The Order of the Rehab and What to Consider Part 3

Copyright 2008 Profitable Partnerships USA, LLC

 

Step 6 – Close-in

 

Step 6 is the step that covers what we like to call “close-in”. This means that your contractors are “closing in the walls”. Once the major systems have been completed, everything has been framed and everything has been wired correctly, this is when we want to insulate the exterior walls of the property. Once that is done, we want to close in the walls with drywall. Now the property’s “rough construction” phases are over and we begin to move into more of the finishing work of the project.

 

 

Step 7 – Painting

 

Step 7 is painting. Once the walls are complete, we paint the interior of the property. With the drywall up at this point, we prep the drywall for paint. In some cases, we will skim it, patch the walls and put a coat of primer or a light, first coat of paint on the walls to make sure we won’t see any flaws once the final coat of paint is on. Once the drywall is installed, skimmed and patched with a coat of primer, we usually come in with another two coats of paint to make it look good.

 

 

Step 8 – Install Flooring

 

Step 8 is installation of the floors, specifically the solid surface floors: hardwood, stone, tile and laminate. Once the paint is on the walls, we look to install all of the flooring around the house with the exception of the carpets. We install hardwood floors in the kitchens, living and dining areas and in the hallways. We install ceramic tile, travertine or laminate flooring in the other areas of the property.

 

 

Step 9 – Install Kitchens & Baths

 

Step 9 is installing kitchens and bathrooms. The floors are now in and complete and it is time to install the kitchen. Depending on the level of the house, either Tier 1, Tier 2 or Tier 3, you may install a base or builder-level cabinet or you may have your kitchen designer come to install semi-custom or custom cabinets in and around the kitchen. We will also install the appliances and countertops. We then move to the bathrooms to install the tubs, toilets and vanities. At the outset of this step, a majority of the house is completed.

 

 

Step 10 – Install Carpet

 

Step 10 involves installing the carpet. We don’t want the rehab crews to walk all over the new carpets, so this step is not done before it needs to be. Carpets are generally the last piece to go in to the property, so we wait until everything else has been completed in the house and there isn’t a lot of foot traffic in the house before ordering and installing the carpet.

 

 

Step 11 – Punch Out

 

Step 11 is what is called the punch out. This is the step in the process where the house is pretty much complete. We might come in to do finishing touches on the property. We essentially wrap everything up in this step.

 

This is where the contractors will put in such things as light fixtures, outlets, switch plates and other small finishes that need to be done on the property. The punch out is an important step that a lot of investors forget to take care of. And when they forget to do it, the completion of the house seems to drag on for a long while because it gets finished piece by piece as people notice small things.

 

This is the last step where you will actually walk through with your contractor to complete a checklist to make sure they have finished off every piece of the renovation. This is the differentiating factor between a renovation that looks great to a homeowner and one that looks sub-par. The small, finishing details are what make the big difference. It is important that you have these covered in the punch-out phase.

 

 

Step 12 – Clean up & Landscaping

 

Step 12 is clean up and landscaping. At this point, you are ready to market the property for sale to your retail buyer. You want to hire and bring in your cleaning crew to make sure everything is vacuumed, set up and clean. All of the windows and floors should be cleaned. The bathrooms should be scrubbed. The house is ready to show. It is also the point where you want to do some landscaping outside to attract people to the property. You want to add that curb appeal to the home.

 

After this phase, you will want to schedule a “home stager” to view the property and prep it with furniture and decorative items that make the house look attractive and cozy for potential buyers. We cover this aspect in our Selling Retail manual.

 

This completes the general steps and methodology of renovating a property.

 

These are the steps you want to take as you evaluate and work yourself through the renovation of your properties. It is important to note that not all of these steps are necessary. This is simply a good flow and process to follow. Understand as you renovate a house the considerations you should make and what steps you should take to do so.

 

Evaluate your project to determine which of these steps are necessary, or more specifically how involved in each step will you need to be due to the nature of your renovation.

