This subject better be right up my alley since were set to do close to 20 of these full rehab flips this year!
Fix & Flips are about building value! There can be some big money projects but we average netting when all is said and done roughly 10 to 15% of our re-sale FMV as profit.
We look to buy below 60% of after repair FMV but this can vary a little based on the projected sale price of the project.
We buy our properties from Wholesalers, from banks as REO’s or from the auctions (REDC). With wholesalers we generally only have a number of hours to inspect the property, make a rehab plan and project a budget to be able to commit to buying the property.
Most wholesalers who work a lot with investors expect the investors word to be golden so we don’t commit to purchase unless we want it because if we say “Yea we want it” we are expected to close on our word.
When we buy a REO or Auction property we have only got maybe 10 days to figure all of our cost’s out and decide if we would buy or bid on a property.
I have to know every little detail of how it get’s finished myself before we can create a construction budget because every thing missed cost’s money and if you put to much money in the budget un-necessarilly you end up potentially pricing yourself out of the investment because your numbers don’t work!
This is a project example:
Purchase price $90,000
Down to hard money $22,500
Closing cost’s $3,100
Hard money set up $1,000
Rehab cost $44,400
Carrying cost $5,600 Includes Insurance & Utilities @ 4 months
Projected price $185,000
Realtor Fee’s $12,950 7%
Closing cost’s $3,500
Total cost $144,100
Sales cost’s $16,450
Projected profit $24,450
Total cash in project $76,600
We are averaging selling our projects within 20 days of listing and we are averaging completing and selling 2.5 homes with the same cash investment every year.
We estimate our ARV as a projected re-sale price by looking at comp’s less than 90 days old and prefer to pull 3 sales which have closed in the last 30 days, which support our projected sale price as we complete all our rehabs in an average 8 to 9 weeks.
We really want comp’s within 1/4 mile but will look at 1/2 mile or 1 mile if necessary, however we are real experts in our rehab area and know from experience where our project falls as a professional rehab.
We always compare apples to apples as same size, same bedrooms and baths, same lot size, same amenities, and same garage size.
REO’s in our area are selling for an average of 15 to 20% below FMV so we are well aware in our area of the actual value of a REO.
As a construction professional we handle our own rehabs sub-contracting to a series of contractors making up our needs, normally 3 bids are sufficient if your looking for a good contractor. If you are contracting your project to a General Contractor or Remodelling Contractor keep in mind your paying 20 to 25% of your contract cost’s in the contractors overhead, profit and contingency reserve.
Be aware that good contractors are busy and respect there time, 3 bids is enough to project cost’s and you can negotiate everything until you reach a contract.
Contractors are mandated by law to do exactly what is within the contract, make sure you and your contractor create a scope of work that is complete and precisely describes each item your contractor will do. Also make sure a critical path schedule is completed and projects your completion date and the day or week critical items will be completed onsite.
Make sure cleaning and trash removal is spelled out in your agreement so as to avoid cleaning up after contractors yourself.
We find that a bonus to the contractor does not motivate the job as a whole and does not motivate the tradesmen remodelling your project, instead we like to have food catered or barbecued onsite for all the crew members to motivate them and drive them to completing work ontime and under budget.
(This one Friday deal really motivates the job about half way through)
Our sub-contractors work with us on all of our projects, so they know there budget prices and timely work is bread and butter for there company and they will get a lot of future work for a good job.
We also had better know exactly what your going to do to the property without asking your realtor as the cost differences can be huge after the fact and a complete budget has to be estimated in advance to purchase the project.
Most real estate agents don’t know or know very little about remodelling or rehabing and although we have gotten good advice on exterior paint colors or combining hardscape and planting ideas this seems to be an exception rather than the rule.
Our bonus to our agent is "If you do a good job and sell it quickly you have a shot at selling one or more additional properties this year, if not they get no further listings and your on to the next realtor.
You can say “Geez, that’s so unfair” no not really as most realtors do very little for the money, if more realtors were motivated to really go out of the way to provide exceptional service there is huge money to be made, but I find a lot of realtors lazy and unmotivated kind of going through the motions.
This is not personal to you realtors who really work hard at what you do, but most realtors sell or buy homes for Mr. & Mrs. Smith (End Buyer) and have no investing expertise or abilities to understand what we need as investors.
Reserves are great but like most of us have seen on TV’s “Flip This House”, “Flip That House”, etc. if you don’t know what your doing the additional cost’s can bury you, and drive you and your project to bankruptcy.
And there again if you don’t know your market and what you can achieve don’t do it, it is real easy to lose money fixing & flipping house’s, we are fortunate as we have the ability to pay off our hard money lender and sit on a property if need be, but we hope that never happens.
A back up plan is necessary but hopefully good planning, knowing your market and estimating accurate cost’s will mitigate the need for backup!