Ensuring Your Fix & Flip Project is Within Scope & Budget
When choosing your fix and flip project, you must give significant thought to the level of work you’re comfortable handling. When first starting out, be careful not to get in over your head - properties that need minor improvements may have less profit potential, but require less planning and carry fewer risks of cost overruns. Tackling a big project before you’re ready can have disastrous consequences, so be sure you’re ready and avoid taking on more than you can handle.
Before you close, it’s important to visit the property and, along with your contractor, evaluate the cost of the rehab work that will be required. Whether you’re preparing your bid or are in a contingency period after winning a bid, this is your opportunity to confirm your cost estimates and be sure that the deal will meet your financial requirements.
At this stage, you should be taking the following steps:
Visit the Property Yourself
First, make it a priority to personally visit and inspect every property you purchase. While you may not be an expert in construction, you never want to be surprised later on by something that could have been easily foreseen, and there is simply no substitute for inspecting each property yourself.
Get Bids from General Contractors
Have one or more general contractors visit the property and provide you with renovation bids. You’ll need to closely review the scope of work with the contractors to determine what work needs to be done and what might be optional. As with your real estate agent, try to find a contractor who regularly works with investors – they’ll have a better understanding of what provides value to your fix and flip project and what may be wasted money.
Obtain Inspections as Needed
Certain items, such as structural elements, HVAC, septic systems, etc. may need to be reviewed by specialists in those areas. If you think there may be issues, obtain quotes or inspections from qualified contractors.
Consult with your Real Estate Agent
Your real estate agent can help you identify potential improvements that can increase the value of your property. For example, are granite countertops or hardwood floors very desirable in the neighborhood or will buyers be more sensitive to the price of the property? When renovating a property, you can't forget the needs of the people who will be buying the property, and your agent can certainly help you maintain this perspective.
Contact Your Lender
If you are planning to obtain a loan to purchase the property, begin talking to your fix and flip lender now to get the loan application process started, so that you’ll be ready to close within the contract period.
Performing Your Inspection
While it certainly may not be possible for you to identify all of the items that needs to be addressed during your renovation, here are some things to look for that can help you avoid potential problems later:
Are there any noticeable cracks in the walls or foundation? Are there sagging or uneven floors? Any signs of rotten wood or moisture intrusion? Foundation repairs can be very expensive and may indicate other structural problems with the house, so be sure to consult with your contractor if there are any concerns about the foundation or other structural components.
Is the roof sagging or visibly uneven? This can point to damaged or rotted rafters below the surface. Is there any evidence of leaks inside?
Will the floorplan appeal to modern buyers or will you need to change the layout? Moving walls and making other structural changes always adds risk, as you’ll never know what other issues you may discover once you begin demolition.
Are the kitchen cabinets and appliances in good shape or will they need to be replaced? Remember that the kitchen is often a focal point of the house, so you’ll need to be sure that it has the requisite look and feel.
Is the system in good working order? Are there enough outlets to satisfy the array of electronics owned by modern buyers? Keep in mind that making additions to an aging system may require you to upgrade the entire system to modern codes and standards.
Is there any evidence of leaks anywhere in the house? What type of interior plumbing pipes are use? Old galvanized and cast iron pipes are much harder to repair and may need to be entirely replaced.
Are there any obvious additions to the home? If so, have your contractor confirm that the additions were properly permitted and are in compliance with building codes.
For good measure, always perform a check (usually on your county's website) to see if there are any open permits on the property. Unsatisfied permits may be costly to resolve, and you may not be able to sell the property without completing the work covered in the permit - whether you were intending to do such work or not.
These are just some of the things you’ll need to consider when deciding whether a project is within your desired scope and budget. Be sure you closely review the property with a licensed contractor so that you fully understand the work that will need to be done. Most importantly, if you find that the project requires more work than you can comfortably handle or afford, don’t hesitate to walk away from the deal – this can save you from big losses later on if unexpected costs arise.
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