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How to Flip a House Using Project Managers

by Michael LaCava on October 20, 2012 · 16 comments

  
How to Flip a House

I had a real bad day the other day.

With framing subcontractors coming in as scheduled, I all of a sudden realized that the floor that they would be framing over had some very serious issues.

Pounding on my cell phone to find someone…anyone to help me on literally zero notice, I realized the only person I had that could do it…was me.

So I dusted off the flooring toolbox, started pulling out the old flooring tools and began ripping up floorboards with my trusty Wonderbar.

Not having done this kind of work in a few years, one of the boards I ripped up broke loose and smashed me square in the jaw.

Dazed and bloodied…and luckily not having to call 911…I realized something…

When you’re first learning how to flip a house, there’s lots of different ways to do it.

Especially when it comes to the rehab, there are a number of different paths to take:

  • Some like to do all the rehab work themselves.
  • Some don’t want to do any of the rehab work themselves.
  • And some pick the middle path, doing some work and then having others do the rest.

Which way is best?

How to Flip A House – Do It Yourself?

Personally, I don’t mind doing some of the rehab work…just as long as I don’t have to do all of it.

Unless I feel the overwhelming need to pound a sledgehammer through a few walls in the demo…I’d much rather pay someone else to do it.

Personally, I’d rather spend my time looking for the next deal.

I used to be a flooring guy for years, so if I have to do some of the work on a rehab, I will. And if my experience this past week tells me anything, I think its best to stick to overseeing the rehab work instead of doing the rehab work.

However, when you’re learning the basics of how to flip a house, there’s no doubt that getting your hands dirty on your first house flip is a great way of really getting to know the business.

Doing at least some of the rehab work yourself to start off isn’t a bad idea…but then getting others to do it for you afterward is a great way to scale things…as well as limit potential trips to the Emergency Room.

The Pros and Cons of Hiring a GC to Do Your House Flips

In an ideal world, hiring a general contractor (or “GC”) to do all your rehab work is the best possible way to go when you’re house flipping.

But that’s only if you can make the numbers work.

It’s certainly nice to have one single point of contact to do all the dirty work for your house flips and rehabs while you’re out looking for the next deal or rounding up potential buyers.

This way is far easier on you (and your chin), especially if you’re doing it part time or have other real estate deals to tend to.

On the flip side, in many areas of the country it’s extremely difficult to get a contractor to do the work for you and still stick to your 70% Rule in hopes of getting the ARV and profit margin to make the deal work.

The issue is that the really good general contractors out there tend to use the same subcontractors and don’t bid out each job they do. They have “their guys” who do the subcontracting and they’re oftentimes reluctant to try to negotiate with them.

On top of that, remember that a GC adds on 10-20% over what his subcontractors charge him. There’s nothing wrong with that because everyone needs to make a profit here.

And believe me, on many jobs, your GC really earns that wage!

A good tip here is if you are dead set on using a specific contractor, you might be able to negotiate a lower management percent or even none at all for a percentage of the profits on the deal. General contractors also can be good sources of potential funding as well.

If you are just learning how to flip a house…everything is negotiable in house flipping!

Should I Do The Rehab Myself when Learning How to Flip a House?

To answer this question, it’s going to depend on a lot of different factors, but the biggest factor of all is you.

For me, it was a logical step to do the rehab on my first few house flips. As I said before, I was in the building trades full time and was used to being on job sites. I love construction and to me, turning a run-down shack into a beautiful place to live is one of the coolest things around.

So I went out and got my state contractor’s license, ready to GC my first house flip all on my own.

As I look back on it, despite the challenges, it was great experience. Primarily because I could see firsthand how the whole operation runs. This on the job experience has really helped me in my house flipping career — so much so that when I hired the job out in the future, I knew exactly how to set the rules and how to follow the whole house flipping process.

There’s nothing like firsthand experience to teach you that.

In House Flipping…Know Thyself

Do you absolutely need to do it this way?

I don’t think so. But think of general contracting your first house flip as a bit of “on the job training”. It’s not necessary – but it’s surely an experience you’ll refer back to many times in your house flipping and real estate investing career.