 

More details are listed in the Profitable Partnerships Renovation Lifecycle appendix of this manual. In the renovation lifecycle diagram, we walk you through roughly six full stages of completing your renovation. It has more detail on some of the different considerations you want to focus on in each of these different steps.

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Tom Zeeb and Will Lansing are active real estate investors, national speakers and mentors who coach students how to make BIG profits so they can live the lives of their dreams. They are the authors of the highly acclaimed home-study course the “Profitable Partnerships Success Library”. For information on having Tom & Will speak to your real estate group or for home study course and other Profitable Partnerships product information, please visit www.profitable-partnerships.com email mentor@profitable-partnerships.com or call 877-COACH-50.

Sign up for their FREE e-course at www.BestRealEstateSystem.com

The Order of the Rehab and What to Consider Part 2

Copyright 2008 Profitable Partnerships USA, LLC

 

Step 3 – Exterior

 

Step 3 has to do with the exterior of the property. We want to make sure the exterior is fixed and cleaned up before we move to the interior of the property. This involves installing new or renovating the exterior components of the property.

 

On a typical project, this generally includes work to the roof, windows and siding or brick and siding. We want to start this process by evaluating the roof. If the roof needs any repair or replacement, we want to start there. The roof will keep us dry, warm and out of the weather.

 

We then move on to the exterior doors and windows to complete those as well as the exterior siding and brick or stucco if it needs some touchup or point up. We do the entire exterior first so that the outside of the house is completed and ready. This allows us to move inside to begin the replacement of all the things we demolished in Step 1.

 

We also like to complete the exterior first because the exterior work will allow us to have a much better curb appeal while working on the property. This may help us gain some initial interest from potential buyers even as we work on the inside of the house.

 

 

Step 4 – Rough-in Major Systems

 

Step 4 is the rough-in of major systems. This includes electrical, plumbing and HVAC. Typically, when you begin the project, depending on the age of the house, you want your plumbers to check out all of the pipes. This includes sewer lines and supply lines. In some of the older houses, this may include galvanized pipe, which a lot of times needs to be ripped out and reinstalled with either copper or PVC pipe.

 

Check local requirements for the building codes. Also check with the plumbers on your contracting team to ensure they put in the right type of material specific to the right type of supply or sewer lines. Check to ensure the proper plumbing rough-in is in place. If you add new bathrooms, it will require you to rough-in new plumbing, supply and sewer lines for them.

 

While the plumber on your team works on the plumbing, it is important to have your electrician check on the electrical wiring. In a lot of the older homes, a consideration you need to be aware of is the upgrade of the electrical service or what we call a “heavy up”.

 

In the older homes, we will need to replace the wiring, the switches and the main panel box to accommodate an upgraded electrical service. In your typical home, a 200 AMP electrical service is sufficient to support modern-day appliances and a central heating and air system.

 

The third component of the rough-in is the HVAC. In some homes, you may be able to salvage existing systems or utilize an existing central heating system and piggyback it with an air conditioning system. Depending on what the set up is you may not need to do a completely new rough-in for this mechanical system.

 

In some of the older homes where there are old boiler units for heat with window units for air conditioning, we typically want to demo those out in Phase 1 followed by the installation of completely new duct work and a new central system and condenser to complete the HVAC.

 

Typically, there is a rough-in completed for the internal unit and the duct work first. It is important to do the rough-in first because these are things that are typically hidden behind the walls and are the systems that supply us with the electricity, water, heat and air conditioning for us to stay relatively comfortable while we work on the rest of the property.

 

We do the rough-in of these systems so that the framing and sheetrock can come in afterwards and close in the walls, concealing all the “rough-in” work.

At the end of this phase your contractors will want to call for an inspection of the work so that they are given the OK to continue on with the project. Sometimes, your local jurisdiction may have suggestions to make in the way the house is wired and how some of the outlets are setup or the particular kinds of piping, wiring, and outlets you are using. This is especially true when you are renovating in a historical district.

