How to flip a house without flipping your lid - Part two
Oct 31 '05
The Bottom Line This is the second (and last) part in this series. Happy flipping everyone.
If you are here, I assume you read the first part about flipping houses. So you already know how to find the right property and how to set your budgets for money and time.
Now the flipping part can begin in earnest.
We've learned to draw up a detailed plan on posterboard and post it in a prominent spot. That way we can always take a look at our timeline and our contractors and sub-contractors know what's what. There is nothing worse than having four different trades try to complete work in the same room at the same time.
The timeline
After making a detailed list of the projects that need to be done, we come up with a timeline. The big, dirty projects need to be done first. I want the roofers and all their stuff gone before I start the exterior painting. So the roofers come in as soon as I have my keys.
Because of Hubby's Epilepsy and my fear of heights, we usually hire someone to do the roofing. Great if the roof is in good shape, but if it's not it has to be replaced. It's hard to see underneath the shingles, so be prepared for cost overrun and extra time if the sheathing under the shingles has to be replaced.
We try to schedule roofers as soon as possible. A new roof is one of the biggest expenses and once we know how bad it is, we can tighten our budget for the other trades.
The electricians are next. There were a few properties that were not up to code with the electricity. This had to be done pronto, because when the building inspector shows up I want to have something to show him.
Basically we schedule all the trades as soon as it's feasible. I want them done, gone and paid so I can figure out where we have to make adjustments to the budget.
A timeline is a great way to let your contractors know when the next group of professionals needs to be in that room. Overlap trades if at all possible, because the less time they spend on the property, the less money it will cost you. But don't crowd or cramp them. It's really not good to have someone laying floors while the painters are busy dripping paint everywhere.
Our rule of thumb is to work from top to bottom with all projects. That means Roof first, then painting and windows, then floors and carpet.
The money
There are two plans for each property. One is the timeline, that's what everyone who works on the property is able to see. The other is the projected cost for each project. It's really nobody's business how much we plan to spend on what. So that's information that stays out of the property and in our office at home.
We have accounts at our local building supply store. That way the trades are able to pick up what they need without having to ask for money every time. But there is a limit to that. We know the people who run the store very well and they know to cut off the trades at a certain amount. It's okay for a plumber to spend a hundred dollars on pipes and materials, it's not okay for him to spend five hundred bucks without approving it first.
If we know a big expense is coming up, we call the store and let them know it's okay for the trade to sign for the materials.
The accounts are settled once each trade is done with a project, or every two weeks, depending on what comes first. Receipts are collected in a locked collection box each night and entered immediately into a ledger. That way we know if there are problems before they become big headaches.
Very seldom, actually just once, have we caught a professional buying much more than he needed. This was a big headache for us, but we were able to settle it without going to court.
Once the trades are finished with their projects and are paid, we have a meeting with our contractor (if the project is big enough we will use one) and re-group. We will go over every item still left to do and find out where we need to cut or where we can safely upgrade.
This meeting is vital, it gives everyone a chance to voice their concerns and opinions.
Finding a good Contractor
Ultimately it is our responsibility to make sure that everyone stays on task and within the given timeline. But some jobs require more time and we can't be in all places at once. That's were a contractor comes in. Some contractors call themselves that and have really no clue how to do the job. Others are absolutely great.
The contractor is our eyes and ears on the jobsite. While we make it a habit to visit each site daily, we still need to be made aware of problems that occur while we are not there. And that's were the contractor comes in. He's there every hour of every day and he's able to keep a close look at our timeline and the part of the budget he's responsible for. We've worked with a really great one lately and, if something is not done, he will finish it himself to make sure the timeline and budget are on track.
We did pay him a hefty bonus at the last project, but he was worth every penny.
The easiest way to find a good contractor is word of mouth. Ask everyone. If you see a building site, find the owner and ask who the contractor is. Ask the real estate agent and ask at the chamber of commerce for licensed contractors. Eventually the same names will pop up. Then hire the best one you can find.
The building inspector
Just like a contractor, the building inspector can make you or break you. There are some that are extremely easy going and others that are hard-a..es at best. And there is no way to go elsewhere when you encounter the latter. But there are a few things you can do to make the project go smoothly:
Be honest with your inspector - seek him out and talk to him before beginning your project. Tell him what you plan to do and how you plan to go about it. Give him a copy of your timeline. The more professional you appear, the more he will be inclined to help you. It also helps to take your contractor and introduce him to the inspector, that way he knows who to approach at the jobsite if there are problems.
If you have an inspection scheduled, but know that the work is not quite finished, contact your inspector as early as possible and re-schedule. Be honest and tell him which tasks were not completed. Invite him to look at what has been done so far. If he declines and wants to wait until the project is finished that's fine, but at least you gave him a chance to stop in and visit.