If you have a full time job and are rehabbing one house at a time, then you may very well have the time, but this largely depends on the kind of job you have as well.

If you have a fair amount of flexibility with your job hours, then perhaps it may work.

If you’re tied to a desk all day and an hour commute away from the geographic area you do your flip in, then perhaps not.

However, only you can answer that.

Do understand this though; in order to effectively manage any real estate investing rehab, you will have to be available to manage the sub-contractors by phone, early in the mornings or in the evenings. And if you have other things on your plate, like a job, a wife, kids…this gets tiresome.

There will be times when you’ll need to go on site and if you are on a business trip a thousand miles away at the time, it might be tough to pull this off.

For me, my flooring business allowed me the flexibility to stop in on the job site and check on things whenever I needed so I was fortunate enough to have the flexibility.

You on the other hand, may not.

Ideally, if you have enough money saved up to quit your day job and become a full time Real Estate Investor then this will be much easier for you to manage. Plus at that point, it IS your job!

So if you’re not sure if being the general contractor is right for you, then you may want to try it to see if you like it.

But if you’d rather play it a bit safer, then there is another choice that may be right for you.

Behind Door Number 3: The Project Manager

Short of hiring a full blown general contractor, you could use a project manager instead. We’ve found this to be a very effective way to rehab house flips, especially where hiring a GC is cost prohibitive.

For example, you could approach a smaller, hands-on type of licensed carpenter who has experience working with other subcontractors. You could then negotiate a fee based on his involvement in the project.

I’ve found carpenters and other subs very receptive to this arrangement. On top of the money they make doing the other work on the property, he’s getting paid an override on how well he manages others.

Like I said before, everything is negotiable in real estate investing and house flipping, so be creative here. And remember it’s about “win-win”.

For example, you could do any number of these financial arrangements:

  • Flat Fee: Simple enough. Pay a flat fee to oversee the job. No real creativity here.
  • Partnership: Work out a partnership or an equity stake in the property. This is a very creative way to handle things. I wouldn’t suggest this strategy on your first flip, but its one to consider.
  • Percentage: Pay a percentage of the overall job that may be smaller than a typical general contractors cut. If he’s good, this could really save you.
  • Flat Fee and Performance Bonus: Pay the project manager a project management fee of around $2,000 and then assign bonuses for meeting timelines and budgets. The bonuses really keep the project manager motivated because he has a skin in the game. You pay some money upfront, but even more when they hit performance metrics.

Whatever you do though, do your best to establish a fee that works for the both of you. The fee you pay is largely dependent on your location and the going rates that project managers are typically paid.

You can get this kind of information from your real estate investment mentors, from other real estate investors in the area, or at your local REIA meetings.

Where to Find Project Managers

We’ve found that finding someone young, hungry and motivated is the best profile for success. It may differ for you, but these are the kind of guys (it’s usually guys here ladies) who will put in the extra hours and get things moving in the right direction. Young, ambitious and smart is always a good profile to look for.

There may be some ideal project manager candidates in our backyard at technical colleges. These newly graduated students are typically hungry and have a good background that could be ideal for your project. In some cases, if you find a good one and your budget allows it, put them on your payroll and keep them working for you full time.

More often than not, freshly minted students for what they may lack in “real world experience” may more than make up for it with all the background knowledge from school in addition to the computer and technical knowledge for running budgets and keeping things humming smoothly.

Of course, before you go and hire a full time person to manage your flips, make sure you’re in the position to afford it as well as have enough projects going on to keep him or her busy on a regular basis.

So whether you do the rehab on your own, hire a general contractor or get a project manager, you can do well and make money any of these three ways.

The question is: Should you do the rehab work yourself or hire someone else to do it? Please leave me a comment below! I’d love to hear what you think the best way is to rehab your real estate investing projects!

Photo: Russ

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{ 16 comments… read them below or add one }

Dale Osborn October 20, 2012 at 1:59 pm

When first starting out with low funds in reserve, it would require you to do the work yourself. Later as your reserves build up, it would be better for you to step out and let someone else handle the minutia details. You can then concentrate on finding and marketing the deals.

