Flipping a house is difficult.
I don’t care how many HGTV shows make it look simple — I’m here to tell you that it’s not. In order to successfully flip a house, you need to source a good deal, find investors to fund your deal, go through the machinations of closing on the deal, renovate the property, be lucky enough for the market to hold its pricing, and then find a buyer to purchase the property for the amount you want. A book could be written on each and every part of the process!
The most difficult step in my opinion is renovating the home effectively. There are factors like budget, level of finish, project management, and timing that all need to fall into place — and I’m not even going to get into how difficult the permitting process can be in some municipalities. I have managed the renovations of close to 500 homes, with over 100 of them being for flips. The margin of error for flip renovations is much smaller than for rentals, and so that is the topic I will address today.
The biggest key to renovating a home successfully is to have a process. There are simply too many things going on all at the same time to “wing it” and hope for the best. You need a process as a check and balance to ensure that you don’t forget something, and also to force you to be efficient with your time. When I was renovating dozens of homes per month, albeit only rentals and not flips, I would have gone insane if I didn’t follow this process.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
My 6-Step Process to Renovating a Flip
1. Make a list of absolutely everything in the house that could possibly be fixed or replaced.
This is so important on a flip because even things that are in “good” condition could need to be replaced if it makes sense economically.
For example, imagine you buy a foreclosure for a million bucks, and it has a fifty thousand dollar kitchen. I’m talking swank mahogany cabinets, sweet wood flooring, marble countertops, and the best layout in the history of the world. Let’s also say that the projected resale on the home is in the $1,500,000 range, and that the stove is an old white piece of junk, but it works just fine.
This is obviously a hypothetical situation with numbers that are exaggerated to illustrate the point, but it would not be out of the question to purchase a $15,000 custom stove for this property. My point is that you need to include absolutely everything on this list, whether it’s working or not.
Here are some of the items that you should be looking at:
- Exterior Hardscape
- Retaining Walls
- Exterior Lighting
- Paint Job
- Garage Door
- Exterior Door
- Entry Appearance
- Interior Doors
- Door Handles and Hinges
- Outlets and Plugs
- Kitchen Cabinets
- Kitchen Appliances
- Kitchen Counters
- Kitchen Sink and Hardware
- Closets and Closet Doors
- Shower Surrounds
- Shower Hardware
- Smoke Detectors
- CO2 Detectors
- Bathroom Mirrors and Lighting
- Bathroom Towel Rack Set
- Hot Water Heater
It may seem like this list is overkill for many homes, and you may be right. But you should still create your own list like this and go down each and every single item for each room so that you don’t miss anything. The next part is that you need to define the scope of what you want done. You want to be as specific as possible.
The list could look and be categorized as below:
|Area||Scope Recommendation||Cost||Notes and Specs|
|Ext||Deep patch, overlay, crack fill, seal coat, and restripe the deteriorated asphalt parking lot per inspection report.||$ 37,625.00||Satisfies city.|
|Ext||Repair damaged carport roofs per inspection report.||$ 325.00|
|Ext||Install safety railing above laundry room entrance per inspection report.||$ 400.00|
|Ext||Replace missing sections of vinyl siding and aluminum eaves per inspection report.||$ 225.00|
Feel free to structure the list in a way that is useful to you, but ideally you would put the list into an Excel document.
2. Have two contractors, plus subs, bid every item on the list.
This is an important, and often overlooked, step. It is easy to say, “Oh, well the white stove works, so let’s just not get a bid.” The contractor may be lazy, you may be lazy, or you may just have a really good idea that you aren’t going to replace the stove. Get it bid on anyway. The reason is that you may be surprised at how cheap the bid comes in for a particular item, and the great price may make it economically viable for you to do the work.
Your contractor could come back and say that he has a great stainless steel stove in his garage from a different job and that you can have it for half price so he can get it out of the house before his wife divorces him! In this scenario, you may be more likely to replace the white stove, but you never would have had the option if you hadn’t listed the white stove on the bid list and then forced the contractor to bid on it.
The other point to be made here is that you want two contractors to bid every job, and you want them to bid the exact same spreadsheet. The goal is to try and establish an apples-to-apples bid. I understand it may be hard to find two good contractors if this is your first flip deal and you have no track record. I called on close to a hundred different contractors and subs before I narrowed down on three guys who made the cut.
As I said at the start, flipping houses is difficult.
