Believe it or not, when flipping houses, controlling your rehab costs is just as, if not more, important than what you pay for the property you’re planning on flipping.
When you’re first starting out, you’ll probably be tempted to do alot of the rehab work yourself. If you’re handy, doing some of the rehab work isn’t a bad idea when you’re first starting. However, the bigger the rehab, the more you’ll need to enlist the services of the pros.
This doesn’t necessarily mean you’ll always need to hire a general contractor – as there are pros and cons of using a general contractor versus doing it yourself and hiring subcontractors. Personally, I use general contractors exclusively now and try not to do any of the work myself. But when I was first starting out, I got my general contractors license, “GC’d” my first handful of flips and did a fair amount of the labor myself.
As “the GC”, I was intimately involved in the every aspect of the rehab. And while doing it, I saw firsthand how important controlling the rehab costs were to my bottom line. By keeping close tabs on your rehab spend, this is one of the largest single factors which can affect your profit. And if you do it well, you’ll make a very handsome profit.
How to Estimate Rehab Costs!
Estimating rehab costs accurately can make or break your real estate business, and it takes years of experience for even the best rehabbers to master the art. However, you can expose yourself to less risk and get more accurate with your projections by learning how the pros think when estimating construction costs.
Flip Houses Using This Rehab Checklist
There are a number of ways in which you can control your rehab spend. Here’s a checklist to help you do just that:
1. Use a Rehab Budget
Using a master budget spreadsheet is one of the best ways to keep track of the repairs needed and keep an eye on all the moving parts going on with the rehabilitation. You can use this spreadsheet as a snapshot of where you are at any time in the house flip process.
2. Get Multiple Estimates
In the beginning of your rehab, its a good idea to get multiple estimates from multiple sub-contractors like electricians, plumbers, painters and finish carpenters. This will help you get a feel for how much each part of the rehab will cost. As a rule of thumb, get three estimates from three different subs.
As you gain more and more experience house flipping, you’ll start to be able to estimate how much each part of the rehab may be. Also, as you work with some of the same subs over and over again, you’ll get a quick sense as to how much parts of the job will cost – just as long as they stay competitively priced.
3. Make Final Checks on Cost of Repairs
After you receive all your estimates and finalize the scope of work needed to be done with each of the subcontractors, its then time to plan a time line for completion.
A few tips on house flip timelines:
Accountability: You must do everything in your power to hold all the subcontractors accountable for the prices they originally gave you. Nothing is worse for your profits than an underbudgeted repair that blows your budget.
Final Walk Through: Do a final walk through with each subcontractor, making sure they have not left out any small details or potential cost over runs. Tell them that you are counting on them to keep to the prices they’ve quoted to you. Remind them that you’ll be doing this many more house flips and you’d like them to be involved.
Unforeseen Repairs: Make sure your subcontractors tell you about any unforseen repairs. If there are potential repairs lurking in concealed spaces, ask them about these and the potential for cost over runs. If there is the potential for additional costs, get a price for both scenarios and factor those numbers into your margins. The less surprises you have when first learning how to flip houses the better.
The bottom line is that there is no way to know every potential cost over run, its just not possible. However, the more you can lessen the chances of them, the more potential profit you’ll make.
4. Set a Time Line For Completion
As soon as you have your budgets and costs finalized with your subcontractors, now’s the time to finalize your time frame for completion. Remember that whether you are just learning how to flip houses or have been house flipping for twenty years, the less time you spend between the purchase and the sale, the more money you’ll make.
Here are a few things to keep in mind when ironing out time frames with your subcontractors:
Subcontractor Meeting: Whenever possible, get all your subs together and have a meeting to review the entire schedule of repairs. In this meeting, you should discuss the best order for all the subs to work together in order for the project to go as smoothly as possible.
Set the Schedule: After your meeting to discover the best logistical order for all to work, set a schedule with dates and give to all the subs and tell them you expect everyone to meet the dates that they helped determine. Iron that schedule and share everyones cell phone number so they can communicate with each other. More importantly, make sure each sub knows that any changes or delays in the project are not to be made without your knowledge or approval.
Exterior First: Begin with the end goal in mind, namely selling the house. So in order to get the house looking as saleable as possible, start the rehab on the exterior of the house first. Just some new shingles and some trim work may be enough to get some inquiries from passers by on buying the house when its complete. Make sure you place a sign out front that forwards to your phone number so you get the calls. This alone could save you thousands in real estate broker charges.
Speed Is Key: When flipping houses, the faster the better. Don’t cut corners, but get the job done as fast as possible. The main idea is to get your house flips rehabbed and ready for sale as quickly as possible without sacrificing quality. There’s a time cost related to the money you have gotten from other sources – so the faster you turn around the house, the more you’ll make in profit by minimizing your interest on that money. Also, maintenance fees, utilities, taxes and other time-dependent costs are less the faster you flip. Time and speed are largely dependent on on the amount and depth of the repairs being done, so the more thats needed to be done, the longer the rehab will take.
Conclusion: Managing the Rehab When You Flip Houses
If you are doing simple repairs, like exterior painting, carpet replacement, appliance updating and a little bit of sprucing up of the landscaping, then this kind of house flip shouldn’t take more than a couple of weeks. However, if you are doing and an in depth rehab, with a new roof, new siding, interior frameouts, major electrical and or plumbing work, insulation and foundation repairs, a rehab like this may take two to three months or longer. Factor in these kinds of repair expenses into your master spreadsheet and account for financing.
When you’re first starting, any rehab that takes longer than two or three months, is not recommended. Don’t bite off more than you can chew at first. Once you have a few flips under your belt, you can then consider longer time framed rehabs. Simply put, the more ambitious your rehab, the greater the chances for cost over runs. So at first keep it simple.
If you’ve made it this far, please leave a comment below! Do you have any tips on how to maximize profits? Let me know what you think!