Reply

Mike October 20, 2012 at 9:44 pm

Agreed Dale. When you first start out its a good idea to do the work, but as you gain momentum and the all mportant cash, you can outsource it. However, I do have students who are doing their very first deals without having to do the rehab. The numbers need to be right however and that only comes with experience and sometimes a bit of mentoring. Thanks for the comment as always Dale!

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Brandon M October 21, 2012 at 7:24 am

Would you mind expounding upon why compensating your Project Manager based on % of profit you make on the deal is a bad idea for your first project?

Seems like if you do not have experience in handling contractors nor have a good handle on costs yet this would be the best way to insure against being taken advantage of by your subs (and Project Manager for that matter).

Great article! Thanks for posting….

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Michael October 21, 2012 at 1:46 pm

Hi Brandon,
I don’t see where I said that in the post. I actually give it an example to use. Maybe you confused partnership. This could also be a good way but you want to be careful on any partnership especially if it your first deal. You don’t want it to be your last. I have seen this many times That’s why I don’t recommend it but surely is an option.
Thanks for you comments!

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Brandon Turner October 21, 2012 at 8:42 am

Nice epic post Mike! I agree – I think it’s wise to use a GC when possible, a project manager when desired, and just do the work yourself sometimes when needed (though not always fun!)

Thanks for the good post!

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Michael October 21, 2012 at 1:50 pm

Thanks Brandon! I agree. It’s funny how we always remember the bad ones more. I am sure we could share some horror stories. The good ones certainly make up for it.

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Lee October 21, 2012 at 3:26 pm

When first starting out we did a mix of doing it ourselves and hiring a PM/Lead carpenter to run our first flip. Now we have 2 renos going at once so we did hire a Contractor for a fixed fee. We knew the costs of the work from our fist project and the contractor has labor to complete the work at a competitive price. You still have to watch the jobs closely if you hire a contractor. We keep pushing on schedule and Quality Control through the project so there is not a big punch-list at the end. Just today we found an electrical outlet behind the Range in the tile backslash. It is the little mistakes that drive you crazy.

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mike October 21, 2012 at 6:31 pm

Absolutely Lee. It’s never perfect and you are correct and you have to stay on top of the GC as well. I am always trying rove that as well.
Thanks for your comment.

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Rob October 22, 2012 at 8:38 am

Great article Mike! So many investors forget to treat their time as a budget item as well. Merely having the ability to do some of the work, doesn’t mean that the time it takes away from finding the next deal is worthwhile.

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Michael October 22, 2012 at 3:36 pm

Exactly Rob. You should be doing what brings you in the most money with your time. In the beginning I think we all wear a lot of hats but the idea is to improve your business model no matter what business you’re in to use your time that is most productive in producing your income.
Systems & always improving on them. Work on your business and not in your business.
The e myth by michael gerber is a great book that talks about that exact principal.

Thanks for your comments!!!

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Terry October 22, 2012 at 5:55 pm

Great post Mike. I always do the work myself so I’ve never even thought of going the project manager route. Thanks!

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Michael October 24, 2012 at 1:52 pm

Your welcome Terry.

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Brad November 21, 2012 at 11:15 pm

Mike, Great article!
When I took the tools OUT of my van, my income mushroomed.
It FORCED me to write work orders rather than swing a hammer.
Next I got rid of the van so no one can ask me to “just run by Lowes and pick up the cabinet.”
The less I do the more I make!

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Michael November 26, 2012 at 6:31 am

So True Brad. Working on your business and not in your business is the key to success!
keep it up & love to hear your progress!

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Taylor Green August 26, 2013 at 7:55 pm

Great posts, I really enjoy reading them…

At what point (how many flips a year) do you think a hiring a project manager saves money on general contractor costs? Thanks…

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Michael August 27, 2013 at 10:22 am

Hello Taylor – Depends on profit margins but I would say at least 12 before you hire as an employee. I would suggest you pay one of your carpenters that has some experience in GC a property and work out % with him to start.

Reply

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