Archive for January, 2013
You can make money or lose money on a rehab. People who make money in real estate take responsibility for managing the rehab. People who do not manage their projects either lose money or do not make as much as they should. Whether it is a buy, rehab and sell scenario or a buy, fix up and hold for rental approach, the project must be managed, or dire consequences are sure to ensue. Plan your work and work your plan.
If it’s not in the seed, it’s not in the harvest. That means that if you don’t plan or provide for something to manifest, then don’t look for it to drop out of the sky and land gently in your lap. It’s like success; the elevator to the top floor is not working, so you’ll have to take the stairs. You can still get there, but you’ll have to work for it.
A lot of the investors reading this article are pretty new to the business. They don’t know much yet, but they’re eager to get started, and a lot of them already have sufficient financial backing to wade in. That can be a bad combination without proper knowledge, and since the purpose of the Inspector’s Corner is to make you prone to success, it’s time to give you some tried and true advice.
Today we’re looking at managing the rehab. About the only thing that will separate you from your money faster than paying a contractor before the work is completed is either a poorly thought out rehab plan or no rehab plan at all. I can’t decide which is worse. They both waste your time and your money, and you didn’t come here to do that.
In order to do a successful rehab, you have to have a plan. Like the fella said; “The play has a beginning, a middle and an end”. So does your rehab. It is like any project that you manage whether it is designing gas turbine engines, writing software packages, putting in a garden or going on a vacation, it has a beginning, a middle and an end. There are certain tasks that have to be accomplished in order for your outcome to be achieved, and some of those tasks are position sensitive in the critical path to the desired goal.
There are a lot of ways to manage projects, and a lot of ways to manage the rehab projects. We are going to look at some of the things you will want to provide for in your project, and also the order in which they are usually done to complete the project on time and on budget. For the sake of this discussion, we will assume 3 sections to the rehab: assessment, documentation and execution.
Assessment is the part of rehab management that provides for the initial perception of the rehab. It acquaints you with the tasks at hand, and lets you know what you’re in for. This phase of the project starts with a walkthrough of the property. This is where you will begin to notice the things you will have to do, begin to think about who you will get to come in to do the work, and about how long it will take you. It should also get you thinking about any special tasks that will need to be performed such as getting a gas test because there is no gas meter.
Assessment can be a visit from a licensed inspector who has the experience and the methodology. It can also mean an on-site discussion with an experienced rehab contractor or rehabber as well. What you’re doing is beginning to create your scope of work for the project, and your project budget flows out of that. At this point you are looking at everything, gathering information to formulate you plan. You should be looking at all the parts of the house and deciding whether they are in good condition or if they will need to be repaired, replaced, removed, painted, re-done or changed in some way.
You should be thinking about what you will have to pay to get all this done, and you should be thinking about who you can get to do it.
This phase is so important. How can you have a dream come true if you don’t have a dream? One of the ways that successful people make their dreams come true is by thinking about their dreams all the time. They look at it from this angle and from that angle, they turn it upside down and go front to back visualizing it, then they go back to front. They make it fill them up, they get consumed with it, and they make it come alive for them. The guy who built the Exxon building downtown didn’t start by saying, “Let’s get some bricks and some wire and make something.” He started by thinking about what the project would look like when it was done. When he had that picture in his head, then he could work backwards through all the necessary stages of design and construction. He knew what he wanted to get in his harvest, so he turned around and planted that specific kind of seed.
Once we know what we want to accomplish, the next step is to write it down in a certain way called a scope of work. A scope of work is a full list of the things that you are going to do to the property. It will include such things as roof replacement, window repair, paint inside and out, electrical repairs and fixtures, plumbing repairs and fixtures, flooring etc. We want this scope of work to be complete in every way. If we miss something that has to be done on the project and it is not in the scope of work, then it is not going to be found in the budget. If it is not in the budget and you wind up having to do the task, then the money can only come out of your profits. That’s the one number in the whole transaction of buying, fixing and selling a house that you want to pay strict attention to because that’s where you get paid. If you do a good job, the pay is good. If you do a bad job, the pay is not so good. Look the house over real good before you start.
Another important part of this discovery and documentation phase is the order and scheduling of the work. How long will it take, who will do the work, who should come in first, where do I start? There are a couple of things going on when you write things down like this. It focuses your attention to the project itself, and in being attentive to the situation, you create the situation. Your focusing your attention gives life to the project.
Planning your project like this will make you a better project manager. Planning like this will make you a better investor. Planning like this will make you money.
The next thing we do is to project a budget to go with the scope of work. Get your contractors in, get your bids and get it done quickly. The purpose of this exercise is to help you figure out whether this deal is going to work for you, or if you pass on the deal. You want everything in your budget. “Everything” in this context means a contingency of 10 to 20% above what you think it’s going to cost. Built into the budget. Every time. Don’t forget it. If the choice comes down to you can do the deal but you have to take the contingency buffer out of the budget, then the deal is too thin for you, there is not enough money in it to be done this way. Pass on that one. You will live to write another offer.
You bought the house. Now what? At this point in time money is made and lost. There are a lot of things you can do here, but the one that works best in this business is if one. If you can make money sooner or later, why not make it sooner?
Starting work on the house means that you did some planning before the house was bought. Contracts have to be signed between you and your contractors, decisions about paint and carpet have to be made, all of the details such as what gets a ceiling fan and what gets a light fixture, and if it gets a light fixture, which one, what kind? Planning makes the day. Scheduling contractors is vital to the success of the project.
Plan your work, and work your plan. Sounds simple, but most folks, myself included, have found out the hard way just how hard the hard way can be if you don’t have a plan for a project like this. Rehabs can be a lot of fun, and you can make good money doing them, but you have to have a plan.
I’m Kevin Smith, and I’ll see you at the property.
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Article excerpts, contributions and edits have been made by Houses Fast editors. Statements and opinions expressed in articles, reviews and other materials herein are those of the authors; the editors and publishers. While every care has been taken in the compilation of this information and every attempt made to present up-to-date and accurate information, we cannot guarantee that inaccuracies will not occur. Houses Fast, its writers and contributors, will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site. By Kevin Smith, with editing by: Joe Proseo