Don't try to bribe an inspector. Most inspectors are like the IRS agents of the building trade. One wrong move and they can ruin your whole project.
If an inspector, for whatever reason, issues a stop work order, be polite. Tell him you understand, fix the problem and move on. Ranting, cursing and complaining will not help. He is doing his job, he has told you before what needs to be done for him to do his job and that's that. Cooperation goes a very long way here.
The Paperwork
I'm almost tempted to write a whole new essay about this, but I'll try to keep it short and sweet. There are tons of paperwork to complete while flipping a house. No matter what it is, make two copies of everything. You have figured the administrative cost into your budget - haven't you? There are projects where we easily go through $200 worth of toner and ink for the printer. It adds up - believe me.
The most important paperwork you will need are your building permits. Codes and Laws vary, but chances are that, if you want to change anything structural, you will need a permit. They can be obtained at various government offices, we get ours at the local courthouse at he building inspectors office. Requirements vary there too, but be prepared to give a detailed description of what you want to do. "I possibly want to knock out a wall" will not do it. Be specific. The more detail you put into your description, the easier it will be to get the permit.
If you want to make big time changes, such as adding a two-car garage on a narrow property, or building an addition, be sure you adhere to the building codes. Your contractor and the building inspector can help you with that.
If you plan changes to certain properties, such as original homesteads or water-front properties, make sure you can do that without having to go before the zoning board. Rezoning is always a lot of work and can be quite a hassle.
Contracts and Receipts are another biggie in the wonderful world of paper. Save everything. Don't toss out a receipt for $2.00 for a handful of nails until the project is complete and re-sold. Even then you should keep it. Sometimes a receipt is the only way to prove that you did a certain job.
Contracts are vital. You should have one for each trade. It needs to specify the projects that need to be done, the materials that need to be used and a timeline. Of course it also should specify a price and the way it's paid. Customary payments to your sub-contractors are 1/3 of the overall cost before beginning the job, 1/3 half-way through and 1/3 after completion and acceptance. The first 1/3 can sometimes be skipped if the sub-contractor is aware that he can charge the cost for supplies at a store you specify.
A contract should also specify the hours of each workday. If a trade skips out on you two minutes after they have their checks, you are protected by the contract.
Make sure each contract includes the sub-contractors license information. If you have to hire a professional for any job, don't hire someone who is not licensed in your state. Talk to an attorney if necessary, but make sure you have all the information you need before any professional starts work on your property.
Insurance contracts: This is such a biggie, that you really need to pay close attention to it. You need to carry insurance not only on the property that you are flipping, but also on everyone that will walk in and out of your property from the day you buy it until the day it is sold. Talk to your insurance company and tell them that you are building/remodeling/renovating a property. They will need certain information and a big, fat check.
Don't skimp on your insurance coverage. Should someone get hurt while working on your property, every penny spend is worth not having to shell out big bucks.
Each contractor should carry insurance on their vehicles and the people they might have to hire. Make sure this is specified in your contracts with each trade. And get proof of that insurance.
People to know and be nice to
There are people that should become your new best friends. The clerk of courts, the registrar of deeds and the inspectors are vital to your project. I know the birthdays of all of them, how many children they have and so on. The more personal I get with these people the better. If I need information in a hurry, want to check out a property that's getting ready to go into foreclosure or need a quick favor, it's better to be on really good terms with them.
A good real estate agent is also vital to your success. Ultimately it's this person that will evaluate your property and has to sell it. Find someone seasoned enough to be able to make valid recommendations. The agent is the one to tell you that your selling price is completely unrealistic or not high enough. Listen and learn and take advice.
By the way - are you still sticking to your budget?
Making timely payments
If your paperwork is organized and you have your timeline, you shouldn't have a problem to pay every bill as it comes in or is due. Make sure there is enough money in your building account to pay your trades on time. It really isn't great to haggle over whether you should pay them Fridays after 12 noon or on Friday morning. Make sure your contractor has the checks on time or be at the jobsite yourself to distribute them.
Payday is always a good time to talk about problems. When you hand a check to the plumber, you might want to tell him that you really are worried that the vanity is not hooked up yet and could he give you a specific time for that job.
If you have accounts with local businesses, make sure you specify a time of when you pay these accounts - and stick to that promise. There's nothing worse than a contractor trying to charge something to your UNPAID account. Rumours will fly and within days all the trades will have left your jobsite or demand daily payment. Plus your reputation is pretty much ruined with the businesses in town.
By now the building inspector will have signed off on all the things he needed to see. This will include your plumbing, your electrical work and everything structural.
Now it's time to get down to the nitty gritty. Take another close look at your budget and your timeline. Are you running over on either one of them? What can you do to fix that. An overrun of a few days is probably not too bad, but when it runs into a few weeks, you have a big problem. Each month that you own the property means another mortgage payment, another insurance payment and less profit.
