How to Skillfully Manage Margins When Deals Get Tight

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As we all realign our business models to adapt to competitive home pricing and continued increases in building costs, it is more important than ever to know where we stand on each and every renovation we undertake. We continue to see a need to more closely manage every aspect of the rehab process, beginning with the initial inspection through the close of the sale of our properties.

When REO inventory was plentiful and prices were at rock bottom, it was easier to absorb hidden repair costs in a deal, but now it is very difficult to increase sales prices in response to finding hidden damage or simply miscalculating a repair cost. As we review our year to date rehab budgets, we are always looking to see if a pattern develops regarding jobs that come in over budget.

Related: How to Use a Margin of Safety to Avoid Financial Disaster (The Buffett Series)

As a Turn-Key Provider, it is imperative that our budgets align with our pricing strategies to ensure profit objectives are met.

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Estimating Accurately is Essential

Managing rehab costs effectively begins with the initial inspection of a prospective property. Whether you are evaluating one property a day or multiple properties, it is imperative that you have an organized system in place for inspecting and pricing potential repairs.

We have found that the best way of ensuring consistency in our inspections is to have a spreadsheet/repair assessment tool that is used on each property inspection. We work hard to utilize the same inspection procedure on every property, so that we don’t miss any items needing repair.

If you are using an outside contractor to perform your inspections, you will need to establish your own criteria and procedure in order to protect yourself against hidden or missed damage. It is always harder to go back and revise an estimate after you have started a project and established financial parameters of the deal.

Being accurate also requires investors to continually update building material costs, labor costs, and carrying costs. In our market, we have seen materials pricing rise as much as 25% on many of the items we regularly use on rehab projects. With continued pressure on margins, managing these increasing rehab costs becomes that much more important.

Managing Contractors

Additionally, we have to closely monitor our labor costs to ensure that any increases that we incur are not a result of our crew’s/contractor’s own inefficiencies. It’s been our experience that when certain contractors get over-extended, workmanship quality has a tendency to drop off, and prices creep up. The more inefficient a crew is, the more they need to be monitored and managed in order to maintain your projected profit margins.

Related: Margin of Safety in Real Estate Investing

So, as we in the industry work to maintain our profit margins in this ever-changing market, we must be sure that we don’t overlook our exposure in the construction and rehab side of our businesses. Don’t wait until a job is completed to take your first look at the expenditures, and be thorough during your initial inspection and bid process.

These important steps can help to ensure that each deal meets your profitability goals and objectives.

What steps do you take to ensure profitability?

Please share your tips and experiences below!  

About Author

Ken Corsini

Ken Corsini G+ is the host of the Deal Farm Podcast (on iTunes) and has 10 years of full-time real estate investing experience. His company, Georgia Residential Partners buys and sells an average of 100 deals per year and has helped hundreds of investors around the country make great investments in the Atlanta market. Ken has a business degree from the University of Georgia and a Master Degree in Building Construction from Georgia Tech. He currently resides in Woodstock, Georgia with his wife and 3 children.

3 Comments

  1. Donna Paget

    Hi Ken. Thanks for the great article. You mention that you use a spreadsheet/repair assessment tool. Do you mind sharing? Estimating repair costs as a new investor is one of my absolute nightmares!

    You, also, talk about hidden or missed damage. How do you protect yourself against these? Are there agreements I can make with the contractors (especially if THEY are the ones who missed the damage?)?

    I really appreciate your insight.

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