 

 

Step 5 – Framing & Subflooring

 

Step 5 is the step in the process where we complete the framing and sub-flooring. Once the demolition, exterior work, and rough-ins have been completed, it is time to address the framing and structural set up of the interior of the property.

 

We want to pay particular attention to walls that may need to come down if we will open up the space, rotten wood that may need to be replaced and rotten joists that may need to be “sistered”. A rotten floor joist may need to be replaced or can simply be secured by placing two other beams on either side of it to sister it and bring back the strength of the original beam.

 

In this phase, we will also frame out new walls. If you renovated a kitchen and will add a half wall, this is when that is framed out. This is when new bathroom walls will be put up, doors are framed out and, if a basement is to be finished, this is the step where you will frame the basement walls. Framing is a substantial undertaking and it requires a skilled crew to do it right so that the level of the house is correct and that the walls and floors are in fact level.

 

At the end of this step you are also going to want to call for an inspection so that the inspector can sign off on the quality of the framing. This is especially true for larger renovation jobs or those where you have framed a new exterior part of the house. You will want this inspection to be completed and passed so you can close in your walls.

 

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Tom Zeeb and Will Lansing are active real estate investors, national speakers and mentors who coach students how to make BIG profits so they can live the lives of their dreams. They are the authors of the highly acclaimed home-study course the “Profitable Partnerships Success Library”. For information on having Tom & Will speak to your real estate group or for home study course and other Profitable Partnerships product information, please visit www.profitable-partnerships.com email mentor@profitable-partnerships.com or call 877-COACH-50.

Sign up for their FREE e-course at www.BestRealEstateSystem.com

The Order of the Rehab and What to Consider

Copyright 2008 Profitable Partnerships USA, LLC

 

One thing a lot of investors fail to do correctly, at least the first few times they renovate a property, is to go through the phases in the correct order. When we first began to fix houses, we did things out of order. A lot times, that caused more problems down the road.

 

We did some demolition work, then some renovation, then some demolition work and then more renovation. We put kitchens in and then painted. At the end of the entire process, we came back after the fact to put in new windows. This kind of pattern is not the correct way to approach the renovation project.

 

This was long before we knew what to do and worked with any type of good, legitimate contractor. These mistakes can be made quite frequently, especially by new people getting into the renovation business. It is important to understand the proper flow with which you should approach a renovation. Knowing out of the gate exactly what will be done will help you frame up the exact order of the work your contractor should do.

 

Even though you will not manage the entire process, it is important for you to know and understand the process you want your contractors to work. This helps you in two respects. It allows you to catch issues with your contractors, it also helps you price projects more systematically and more effectively.

 

We will now walk you through the process and the different steps it will take to evaluate the rehab process. This is the way you want to approach each and every renovation project, no matter how big or small it may be. It is important that you bucket or break down the steps of the process in this fashion.

 

 

Step 1 – Meet Your Crew & Confirm Requirements

 

Step 1 is meeting with your contracting crew and confirming the requirements and parameters of your job. Once you have the property under contract, it is ideal if you can have your renovation crew in the door with you before you actually purchase the property. This way, you will walk them through with your tier-level manuals, specifying the level of finishes. You will confirm the scope of work they will complete on this project.

 

They can prepare materials ahead of time, along with plans and timelines. Then by the time you purchase the property, they can begin work right away. We always try to encourage and set our contractors up to get into the property before we purchase the house.

 

Once we do the walkthrough, we spend time to confirm with them exactly what will be done, re-examine the tier-level spreadsheet and systems to ensure that we have the proper material grades going in the property, revalidate and confirm the scope of work and cost of the project.

 

It is in this step that we decide with our crews if plans and permits are needed for the project. In most cases, when any kinds of new systems are being installed or exterior work is being performed, your local jurisdiction is going to require permits.

