How much to spend on the Rehab of a Flip?

[John Jack R.]

I just spent the last two days in meetings with potential flippers and maybe guys who have flipped a few years ago and want back in, or perhaps some want to be flippers. I don't know. But here in Vegas everyone wants the $180,000 to $250,000 family house in a decent neighborhood that they can spend $10,000 on fixing up and in less than three weeks rehab it and sell it. Excuse me?

Okay I know that there was once a time when you could pick a deal up from the street, do a mop and glow, sloppy paint, cheap carpet, the cheapest granite in the world, keep everything original including the gold light fixtures and gold trim and sell and make money.

But like everything else, all good things or what seem to be good things, come to an end. The MLS is littered with mop and glow houses with more than 180 Days on Market by these get rich quick flip artists.

At the end of the day I believe that you still have to deliver VALUE. Which means making the home within reason, the best that it can be with attention to detail and giving the home creative fixtures and touches and finishes which the potential home buyer would not see anywhere else. This by the way, takes money, creativity and thought. More importantly thought and time. Personally, I could and would never do, a mop and glow. Where is the value creation in that?

Hey when I sell a house and its a skinny deal at least I know that the buyer is now living in an awesome home that I, my crew, and the new owner can be proud of. One thing that I can say, is that even if I go over budget, our flips sell fast! And we get top dollar. There is still the balancing act of price versus appraisal versus what we have in the project. 

I am not sure about other parts of the country, but Las Vegas is notorious for people spending zero dollars on their homes after they buy them. Good News for me, because the 1988 Family House still has the same white tile counter top. Plastic one piece bathrooms with tub and shower, original carpet and tile and thirty year old toilets, sinks and water stops. Which by the way in our rehabs are completely replaced.

Why would you rehab a $300,000 house and not put in a new toilet? What the $98 is going to break you? Yet I see it all of the time. And then you wonder how come it's not selling?

So, if you really believe that you can rehab a 1900 square foot family home with $10,000 dream on, but people do and it's always, what I call a basic mop and glow.

To make a point, I took a 1292 square foot cement brick (built 1964) house in a predominately working class neighborhood. We had purchased it for $90,000 last year, and it was a cash flow rental. When the tenant moved out, at the end of May 2015, we decided to rehab and flip it.  So we spent about $18,700 which included a new roof (that's another story). My partner kept saying this should only be an $8000 rehab!! We started the rehab in third week of June, finished the last week of July and went on the market that same week on July 29th. We always pay to conduct our own post rehab appraisal. The appraisal came in at $140,000 and the house just went under contract on August 3, 2015 for $143,000.

At the end of the day this rehab came in at about $15 a foot. So I have two questions;

1. What is the best formulation for rehab estimate?

2. Should you not have enough upside in the deal do to more that a mop and glow? In another words if you cannot deliver a value product why even do the deal?

3. What are your thoughts on quality versus profit or no profit?

I have attached the final virtual tour so that you see the final product. I should really post some before picture so you see what it looked like before.

Anyway I would like to hear your input on the questions I posed and also please let me know your thoughts on the project. Just click on the virtual tour below. Thanks :)

Nebraska Virtual Tour

[Christopher Brainard]

Originally posted by @John Jack R.:
1. What is the best formulation for rehab estimate?

2. Should you not have enough upside in the deal do to more that a mop and glow? In another words if you cannot deliver a value product why even do the deal?

3. What are your thoughts on quality versus profit or no profit?

Yeah, the investment scene in Las Vegas stunned me when I first moved here six months ago. The easy money is gone, appreciation is slowing to reasonable rates, and I think a lot of investors are struggling to figure out how to make a buck without that 30% per year appreciating. For the past several years, you could buy a turd, just wait a few months, and sell that turd for a hefty profit.

Answer your questions:

1) The best formula to estimate rehab costs is to walk the property and estimate the rehab costs. I carry a sheet of old fashioned paper and a pencil and mark what needs to be done as I go through. I add it all up at the end and I'm good to go. You need to know the quality of material you're going to put in and how much it is going to cost, then just plug the numbers. 

2) People are doing the deals to squeeze as much out as they can with minimal investment. An investor that I'm friends with is currently hoping to squeeze about 10% out of each flip with a target price of $200k. To me, the risk isn't worth the reward with such small margins, and he isn't paying listing broker fees either. The problem, as you noted, is there are a bunch of people on the 'mop and glow' bandwagon so competition is fierce for property. I haven't seen many full renovations since I've been here. I wouldn't do a 'mop n glow' personally, but the 'mop and glow' crew are keeping flip property prices higher than they really should be to make a solid profit and do a true renovation. 