Functioning as your own Contractor or Sub-contractor
If you are experienced in the building trade and have the skills to complete a lot of the jobs yourself, feel free to do so. The keyword here is experience. If you've never build a house, hire someone and learn from that.
If you know you will be doing the painting, laying the carpets and replacing the doors and windows, put yourself in the timeline and then stick to it. There are other trades that depend on you getting the job done on time.
Let's say you have planned on installing the kitchen cabinets yourself. You've done this before - right? You know it will take you two days to get everything done, but now your kids got sick, you'd rather be golfing, or have some other reason why you can't do the job as planned.
Make sure the other trades are aware of the delay. Too many delays and some of the trades will have to move on to another job. That too should be specified in your contracts. I call it the "what happens if.." clause. What happens if the materials are not here on time. Are the trades allowed to go to another jobsite and work there? What if the stuff gets to my site one day after they leave? Do I have to wait till they are finished with their other project or can I hire somebody else. "What ifs" are big in flipping. Get it in writing.
Ch...Ch...Ch...Changes
"But honey, I really wanted the light brown tile for the bathroom, can't we just change it?" "Oh no, we forgot to allow for a dishwasher hook-up, but now all the cabinets are in already".
There are two words that will cost you big bucks in your quest for the ultimate flip. "CHANGE IT". Every builder will rub their hands together when he hears those words.
Before putting in a change order with any trade, think about the following - changing anything will mean a possible delay in delivery, will cost you money, because things will have to be moved or removed and then re-installed and it will cost you time. Is it really worth it. Is there some way to make do with what you got? You are not doing this for yourself. You are trying to make a profit.
On one of our first jobs I projected my own personal taste whenever I could get away with it. There wasn't a day where I didn't sign off on a change order. Even with the extra 20% for cost overrun, I still managed to spend four thousand dollars more than anticipated. Why? Because I decided that the laminate floors we put in were too dark and had them all ripped out and replaced with lighter ones. Only to have the buyer come in and cover everything with carpet, because he didn't like wood floors.
This was a very expensive mistake and one that I will never make again.
Personal tastes have no room in a flipped property
I don't care if you like primary colors on every wall of the house, if you like cherry wood and granite countertops in the kitchen and if you will only take a bath in a high-end jacuzzi. If your market doesn't allow for upgrades like this, dont' do them. There really is no point in dropping $12.000 on stainless steel appliances, if your market will not sustain these cost.
Use comparisons whenever possible. Chances are that neighbors in your area will be nosy and want to find out what it is you are doing. Use this to your advantage. Ask to take a look at their houses and see what's inside. If every single one of them sports an avocado green refrigerator and a harvest gold stove, you might want to install a basic refrigerator in your property, instead of the "super-dupermakes fifty different shapes of ice cubes" one.
On the other hand, if every home in the neighborhood sports quarter sawn oak floor, you might not want to skimp by putting 99 cents a sq.ft. carpeting in yours.
Colors are a big one when it comes to flipping. You want to keep everthing neutral and light. There is a color that I call "builders beige". Works wonders, is reasonably priced and easily changed by a future owner. If you really want a lot of color, use colorful pillows, curtains and rugs to accentuate this neutral shade.
Bringing it all together
Before each trade leaves and receives their final check, do a walk-through with your contractor. Make a punch list of all the items that need to be finished and specify a time and a trade to finish them.
Are there paintjobs that need to be touched up? Does paint need to be scraped from windows or doors? Do all the outlets have covers? Are the floorboards back on the wall? Is the caulking for your bathroom okay, or does it need to be re-done.
Walk through each room and use the "fine-tooth comb" technique. Look at everything, write down everything. Talk to the trades, get them back on task and then hand out the final check. Don't sign of on a job that is not 100% finished.
Allow a few hours to do the walk-through and don't forget to check if all the lights are working. We had a project where none of the ceiling fans were installed as required. Because we made the walk-through in the daytime and were a bit rushed, we didn't notice until a few days after the electrician had left the job site and had cashed his check. He was nice enough to come back and complete the work, but he would have had a good leg to stand on otherwise, because I had signed off on the contract. Oops!
Once your property is completely flipped, you will have to make arrangements to have it sold. Meet with your Real Estate Agent a few weeks before completion and set a date for an Open house. Make sure all the work is complete by then.
Over the years we have found that it's better to show a house furnished. We sometimes use furniture from our own homes to show the property off, or we use one of those rent-to-own places and get stuff there. Keep furniture minimal but well-placed and dont' forget to put out bowl of fresh fruit or flowers.
After your flipping is complete, you have to remember that now you are selling someone a home.
If you really haven't read part one of this essay - here's the link:
http://www.epinions.com/content_4560035972
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