Contrary to what many may believe, closing on a deal that was recently rehabbed is not the end of a real estate transaction. While profits may be realized and goals met, there is one critical step that remains – analyzing the process in which the house was flipped. Before the deal can be considered complete, investors are strongly advised to review their latest transaction with a critical, unbiased eye. I want to emphasize this advisory, however, as this step is not necessary, but it might as well be. Any sensible investor, regardless of their experience, would be foolish to neglect such a valuable learning experience. After all, the more you are able to retain from each of your previous deals, the more prepared you will be to tackle projects in the future.
Following a deal, it is important to take a step back and analyze every aspect of the transaction that took place under your delegation. Take note of everything that went according to plan and those things that failed to meet your expectations. Make it a point to understand what you did well and what you did poorly. Were your profit projections in line with your actual profit? What worked, and what was a disaster? How can you approach your next project, as to avoid repeating potentially costly mistakes? Answering these questions, and many more just like them, will serve as an invaluable tool to your real estate investment business.
In reviewing completed transactions, investors can evaluate their current situation, the direction they intend to head, what they want to do and what they aspire to accomplish in the future. Essentially, you can’t know where you are going until you know where you have been. Previous deals will provide investors with a solid foundation in which they may learn from past experiences. Conversely, failure to do so may demonstrate an increased propensity for negligence.
As I am sure you already know, negligence is perhaps the worst attribute to exercise in the field. Failure to comprehend the task at hand will lead to costly mistakes that can ultimately ruin a business. Therefore, you owe it to yourself to use every deal you complete as a means to enhance your knowledge of the real estate industry and mitigate potential risks. It is important to justify your efforts and learn from your mistakes.
Successful rehabs are no longer a mystery. There is an actual method to their madness. Conducting a post-rehab analysis is simply one cog in a larger machine that is rehabbing real estate. According to Brandon Turner at BiggerPockets, “learning how to properly analyze a flip is the first step in a successful and lucrative career in house flipping – and it doesn’t have to be difficult or scary.”
Following the completion of a rehab, that is to say the day you receive a closing check, you will be left with a distinct paper trail. The documents in your possession should reflect all of the research you conducted, the numbers you crunched, the papers you had signed and hopefully a sizeable paycheck. However, despite the deal having closed, these papers still have a unique purpose. They represent the path in which your deal transpired. They are quite literally the road map that guided you to your closing. Therefore, they contain all the information you need to know about the home you just sold. The trick lies in deciphering these metrics and using them in the next deal. After all, success is usually the result of a learned and modified behavior onset by the comprehension of the metrics at hand.
The sheer volume of metrics that will become available to you at the end of a deal can be overwhelming. However, it is important to maintain your focus. Instead of getting lost in the labyrinth of information, try to alter your perspective. Look at the broader picture, as to understand the real problem areas that hampered your progress. These will be the areas that have the most helpful information. Accordingly, improving the wrong metrics can be incredibly counterproductive.
Before diving in headfirst, you will want to have your metrics organized in a manner that is conducive to the success of your business. This will require establishing a post-rehab filing system.
Post-Rehab Filing System
In order to properly analyze your metrics, you must have an efficient means of sorting through the data that you have compiled up to this point. The way in which you file and organize your documents will facilitate a more effective and productive business. In fact, the system in which you file your documents will determine whether or not your post-game analysis is successful. An organized system may be all that separates average investors from great ones.
Within your system, you should have two separate folders for each property: a Monthly Invoice Folder and a Master Property Folder.
The monthly invoice folder will harbor a set of sub-folders: invoices and receipts for gas/oil, electric water, sewer, first mortgage, second mortgage, contracts and building permits. The master property folder will also contain two separate sub-folders: one for buying and one for selling. The buying folder should include the following:
- Buying System Checklist
- Buying Financial/Comps and Exit
- Purchase and Sale (Buying)
- Title Search
- Land Trust
- Mortgage Info
- Closing Statement/HUD-1 (Buying)
- Title Insurance
- Short Sale Package
The selling folder should include the following:
- Disclosures/Listing Agreement
- Purchase and Sale
- Closing Statement/HUD-1 (Selling)
- Seller Carry Back Mortgage Note
- Selling System Checklist
Investors are advised to categorize their folders even further, as it will only assist in further delineating the data. We recommend color-coding the folders by property type – wholesale, renovation, buy & hold, etc. It is important to categorize your properties as much as possible so that when the time comes to look up something, you can quickly and easily do so. By using this system, managing and organizing expenses becomes simple and effective – exactly what investors need.
In addition to keeping records of previously closed properties, you will want to create a folder for storing deals that are still active. Subsequently, these folders will hold all of the necessary documentation for completing and closing active deals.
While accounting is not as glamorous as completing an actual rehab, it is certainly instrumental in making a profit. In fact, a profitable rehab is all but impossible without some degree of effective accounting. Every investor should know exactly where every dollar is spent and made. There is absolutely no excuse for any investor who neglects the distribution of funds on a respective deal. Accordingly, the success of your business is directly correlated to the profit you make on every deal, so it is paramount that each transaction is accounted for – down to the penny.
In order to account for the distribution of funds, it is imperative that you first have a basic understanding of the concept. The initial function of an accounting system is nothing more than organizing financial information and providing accurate reports in which money may be tracked. In having a working knowledge of the accounting process and its underlying principals, investors can place themselves at a considerable advantage.
Once you have grasped the concept of accounting, and more importantly its usefulness, consider investing in the appropriate computer software to complement your particular needs. While there are many options made available to the public, QuickBooks is perhaps the most popular and easy to use. QuickBooks is specifically designed to help smaller businesses manage their finances in a manner that is conducive to their bottom line. Among other things, QuickBooks keeps track of customer and vendor information via checks, keeps detailed information for every bank account that is relevant to your business, and allows you to run reports on the efficiency of your accounting. Perhaps even more importantly, however, is its ability to keep track of the inventory investors acquire.
Final Closeout Stage
In conducting a post-rehab analysis, investors need to preform what is known as a profit analysis. Such an analysis is intended to detail the financial aspects of the deal in question. It should contain a summary profit and lost statement that highlights the original cost, cost of improvements, the carrying costs, the selling price and any closing costs that are associated with the transaction. Finally, the calculated gain or loss should be included and serves as a critical reference point. In addition, are a number of variables that will help clarify the situation and alleviate any complications that may arise. This includes, but is not limited to, the number of days the property was held and how long it was listed for sale.
In sticking with a system, closing on a property will require you to transfer the respective folder to a location that is more conducive to your analysis. We recommend placing the recently closed property in a file labeled “Closed Properties.” Simple, but effective. To assist you in your efforts, we have compiled a checklist of what should be included in such a file:
- Copy of Buying HUD-1 Statement: This is the closing statement you will receive when you first purchase the property.
- Copy of Selling HUD-1 Statement: This is the closing statement you will receive when you resell the property.
- Copy of Check or Wire From Sale: Having a copy of the check or wire confirmation makes it easy to trace the funds back to your bank account.
- Financial Report From QuickBooks:
- Journal Entry From QuickBooks
- Class Income Statement/Profit & Loss Statement
The process of flipping a house is exhausting, but rewarding to say the least. As much as investors would like to say they are finished with a rehab when they receive their final closing check, there is still one critical step that needs to be addressed. Conducting a post-rehab analysis is absolutely imperative to the success of any business. In doing so, you will be made aware of what works and what doesn’t. What you take away from a respective deal will be invaluable in completing successive flips. This, in and of itself, is worth taking the extra time to evaluate your recent transaction.