When most people think about house-flipping or rehabbing real estate properties, their mind generally shoots straight to dollar signs. It certainly can be a lucrative business, but for many, it remains a confusing operation. Below, I will detail the seven phases involved in house-flipping. Knowing how the process works and what exactly a real estate rehabber does – will not only make you more knowledgeable but also make you a more informed investor.
What is a Real Estate Rehab?A real estate rehab is when an investor purchases a property, renovates it and then sells it to make a profit. The extent of work that is required for each property differs, and as such, rehab projects can last from a few weeks to a few months. Due to the amount of time and effort put into renovating these properties, there are great opportunities to earn wide profit margins.The Seven Phases
The initial property walkthrough:The first phase of a rehab project involves you visiting the subject property. While on-site, you should take the time to identify and assess all of the repairs that will be required during construction. Having tools such as a camera, measuring instrument, flashlight, as well as anything else you deem necessary will help you to collect information as accurately as possible. Be keen about capturing images of problem areas throughout the house (mold, structural damage, etc). These images will assist you with coming up with repair estimates, and when you want to showcase before/after photos once the project is completed.During your initial walkthrough, you also want to consider whether you want to make additional improvements to the house that may help it to sell. These improvements might include things like adding hardwood flooring, adjusting the size of a window, or making expansions to a particular room.
Create your Scope of Work (SOW):Your scope of work is a detailed plan of the work that will be completed throughout the construction process. This is drafted prior to any work being started, and it essentially instructs the contractor of all minor and major tasks they will be working on. A good SOW addresses:
- All required renovations (carpet installation, light fixtures, demolitions, etc)
- Your project budget – prioritize your renovations according to what is needed, wanted, or optional
- An estimate of the final project cost
- Identify and note every single repair that is needed! If a light bulb needs to be changed or trash has to be taken out – be sure to specify those details
- Sometimes unexpected things happen during rehab projects so, be sure to budget for surprise costs.
Hire a quality contractor:Quality contractors can be found within your professional network, real estate groups, job boards, and local hardware stores to name a few places. Keep in mind that when you’re choosing a contractor to work on your rehab project, you’re also deciding on a business partner. You don’t want to just choose anyone. They can make your rehab experience a pleasant one, and unfortunately, they also can make it a horror story. So, take your time.As with all new relationships, you want to start by introducing yourself and what you’re about. You can introduce yourself in a variety of ways, for example, creating a professional intro document. This document might give insight into your background, your goals, what exactly you’re looking for, as well as, what the contractor can expect if they decide to work with you. Provide as much relevant information as possible – including things like your scope of work, your payment system, and things of that nature.
By taking the time to do these things, you are establishing credibility and positioning yourself as a real estate rehabber that can be trusted. Contractors also want to be assured that you are reliable and that you can potentially be a source of more work opportunities in the future.
When pre-screening contractors, some questions that you might want to ask about are:
- How much experience do they have?
- Are they licensed?
- Are they insured?
- Who works on their team?
- Do they own equipment?
- Can they provide referrals?
Gather your critical documents:After you have chosen a contractor who is a good fit for your rehab, the next step is to get all contracts signed. Your paperwork should include:
- Independent Contractor Agreement – Overview of the entire project, including the price
- Scope of Work – Complete outline of all work being completed, including materials
- Payment Arrangements – When and how payments will be made
- Insurance Indemnification Form – Insurance requirements for the contractor and their workers
- W-9 Tax Form – Required by the IRS for independent contractors
- Final Lien Waiver – Required upon completion of the project
Once you have all of your critical documents gathered, schedule a meeting between yourself and all parties involved in the rehab (subcontractors, etc). Use this time to go over everything in detail to make sure that everyone agrees on the time frame, project details, and the budget. Ask questions, listen to suggestions, and handle any disagreements at this time.Oversee the Rehab:Now that you’ve got your contractor and your documents squared away, you want to ensure that all of the necessary permits are obtained. The kind of permits that you will require will depend on your location and the scale of your rehab. Generally, regardless of where you are located, you will need permits for work that includes re-roofing a property, placing a dumpster in front of the property, alterations made to load-bearing walls, and things of that nature.The penalties for not having your permits in place might be getting fined or having a lien placed on the property by local authorities. Once those things come into play, they start to negatively affect your profit potential; avoid all of that make sure that you’re adhering to local regulations from the start.There are five stages that you will encounter when the rehab is underway:
- Demolition and trash removal
- Foundation / Framing problems
- HVAC, electricity, and plumbing
- Trimming and Painting