Fix and flips have many areas to make mistakes in and you can get upside down in a project quickly if you make a few bad choices. My company, LVN Real Estate, has been a fast-cash house buyer in Denver since 2013 and I have made my fair share of mistakes along the way and even lost money on some houses.
It’s the way it goes.
It’s not IF you will lose money on a flip, but when!
We are not perfect, but here are my best tips for when you first start out.
1. Due Diligence Before Buying
Although LVN Real Estate offers fast closes and cash offers on Denver homes, that does not mean we do not do due diligence on the properties we buy. We thoroughly inspect every property before we purchase it. We have an in-house project manager who goes in and looks at every square inch. He takes photos and videos of the property so we can remember the layout and make plans after the fact.
This saves us time having to go back multiple times. He takes detailed notes and looks for issues that may present themselves while rehabbing. We look at things like the roof, sewer line, furnace, foundation, windows, etc. The big items are the most important.
ALWAYS spend the $100 or so to get the sewer line scoped. The time you don’t, is the time you have a 10K sewer line replacement and kill your budget. If you don’t have a project manager on your team like we do, simply hire a property inspector. It’s well worth the money and can save you thousands.
It also gives you leverage on negotiating when you can take a report back to the seller and show them your findings.
2. A solid plan
Failing to plan is planning to fail.
Always have a solid plan before starting your flip. You should know exactly what you are going to be doing to the home. You will want to create a scope of work that details exactly what you have in mind for your contractors. We have a labor cost section and a material cost section. If you are just getting started, you may not know these costs. If this is the case, simply use an excel spreadsheet to map out everything you will be doing and have 2 sections. You should be able to estimate material costs pretty well by using Home Depot and other building material suppliers’ websites.
For example, you can measure the size of a room and know how much laminate or carpet you will need to put down. From there you can multiple the cost per sq ft by the size of your room.
After you have completed this, you can send this off to a few contractors and ask them to fill it in for their bid. Eventually, you want to get to the place where you dictate the price of labor and tell them what you are paying. When starting out, this will be difficult to do, unless you lean on someone with experience.
Always get 3 bids to make sure your contractor is in line and never pay hourly. You want to pay by the job, so your contractors are incentivized to complete the job and get paid.
Here is an example SOW (scope of work).
3. Finding & Hiring A Contractor
The type of contractors I look for are the guys who typically aren’t advertising. Those guys with the fancy trucks and ads all over the place are generally very expensive. A few places to look and find contractors are by going to Home Depot and talking to guys, searching Thumb Tack, Craigslist, BBB, Facebook real estate group pages, and the best of all – referrals.
Referrals are often the best because it’s coming from someone who has experience with the contractor.
As I mentioned, start by having conversations with multiple contractors and getting bids from there. See who is in line with your budget that you had in mind. The cheapest isn’t always the best… in fact, oftentimes the cheapest guys are your biggest headache.
You probably have holding costs for the property, so if you don’t have a competent crew, they could cost you a lot of time and money by dragging the project out.
Once you find one you like, make sure to ask for references. Find active jobs they are working on and actually go look at the job. Ask the client how the contractor has been to work with and make sure you like the quality of their work.
If they have no active or recently completed jobs, this may be a red flag and you probably want to keep hunting.
After you have identified your contractor, it’s time to do some paperwork.
NO handshake agreements. This will not do and is a recipe for disaster.
Make sure you set clear expectations up front with what you are looking for. Make a contract or have an attorney draft one up for you. Add your SOW (scope of work) to it and have them sign off on exactly what they will be doing.
Make sure you include how you will be paying them. If you are paying weekly, put that in the contract. If you are paying on a certain number of draws, map out your draw schedule. This is how we do it. We will have 3 or 4 draws. This means when the contractor completes a certain amount of work, they will get a draw.
So maybe draw 1 is demo. After the demo is complete, they can get their demo draw. From there they can start on draw 2 items. Do not release payments until their draw construction items are done and you have seen the work and signed off.
After you feel good that the work was completed you will want to send them a lien waiver saying that you are paying them for all work completed so far and that it is a full payment. This will release you from any obligation to pay them for work that has not been completed.
5. Routine Inspections
You want to make sure that you are not a ghost on the job site as the project starts and throughout the job. Communication and checking in on things is huge! You will want to show up at the job site regularly and check to make sure things are going as planned. If you show up and no one is there, call them and find out where they are at. If the project is having good progress and they aren’t there, that is ok, but they need to be on track and hitting deadlines.
There are virtual systems you can implement as well. We have our contractors on a Slack channel for communication, require picture updates and progress reports before we pay, etc.
Communication is one of the biggest aspects of any business. You need to stay on your contractors and make sure you are on the same page as things go along. The last thing you want is a bunch of change orders at the end of a job, which could cost you thousands of dollars to correct mistakes.
There’s plenty of other nuisances involved in a fix and flip, but these are 5 key factors that I think are important to implement and keep in mind when starting. Good luck on your flip!
For fix and flip inspiration and rehab ideas, make sure to give us a follow on Facebook and see some of the houses that LVN Real Estate bought for cash and flipped in Denver, Colorado.