, so you need to trust them. Not to mention, missed budgets, missed timelines, and having to redo work are margin killers.
Don’t take their word for it, vet them. Given the above, it’s critical that you vet your team thoroughly. Don’t just take them at their word. Check their licensing, check their insurance, meet their subcontractors, call their referrals, look them up on BBB, Google them, view a current project they’re working on, and ask for a portfolio of past projects. Do all the research you can to ensure you’re hiring the right team.
Contractors are in tight supply so when you find a good team, don’t let them go. There are lots of places you can go to find contractors (see our contractor piece), but the good ones are in tight supply. Once you find a team that you trust — they do good work and help your business succeed — keep them.
Treat them well, but hold them accountable. You need to know where your project stands at all times to save you time, money, and headaches. Set really clear expectations upfront and ask them to do the same. You need to establish rules of engagement to limit surprises. Show up unexpectedly to the site and document anything you don’t like. Hold video walkthroughs if you can’t do walkthroughs in person. It’s your prerogative. That said, treat them well when they are meeting or exceeding expectations. Pay them well (don’t nickel and dime them) and feel free to throw in special treats: lunch, beer, pool parties, you name it. Showing your contractors you care about them will keep the morale high.
Other best practices
Get the little things right. Have you ever walked through a house and several very minor details (floorboard is nicked, faucet is leaky, doorstop is missing) just leave you with a bad taste in your mouth? Those details only account for about 10% of the work of a project, but that first impression is so important for the buyer. Nail down the details to ensure max value for your home.
Make friends with neighbors. This will save you several trips to the property. If something is going on, having a set of eyes close by and someone who can, say, go lock the door or turn off a light, will be a huge help. Also, neighbors can help you find potential buyers!
Protect your project site. If your project is taking place is a less-than-ideal neighborhood, fence it off. Don’t leave materials, appliances, etc. lying around, just to be stolen overnight. Also, fence off the HVAC system. Protect your assets and your money.
We hope you found the information helpful! We will be back soon with the next piece of our how to fix and flip a house series.
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This article is offered for informational purposes only. The information and guidance offered is generic and may not apply to you or your specific project or property. Please seek out appropriate professional advice before making any investment decision.