3) I'm all about the profit. I always do quality work, I supervisor my contractors closely, but if you can't make money doing it, what's the point? I wouldn't buy a property to rehab if I couldn't do what I wanted and make money. 

-Christopher

[Account Closed]

I like your term mop and glow. I always feel like I do too much, and I know I do more than my competition. And I assume each market is very different. Around me, the laziest and least seems to be done by the realtor flippers. I assume they know something I don't. Like how little the stuff shows two potential buyers. I focus mainly on first time homebuyers. And when you put in a brand-new kitchen and hear the buyer talking about how they want to paint the cabinets teal blue, it kind of makes you wonder if it is worth it to really make a house nice. I also see houses that have been foreclosed that were flipped within a few years prior, and the buyers painted the walls pink or otherwise trashed the place. I have had appraisers give me absolutely no credit for being head and shoulders above everything else in the neighborhood. And I have noticed that my buyers do not notice many quality differences, especially in tile, carpet, wood floors, trimwork, etc. so I have noticed a trend with my own work where I seem to get more and more basic with each flip. I have said before, but builders new builder grade for a reason. They know that it sells just as well to be fresh and clean as opposed to current and trendy. No I assume this all changes when you get out of the entry-level houses

[Account Closed]

"At the end of the day I believe that you still have to deliver VALUE" @John Jack R.

Homes especially for the under $200k crowd the value is transitioning the clients from renters to owners.The average rent in Vegas of around $900 a month makes the competition for $150k and below homes fierce,based on the simple fact this is that their rent payment could be the same or lower than their mortgage payment.

Cash buyers have the advantage of first dibs on these first time buyer homes and the funds to make them presentable and livable .The banks still put these sub $150 buyers thru so many hoops that as flippers (resellers) that we have to give thousands back in closing costs etc to have the financing fly. It is a fine line between presenting better than mop and glow product and making your time profitable. The nice thing about these sub $150k homes there is always the exit strategies of renting,lease to own ,etc

[Ryland Taniguchi]

Best approach is star rate the comps. 1-star - Teardown 2-star - Ugly home 3-star - Middle Class Home 4-star - Nice Neighborhood 5-star - Luxury Rate with stars and go plus or minus. Your rehab should always be one plus over the comps. No more, no less. The goal is not to make a beautiful home, but to make a home one-up from the comps. New flippers tend to make the mistake of over rehabbing the property for the area and making it their dream home. That can waste tons of time and money.

[John Jack R.]

Originally posted by @Account Closed:

"At the end of the day I believe that you still have to deliver VALUE" @John Jack R.

Homes especially for the under $200k crowd the value is transitioning the clients from renters to owners.The average rent in Vegas of around $900 a month makes the competition for $150k and below homes fierce,based on the simple fact this is that their rent payment could be the same or lower than their mortgage payment.

Hey Steve you are absolutely right! First time home buyers can be a great market, but it is a very competitive market. I am not too sure if its the realtor or the banks banging on the seller for concessions. Anyway how do you feel about the, the growing family "it's now time to purchase our second home" market? We have had quite a lot of success in that area, the numbers are bigger, more risk and like anything buying at the right price has its challenges.

[John Jack R.]

Originally posted by @Ryland Taniguchi:
Best approach is star rate the comps.

1-star - Teardown 2-star - Ugly home 3-star - Middle Class Home 4-star - Nice Neighborhood 5-star - Luxury

Rate with stars and go plus or minus. Your rehab should always be one plus over the comps. No more, no less. The goal is not to make a beautiful home, but to make a home one-up from the comps.

New flippers tend to make the mistake of over rehabbing the property for the area and making it their dream home. That can waste tons of time and money.

 Ryland, I really like your approach. Will definitely keep it in mind. Thanks. At the end of the day it still needs to translate to dollars and cents. Have you ever gone back at broken it down to dollars per square foot? For example a three star home is $x a foot, One star home typically $Y a foot and so on?

[Bill Hinshaw]

Wow @John Jack R.

