I remember a few months ago after my beloved Red Sox won the World Series for an improbable third time in ten years (just once would have been PLENTY for me btw), I was faced with a house flipping dilemma.
‘The house I had bought in Hanover, Massachusetts – although it seemed like a great deal when I had purchased it, was far more complicated of a flip than I ever could have imagined. Sure, there are step by step guides on how to flip houses like a pro. There are even proven tactics that ensure you make a profit on a house flip deal – many on the BiggerPockets blog here, but nothing is ever foolproof.
Remember that in this business you are working with human beings and anything can and will go wrong.
One thing I’ve learned is that its very important to remain flexible. I always advise my students to expect the worst and hope for the best – even when the number work out brilliantly. So in order to be as prepared as you possibly can be when things do go wrong, here are four tips that can help you flip houses like a pro…even when things don’t go exactly to plan.
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.
1. Only Work With The Right People
Sometimes we need cash as fast as possible and in the process we end up hiring the wrong people for the job. There’s no telling what can go wrong when you hire the wrong people to rehab and help you flip your house. In this business it is very important that you hire the right contractor who knows what they are doing. Don’t just hire any lawyer to help you get your paper work in order; hire one who specializes in real estate.
2. Coordinate With Your Team Members
Once you’ve put together a great team, you have to always be on the same page with them. When I put together my team for the Hanover property, I wanted to renovate the property in four weeks but my general contractor told me that this wasn’t possible. I didn’t have the money for a six-week project so I negotiated with him. After going through all the details of the project, he finally agreed that it was possible to complete it within four weeks.
3. Push Your Team Members To Finish On Time
Pushing here means giving them motivation to work harder and finish all their tasks in a timely manner. Remember that if you want to make a profit on your house flipping deal, you have to rehab and flip it as fast as possible. Holding on to the property too long will result in unnecessary holding and finance costs which will slowly eat away at your margins. There are many ways that you can motivate your team members and ensure that you make a profit. Here’s a few ideas for you:
- Hint to your contractors that if things go as planned and the project is finished on time, you will provide them with more work.
- Communicate clearly with your team members throughout the entire project.
- Make sure that everyone feels that their efforts are being appreciated and they are being compensated accordingly.
- If your team finished the project early, you can give them a bonus or some type of reward.
4. Buy At 70%…But Leave Some Wiggle Room
As we worked on the Hanover project, some repair jobs came up that I hadn’t anticipated or included in the budget. Thanks to the 70% rule, I was able to accommodate these unexpected expenses.
If you do not purchase the property at 70% or lower, you won’t be able to accommodate the extra expenses you couldn’t anticipate.
For instance, I found that the house in Hanover had baseboard heating in the kitchen but the rest of the house had radiant heat. We had to install radiant heat in the kitchen and this ended up costing $1800, which I hadn’t included in my budget. I then had to install radiant heat in the kitchen because to me, it didn’t make any sense to give new home owners a house installed with radiant heat everywhere but the kitchen.
Another expense I hadn’t anticipated was replacing the tile floor. The floor tile was cracked and replacing it seemed like the right thing to do. Some people would have just installed the cracked pieces but honestly, the floor wasn’t installed correctly to begin with. Installing the few cracked tiles was a cheaper option but I did not want to do it that way. If I had cheated on the 70% Rule, my margins would have been so thin, the project would not have been profitable. Fortunately I stuck to the rules and it all worked out well, making a nice $41,000 profit.
Bottom line: Prepare for the worst and expect the best…and you’ll stay out of big trouble flipping houses.
If you’ve made it this far please leave a comment below, Id love to hear what you think!