Planning for the Unexpected with Rehabs

Announcer: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Kelly: Hi, I’m Kelly McDonald, I’m the VP of Residential Debt here at RealtyShares, and I’m very excited today to talk to you about planning for the unexpected when rehabbing a property.
Announcer: This REI Classroom real estate lesson is sponsored by theinvestormachine.com, FlipNerd’s private investor coaching program and your blueprint to investing success.
Kelly: One consideration that any lender is going to take into account when evaluating whether or not to give you money is going to be your experience. In the due diligence process, experience means knowing how to handle unforeseen problems that come up during the rehab process. These problems can be anything from contractor issues that might arise, perhaps you finally get into a property after purchasing an REO and find out there’s mold, electrical or plumbing issues that you need. There might be pests, such as bugs or rodents that need to be evacuated and evicted from the home before you can begin. Or maybe you finally finished the rehab and it takes longer than expected to sell, or unfortunately, you have some personal issue that causes a financial setback. Any of those problems can arise and it’s important to know what to do in order to make sure that you’re planning for those problems ahead of time.
The first and most important thing you can do when working with a contractor is make sure that your contractor understands your timeline, has put together a perfect phase schedule, and has a plan themselves to stick to it. You’re going to want to work closely with your lender and your asset management team there to make sure that your draw requests are being met and that you’re submitting them correctly in order to get your money back as fast as possible if you need that to move on to your next phase.
And the third piece of that would be to make sure that when you’re getting the inspections scheduled, so that you can submit for the draw process, that you’re planning ahead. Perhaps, for example, you might want to go ahead and ask for the inspector to arrive the day the work is going to be finished. This is going to allow for your money to come back as fast as possible to you.
Another good idea to go ahead and move on to is what to do in terms of unforeseen issues, right. So, if you become a member of your local Chamber of Commerce, you’re going to meet other folks in the industry who can maybe help you out with the plumbing and the electrical issues, for example, that may have come up. If they themselves can’t help you, they’ll definitely know who to refer you to and help you out of that jam.
The last thing I really want to point out is that you really need to plan for what happens when the rehab is done. You want to make sure that you have the reserves to complete the project before you even get started. Consider making cookie-cutter scopes and knowing your bottom line on every single deal before you start. If you have a concept of exactly how much you can put into every deal in order to make your profit, you’re more likely to stick to your scope of work, stick to your plan, and know when to move on from any given project.
Worst case scenario, do you have a relationship with a bank to allow you to refinance? Consider making sure that you do put that into the process and start as soon as possible. Would you be able to rent this property and cover the payment until you have the seasonality to refi out? These are all things that you should consider prior to doing any project, and thinking about the unexpected is the best way to get out and make sure that you have a successful project.
Thanks so much. Looking forward to seeing you again. If you have questions or concerns, please don’t hesitate to reach out to me at [email protected]. Thanks a lot.
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