The old expression, “By the yard it’s hard, by the inch it’s a cinch,” applies to many areas of life, not the least of which include that often-overwhelming concept known as the real estate rehab deal.
While rehabbing real estate can be a profitable and exciting form of wealth-building, it can also be a confusing venture that seems to have more moving parts than a car engine. However, by understanding the process of how house flipping works — and what a real estate rehabber does from beginning to end — you’ll not only gain more knowledge, but your rehab investor IQ will skyrocket.
Here’s a quick primer to the seven stages of a real estate rehab deal to help your fix and flip investor game, and make your investing journey more manageable and realistic.
How A Real Estate Rehab Deal Works
1. Preparing/Creating A Plan
Kicking off your rehabbing project entails more than a cursory look at renovations needed and hiring a contractor. You first need to carefully assess the property. When creating a plan, there are two things you need to determine:
- Repairs needed: During your on-site visit, take with you a camera, graph paper, and measuring tools. These will help you gather a more detailed assessment of the property. Take photos of problematic areas and accurately measure the repairs needed. Your photos can also give you before-and-after shots of the house to show your clients. Take a flashlight with you for those dark corners and rooms.
- The improvements that help sell the house: Is there a particular room that needs more sunlight? Maybe installing a bigger window, or perhaps a skylight, would help. Should you install carpets or flooring? How about the color and style? Take note of improvements that up the value of the property.
When done, create a sketch of the property. This time, itemize the repairs and improvements you would like to see, down to the last square meter. This will help share your vision to your contractors.
Bonus tip: It’s never a bad idea for a fix and flip investor to have a lockbox and spare key on the property for whenever contractors visit. This will save you time, since you won’t have to meet them each time they need to access the property.
2. Creating The Scope Of Work
Your scope of work relies heavily on your pre-rehab planning. This is where you detail the extent of the project for your contractors to see every major or minor renovation. To do this successfully:
- Go through your planning notes and list all renovations needed (e.g demolitions, removals, floor installations, etc).
- To budget more efficiently, prioritize each renovation as Need, Want, or Optional.
- Estimate the cost of each project. Remember, you can do away with optional ones, in case it goes beyond your budget.
- Detail everything that needs to be done for every single repair or renovation, down to the last fixture, faucet, or furniture. Also, look at possible material you can reuse instead of buying new.
- Finalize your scope of work based on the cost estimation of each project. Remember to always budget for unanticipated problems.
Your final scope of work is what you will present to prospective contractors that will, in turn, bid on.
Do not forget to compare your home value after renovations with those available in the neighborhood. If you sell higher than the going rate, buyers would shy away from your property.
3. Hire The Contractor
Your contractor will either make your rehab project easy or hard. It’s important you take your time in picking the contractor you’ll share your real estate rehab deal with.
You can find contractors via your investor network, websites, job boards, your local building department, supply houses, or local real estate associations.
The first step is to create a professional document that helps market yourself to potential contractors. This includes background about yourself, your goals (would they be able to work with you in the future again?), the kind of relationship they can expect from working with you, and what you’re looking for in a contractor. If possible, include how you handled previous projects (e.g. pay schedules, scope of work, etc.).
These details help build trust and establish your reputation as a trusted real estate rehabber. Make sure your pitch makes you appear as a viable business partner, not just for this project, but for future ones as well.
Pre-screening interviews can help you gauge a contractor’s suitability. A few questions to ask include:
- Years of experience
- Equipment they own
- Workers in the team
- Licenses and permits
- Any subcontractors
- Any bankruptcies
- Willingness to provide future referrals
After pre-screening, invite them to send in bids for your project. Then, evaluate each bid you receive. (And pick a winner!)
4. Critical Documents & Getting Started
Once you’ve evaluated and picked the contractor that best suits your rehabbing project, you can move on to signing the contracts. Keep in mind, no project should start before all parties involved have agreed and signed the contracts. (This is a must.)
Be sure your paperwork has the following:
- Independent Contractor Agreement: Details everything about a project, including the price.
- Scope of Work: Details the extent and limitations of the project, including every single material to be used.
- Payment Details: When payment will be delivered.
- Insurance Indemnification Form: Insurance requirements of the contractor for their workers and any liability throughout the duration of the project.
- W-9 Tax Form: This is a form required by the IRS for independent contractors.
- Final Lien Waiver: This is for the end of the project, but it’s best you show the contractor the stipulations at the beginning.
Once forms are prepared, schedule a meeting and walk through with all parties involved (contractors, subcontractors). This will give you the peace of mind that everyone involved is on the same page, especially with project details, time frame, and the budget. Entertain suggestions and address disputes immediately.
5. Managing The Rehab
When in the trenches of the actual rehab, you will encounter five different (but important) stages:
- Demolition and trash cleanup: Removal of damaged items (walls, floors, toilets, piping, etc). Outside cleanup would include dead trees, bushes, fences, decks, etc.
- Foundation and framing issues: This stage takes care of the skeleton of the house.
- HVAC, plumbing, electricity: Building inspectors come in after this stage to check if installations are done right.
- Insulation: Remember to start insulation only after the electricity and plumbing inspection is done. Depending on where you are, another inspection is due to see if you have properly obscured any wiring, piping, and ducting.
- Trimming and painting: trim work followed by painting are part of the last stages in your rehabbing. You will now begin to see your vision come to life.
6. Walk-Through Inspection & Final Payment
No matter how meticulous you are, or how much you trust your contractor, there will be a few things that go unnoticed. To provide for this, it’s necessary to conduct a second walk through of the property, after all initial inspections have been completed.
Make sure the contractor delivered everything listed on the contracts. Also, don’t forget that final inspections need to be done to finalize your building permits. (Budget time for this.)
When you find the project satisfactory, draw up the Final Waiver of Lien to be signed by the contractor. Promptly deliver the final payment for a job well done (and lay the groundwork for a future working relationship).
7. Staging (Open House)
You’ve come a long way, but now it’s time to sell your house. This means cleaning the house and prepping it for staging. Staging gives potential buyers an idea of how they can efficiently use the available space of a property.
Stage the bathroom, master bedroom, kitchen, and living room. Give them an idea how it would feel to live inside this house. Also, make sure the exterior is equally presentable (e.g. lawn, fences). It also goes without saying, professional photographs help sell a house faster than those taken from smartphones or properties with no photos at all.
You want to think about how you can leave a good and lasting impression on potential buyers. Where should you spread the word to attract more leads? What are the things you can do to help close the deal?
Let potential homebuyers picture themselves in your rehab property and you’ve done most of the heavy lifting already.
One Step At A Time
The journey of a rehab investor can seem daunting, especially if you don’t have a ton of real estate rehab deals already under your belt. It’s worth noting, however, that by breaking down the house flipping process into seven key stages, you’ll start to see that the successful fix and flip investor doesn’t try to do everything at once.
They have a vision of the big picture. At the same time, they keep a close eye on the day-to-day progress of a rehab. They know one thing for certain: by doing their due diligence and arming themselves with information, there’s nothing they can’t handle.