 

Before you begin any project, double check the building codes and requirements of your local jurisdiction to see what is required. Typically, if you are unsure, we always suggest to err on the side of caution and get a permit. When people do not get permits when they are required to, county inspectors can be quite harsh and in some cases can really turn your project upside down.

 

 

Step 2 – Demolition

 

Step 2 is after we purchase the property and the crews begin to work. We will call this “demolition”. This is the part of the project where we want the contractor or rehab crews to demolish everything in the house that will be pulled out. We don’t want to do this in step-by-step phases. We want to do this all at once. We want to demolish or demo the entire property if the scope of work calls for it.

 

Demolition is when you bring in a crew, a particular dumpster to haul away trash, rip out the things you need to rip out and clean out things that are out of date or need to be hauled away, such as kitchen cabinets, old appliances, bathrooms, bathtubs, toilets, vanities, old flooring, carpeting, drop ceilings, paneling on the walls, old plaster, old bead board, old drywall and other things that will be replaced after they have been ripped out and thrown away.

 

This is a nice step to do all in one. It gives you a clean slate with which to work for Step 3. Demolishing is a step that generally can happen very fast and doesn’t need any special type of permitting.

 

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Tom Zeeb and Will Lansing are active real estate investors, national speakers and mentors who coach students how to make BIG profits so they can live the lives of their dreams. They are the authors of the highly acclaimed home-study course the “Profitable Partnerships Success Library”. For information on having Tom & Will speak to your real estate group or for home study course and other Profitable Partnerships product information, please visit www.profitable-partnerships.com email mentor@profitable-partnerships.com or call 877-COACH-50.

Sign up for their FREE e-course at www.BestRealEstateSystem.com

Working with Lenders

Copyright 2008 Profitable Partnerships USA, LLC

 

In the renovation business, you will come across a number of different opportunities or options to finance your renovation deal. It is important that you understand how each of these particular sources of money work for you. We will discuss these individually for you in this section.

 

We want to make you aware that of all the sources of money that we talk about we recommend generally staying far away from a conventionally underwritten mortgage.

 

Most conventional mortgage companies do not underwrite “renovation” or “rehab” loans. It is too messy of a product for them and many of their guidelines will not support the type of product you need. Therefore, we are going to discuss some creative ways to finance your renovations as well as special niche financing options that are made available to renovators and investors.

 

 

Creative Financing

 

When we talk about creative financing, we mean in the way you acquire the property subject to the existing owner’s mortgage. This takes care of the acquisition of the property.

 

Buy the property subject to the existing mortgage balance and use one of your own personal equity lines or credit cards to finance the construction.

 

The nice thing about this strategy is that you don’t have to deal with any third-party intermediary to approve the type of construction work you do. You are the bank. When your renovation team and contractors complete the work necessary on the project, you then issue them a check or payment from your credit line.

 

In this scenario, it means you need to have the availability of credit or money to pay out of pocket for all of the renovation work that is to be done on the property.

 

We don’t advise this strategy because we are big fans of teaching our students to finance deals using other people’s money (OPM). There is no reason you should have a large chunk of your money at risk for these renovations.

 

This has advantages and downsides. The advantages are that as the bank, you make the payments and don’t need approval from anyone else to get the money released to the contractor. You will see in the next financing option that you will have to get approval for this.

 

At the same time, the disadvantage of this strategy is that you have your own money into the construction and do not get it back until the property sells or you refinance.

 

Additionally, you don’t have a second set of eyes to look over the work and agree to the completion of the project for you like you do in other methods of financing.

 

Again, we recommend you stay away from this strategy unless you are able to have someone give you a second mortgage and finance the renovation work for you. This is a possibility in a strong market where people know they will be paid off because the demand for housing is strong. In a soft market, this is very hard to come by as most private lenders are not interested in second mortgages.

 

Another option in this scenario is to take the property subject to the existing financing of the seller, then depending upon the kinds of financing options that are available in the marketplace, you may be able to refinance a new mortgage into your own name and pull cash out at the same time because your loan to value is so good.

