Renovating properties is an all-consuming process and can become a nightmare both financially and personally if you aren’t totally dialed in with every part of your business. Our team has been developing the system to grow from a few dozen rehabs a year to well over 150+ for 2018. That volume comes with practice, dedication, failure, clarity, focus, learning, and time. By learning the lessons on both the successes and failures and implementing those things into our business, we have continued to refine what the processes look like. We’re working to change the way we tackle our renovations, our team’s happiness, and our bottom line.
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.
Big Picture Questions
Whether you’re flipping a few houses a year or scaling your business by any multiple, you need to know the rules of the game and how to score it.
- What is your buying criteria?
- Area of the city/town
- Price point you are buying/selling at
- Any other determining factors like square feet, beds/baths, neighborhood/schools, etc.
- What is your expected profit margin?
- Defining go/no go territory
- Your cost of money
- Acceptable profit compared to risk
- What is your goal for the month/quarter/year?
- Clear goals set for the number of deals, dollars, or both
- Funding for X number of deals and the best use of those resources
- What’s needed to hity our goals
- What is my exit strategy?
- Keep property as a rental
- Sell on MLS
- Sell off market
Remember, it doesn’t matter how awesome your construction team is if you don’t know what the goal or the score is. Then you have no idea if you are winning or losing. I do realize that the title of this blog has to do with systems, and we are getting there. What we have realized is building a system around a concrete set of ideas and goals is way easier than trying to hit a moving target.
Different types of properties will require different kinds of systems.
Once you are clear on the acquisition side of what you are buying, you know what to look for buying. As you are looking, you’ll start to develop an idea of the type of rehabs you are doing. We are in the lower/middle of the average home prices in our market. Within these rehabs, we typically have two different types of renovations. We sell turnkey homes, and we sell fully renovated properties on the MLS. Although similar, there is a distinct difference with the level of finishes and potential complications with colors, tile selections, etc. within the MLS properties versus the turnkey properties.
No matter where you are in your construction right now, take a step back and ask the next question:
Am I clear with what the rehab looks like when I am finished?
- Exterior landscape
- Vibe/feel of the home
If not, then what do I need to do to be clear on the project?
I’ve gotten into renovation projects with no idea what the end result will look like, resulting in pain, sleepless nights, and lost money. Looking back, these were a very scary miscalculation. If you don’t know the answer to all those questions for your project, then you have two ways to solve the problem:
- You define the project.
- Know how detailed you want the outcome to be.
- Know how to ensure the conditions for the end result.
- Write down everything with a created scope of work.
- Review the scope of work with the contractor and sign an agreement defining timeline, cost, and end result.
- You get help defining the project. (If you can’t afford this but need the help, you may want to reevaluate your business.)
- Does this design make sense with the type of house?
- What is current within the marketplace?
- Do the colors and selections equal the cost and type of property you are selling based on the end result goal?
- Are the designer’s information, the type of selections, and the end result review clear?
- Are the suggested budget and scope of work communicated? The key is to avoid surprises.
- Is there a clear timeline for results?
- Is anything additional needed for the desired design?
- Is all the work completed to code, safe, and functional?
- Real Estate Agent:
- Does pricing for purchase makes sense relative to construction?
- Does the construction scope work for desired end price (ARV)?
- What’s the best to sell property?
We have nearly all of these folks on our team internally, but we didn’t start that way. There is a long list of mistakes we made buying properties we thought were “good deals” when we hadn’t determined the exit strategy or when the deal wasn’t worth the investment based on the other opportunities in the market.
Related: How to Get a Renovation Loan With Less-Than-Stellar Credit
This process might seem daunting, and at first it is. I am not a great detail person, but I am not responsible for that in my business. We have amazing people in our organization who are responsible for details and specific problems because they are good at what they do, and they are clear on what the goal is.
In the first part of this series, I’ve covered thinking of the big picture. This is the goal. I want to flip 10 houses this year. I want to make $20k per rehab. We want to earn X% of a deal per $100k invested. Just because you aren’t flipping dozens of houses doesn’t mean you don’t need these answers. If you start with these questions now, as you scale, not only will you already have those answered, but you will know who you need in what positions to help bring additional people power to your team.
In the next post, I will continue diving into the specifics of reviewing a deal, starting, rehabbing, and completing your renovation projects. This week, take time to write down the areas where you are struggling, need help, or want to grow, and leave those in the comments!
Where are you on your renovation projects? What roadblocks have you run into?