Rehabbing is the term used in the world of real estate to describe the construction process involved in flipping houses. Investors, contractors, and anyone with some extra cash and time on their hands and a love of real estate and remodeling has surely considered flipping a house as a quick way to earn some extra income. A decent structure of a home in a good neighborhood, and an investor with the time and funds to invest and an interest in real estate or house remodeling, makes for a perfect opportunity for a “fix and flip.” Here are some key tips to making the process go smoothly.
Be sure to pick the location carefully. The mantra in real estate, “location, location, location” is the most important rule to follow. When the real estate market is saturated with houses for sale and not enough people to buy them (known as a buyer’s market), people will be looking for that prime location since they have so many houses to choose from.
Estimate rehab costs very carefully. There will always be unexpected costs that cannot be calculated before beginning a project. Damages that were not visible may appear once the building demolition or construction begins, prices on appliances or materials constantly fluctuate, and lots of contractors require up-front deposits to buy materials before the work even begins. Plan ahead, make sure there is enough money, and then plan to spend more. A good rule of thumb is to plan to spend 50% more than estimated or planned. For example, if a flip is estimated to cost $50,000, plan to spend $75,000 by the end of the project. Phil Pustejovsky elaborates more on this.
Also important to consider: time is money, especially if there is a monthly mortgage on the invested property. Contractors typically work on several projects simultaneously, so schedules can easily be pushed back and delayed. Additionally, if the project requires permits and approvals from the town, the flip is unfortunately at the mercy of their schedule. An inspector may only be available once per week to make his rounds, and the work cannot continue until the inspections have been passed. Another good rule of thumb is to double the rehabbing time-frame. If the plan is to flip a house in two months, give it four months to get the project finished, and finished well.
Whether or not to hire a contractor is another factor to be considered carefully, as strongly pointed out by RealSatisfied. Unless the flipper is an expert in plumbing, electrical work, or construction, it is wise to invest in specialists to finish those areas of the house. While it may be easy to put up sheetrock, or sand and paint, work that needs to be inspected by a town inspector should be left to the experts. There are very specific codes that must be followed when updating plumbing and electricity within a house. Keep in mind the additional cost of hiring a subcontractor and the fact that they have their own schedules.
House flippers may be able to save some money by offering to help the contractors with their work. The less staff they need to hire, the more costs stay down. Keep a detailed list of every expense. It may be wise to itemize the list, either by contractor, by room, or by vendor. Make sure there is a receipt for every item purchased. For large purchases especially (flooring, appliances, heating systems, etc.) keep all records and warranty paperwork. It is best to create an organized spreadsheet to help track this, or get the help of someone who is good at bookkeeping and filing. Further reading: Peter Harris blog.
Once the project is complete, consider what other work needs to be finished before the house can be sold. There may need to be work done on the landscaping to beautify the way the house and property appears on the outside. This may include a new lawn, rectifying any cracks in the sidewalk or driveway, removing any trees or low-hanging branches. Even something as simple as consideration for where the garbage cans are kept makes a great impression on buyers. A new, clean, finished empty house is often a hard sell. Consider having the house staged with furniture so buyers can imagine the room layouts. It is much nicer to walk into a bedroom and see where a bed goes than have to imagine the space. Remember to keep paint colors neutral; buyers want the impression of being able to move in without having to do any additional work. As you can see there are a lot of moving pieces to house flipping. You may want to consider a real estate coach to help you through the process. A good example is Freedom Mentor.