 You did a lot to that house for 18k. Really nice job. The interior is exceptional for what I would expect in that neighborhood as a buyer. I have to say, in a million years, I'm not sure I would have ever looked at that house and thought that it would be a candidate for flipping. The exterior, the neighborhood, the AC unit on the roof, the bars on the windows - good grief, it's hideous. Yet you saw the value.

Not sure I have enough experience to answer question 1. For questions 2 and 3, quality has to be valued equally with profit. If there isn't enough room to deliver a quality product, I would have to pass. We've fixed things on our current flip that weren't caught at inspection and the future owner will never know about. Once you know it's there, you have to fix it, right? Luckily for us, we have plenty of room, so I didn't have to struggle with the question of not making a profit or sacrificing quality. 

I would also say there is more to it than quality vs profit or no profit. Finding creative solutions to unexpected problems and making budget sacrifices in other areas to fix a quality issue would also come in to play. Being able to do those well requires experience, so that is a factor, too.  

[Vincent Crane]

I think the quality should be driven by 2 things, what comps have, and also the value add of what you're putting in. Knocking down a wall to open up the space, tiling the bathroom, adding another bath, staining the cabinets, new flooring through the kitchen and living room, definitely new paint/ painting the trim, even some landscaping. But the things that might add quality but not value could be, more expenses appliances or material than what the neighborhood justifies, a pool, a massive deck, too much landscaping, new cabinets when really the existing ones would look fine with a touch up. It sounds like you've done a great job so far though. If you're adding more value than the other flippers around you, your houses are going to sell for top dollar and turn faster.

[John Jack R.]

Originally posted by @Vincent Crane:

I think the quality should be driven by 2 things, what comps have, and also the value add of what you're putting in. Knocking down a wall to open up the space, tiling the bathroom, adding another bath, staining the cabinets, new flooring through the kitchen and living room, definitely new paint/ painting the trim, even some landscaping. But the things that might add quality but not value could be, more expenses appliances or material than what the neighborhood justifies, a pool, a massive deck, too much landscaping, new cabinets when really the existing ones would look fine with a touch up. It sounds like you've done a great job so far though. If you're adding more value than the other flippers around you, your houses are going to sell for top dollar and turn faster.

 You know what? They do! The challenge is the balancing act between the real value and comps or appraised value, so as not to over rehab.

[Ryland Taniguchi]

Originally posted by @John Jack R.:

Originally posted by @Ryland Taniguchi:
Best approach is star rate the comps.

1-star - Teardown 2-star - Ugly home 3-star - Middle Class Home 4-star - Nice Neighborhood 5-star - Luxury

Rate with stars and go plus or minus. Your rehab should always be one plus over the comps. No more, no less. The goal is not to make a beautiful home, but to make a home one-up from the comps.

New flippers tend to make the mistake of over rehabbing the property for the area and making it their dream home. That can waste tons of time and money.

 Ryland, I really like your approach. Will definitely keep it in mind. Thanks. At the end of the day it still needs to translate to dollars and cents. Have you ever gone back at broken it down to dollars per square foot? For example a three star home is $x a foot, One star home typically $Y a foot and so on?

I use the square foot (aka "fixed cost") method but separate from the 5-star. I also use the 70% of ARV minus construction costs but also separate. I like to analyze with different methods and compare the results.

Using the square foot or fixed cost method, I analyze $5/sq foot and it should take 2 weeks and I want a 12% profit margin after fixed costs (closings costs and holding costs and construction costs). For $15/sq foot rehab, should take 1.5 months and I want a 16% profit margin after fixed costs. At $25/sq foot rehab, should take 2.5 months and I want a 20% profit margin. On a $40/sq foot rehab, should take 4 months and 24% profit margin. 

In my market in Seattle, Investors will take 5% to 10% profit margin on auction properties and there are many people who will take a 10% to 14% profit margin on a $40/sq foot flip. I don't do these myself but seems like there are many other happy to buy it on a wholesale.

The 5-star is just used for comps to determine the right rehab, the right construction estimate and the right ARV.

[Robert Adams]

Every rehab is different in one way or another. The trick is to be in tune with the market, rehab costs with both materials as well as labor and be able to make quick discussions as to how much it will cost to get the rehab complete so you can calculate your offer price and returns based on that offer price. There is also the balances of adding value and demand to the property with out over doing it and losing $$ on upgrades you can't get back.

Nice job on the rehab in the virtual tour. Now that it is complete what would you do differently? I find after I sell my rehabs I usually have one or 2 things I would do differently and those are the most valuable lessons.