3. Have a designer opine on the finishes that you should use to create a consistent, quality level of finish.
I’m sure that you are super in touch with the latest crazes in home remodeling, and that you watch every home design show in the world. However, you should still get a designer to opine on what types of finishes you should use. It will cost you some money, but it will be worth it.
If you have done a hundred flips, then maybe you don’t need to ask someone for advice, but until that point, just swallow your pride and ask. You want to ask opinions on things like accent walls, paint colors, and counter material.
The other thing you want the designer to do is opine on which items on the bid list to do. The designer may ask what the budget is, but tell them that it doesn’t matter for now. Likely points of emphasis will be the kitchen, master bathroom, and dining room, but depending on the area and price point, it could be something else.
4. Decide on the “No,” “Yes” and “Maybe” items on the bid list.
At this point, you need to start narrowing the comprehensive bid sheet down. There should be two main factors: the budget and the economics of the deal.
In a hypothetical situation where you have unlimited cash, the only factor that would count is economics. If you feel that spending double your budget is economically viable, then you should do it.
For example, I purchased a home in a very nice part of town by Silicon Valley. It was a shabby, super beat-up two-bedroom home on a decent lot. The plan initially was to put in $45,000 and flip it quickly. However, once I purchased the home, I realized that by putting in closer to $200,000 and making the home three bedrooms, I could earn well over the marginal expense of $155,000 because the market for larger houses was booming. I have a wealthy business partner, so my budget wasn’t constrained, and the only factor we really look at is the economics of the deal.
If you do have a budget, which most people do, then obviously that needs to play a part.
To narrow down the list, you need to go through every item and put down a “No,” “Yes” or “Maybe” next to it in a new column on the right. You should have two bids for each item (one from each contractor who bid the cost), and for now, assume that you can get the best price on each item. After you are done doing this exercise, you need to total up the amounts of the bids for the line items where you put “Yes” and “Maybe.”
5. Negotiate with the contractors.
Negotiating with contractors can be difficult, particularly if this is the first time you have used them. The key is to be fair. If you grind the hell out of them, then they won’t want your business in the future and may do a shoddy job on this project. You also don’t want them to gouge you with pricing — it is a tricky line to straddle. The key is to understand where the costs come from, both time and materials.
If you are putting in a new light fixture, then you should go online and see how much they cost. Home Depot’s website is a great and easy baseline resource for this. Then, simply ask the contractor how many hours it will take him to do the job. The goal here is to try and put an hourly price on the contractor’s labor that is fair to both him and you. Sometimes, a contractor won’t know how long it’s going to take because the job is so large, like re-wiring the electrical. He can still guess.
Anyway, you have these two bids for all of your “Yes” and “Maybe” items. Add an additional column in your spreadsheet with the lower of the two bids for each item. If this amount is within your budget, then go to one of the contractors and ask them if they would do the whole project for the total amount of your “Yes” and “Maybe” items. Most times, I have found that this will be a yes, unless there is some huge discrepancy on a big ticket item, in which case you may have to negotiate some more.
If your “Yes” and “Maybe” total is more than your budget, then ask the contractor if he will do all the work in the “Yes” and “Maybe” column for the total of your budget. You want to make sure that your budget is somewhat close to the total that he bid. A decent ask would be if your total of “Yes” and “Maybe” came to $33,000, and your budget was $30,000.
Three grand is a lot of money, but it’s a large project, and hopefully it is worth it to the contractor. If your total for the “Yes” and “Maybe” came to $33,000, and your budget is $15,000, then you need to work on your underwriting and take out a bunch of the items in the “Maybe” column.
Negotiating will have a lot of give and take. They key is to be reasonable and fair.
6. Start work and create a punch list.
Once you agree to the numbers with the contractor, then get an estimated completion date from them also. Monitor the process by asking questions — not by complaining. Most renovation projects look like crap until the last few days.
When the contractor says he is done, then bring back the agreed upon contract and walk the project with your contractor and make sure everything actually is done. Make a list of everything that is not done, but needs to be. This is called a punch list. It is possible that things come up that weren’t on the original scope. Work out a fair price with your contractor and get all the little items taken care of.
Payment can be a tricky thing because contractors sometimes need money to get the job going. I will usually pay half up front, and then another twenty five percent when they say they are done. I hold back the last twenty five percent as retention until I have walked the property and everything on my punch list is completed.
What steps do you take when you renovate a home? Do you think I missed something important? What issues have you come across when renovating a home?
Leave your comments below!