 

Depending upon the condition of the property and the mortgage programs available, you may be able to pull cash out to make the needed renovations. This typically works in a credit rich marketplace and on properties that do not require more than cosmetic touch up because they will appraise well.

 

 

Traditional Construction Loan

 

Depending on what happens in the marketplace in both the real estate market and the credit market, construction loans are a little bit more difficult to come by. These will be offered by niche lenders or smaller, localized banks that may know more about this market segment or have a more specialized product to offer.

 

The reason is that a lot of lenders will not underwrite construction lines because of the condition of the property. They fall outside a lot of Freddie’s and Fannie’s guidelines. It makes it more difficult to sell the paper in the secondary market. A lot of conventional mortgage companies or banks will not offer construction loans unless the market is very hot or it is a particular niche of their business.

 

Finding these lenders can be a good thing. When you find a construction lender, you will find that they typically require a certain amount of money down up front. Typically 10% to 20% of the total amount of money you need to borrow of the loan size.

 

A lot of these renovation loans will be set up so that it is an acquisition plus construction loan. It will all be wrapped up into one. They will advance you enough money for the acquisition. They will also set up a construction draw escrow account for you to draw down upon as certain milestones are reached and you complete your renovation project.

 

You will need to submit to your lender before they underwrite and approve the loan a draw schedule that tells them exactly the amount of money that will be required, the exact list of repairs and the schedule at which these repairs will be completed. This draw schedule is then used to disperse funds to you or your contractors as the particular pieces of the project are completed.

 

The advantages of your local niche bank giving you a construction loan is that it is typically a lower cost loan and is generally at market interest rates. It also serves as a second set of eyes. Most banks, on the release of your construction draws require that an inspector visit the property to ensure the progression of work and that things are being done correctly.

 

The downside is because it is a bank; you will have to go through more of their standard documentation. They will look at your credit. They will look at your reserves. They will underwrite you, not completely, but more on a conventional basis.

 

 

Hard-Money Lenders

 

A hard-money lender is also what we call an equity-based lender. These are lenders who base their underwriting criteria strictly upon the equity in the property. They do not look at credit scores, W-2s, or 1031 files. They simply look at the equity position you have in the property.

 

A lot of times, you can use a hard-money lender for renovation deals. If you buy properties at the right numbers, most hard-money lenders will lend to you based on the after-repair or to-be-completed value (ARV). They will typically lend you anywhere from 60% to 70% of that value depending on the size of the project and the current condition of the marketplace.

 

The way a hard-money lender sets up their program is very similar to the bank. They will advance you enough money for the acquisition of the property. They will also escrow the construction money along the lines of a construction draw. As you complete the various pieces of the construction budget, they will release to you that money in line with your draw schedule.

 

One advantage of the hard-money lender is that you do not need credit to qualify. The lenders give you money based on the value of the property and your equity position. Another advantage is they are very flexible. They work very quickly. You don’t have to go through the red tape and documentation that banks will typically require you to go through.

 

The downside of using hard-money lenders is that they are very expensive. They generally charge a handful of points upfront to get the money. They will generally require you to pay a hefty interest rate. Most hard-money lenders charge upwards of 14% for their money.

 

It is an expensive but easy alternative. Many investors like to use hard-money lenders because they make the business so easy. They simply just factor this in as the cost of doing business.

 

As you get into the renovation project and gain experience in the business, try all three out. See how you can manage all of these different strategies to see which one resonates with you and fits best with your business model. All three will accomplish the end goal of financing the renovation of your project so you can finish the work and move on to the next project.

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Tom Zeeb and Will Lansing are active real estate investors, national speakers and mentors who coach students how to make BIG profits so they can live the lives of their dreams. They are the authors of the highly acclaimed home-study course the “Profitable Partnerships Success Library”. For information on having Tom & Will speak to your real estate group or for home study course and other Profitable Partnerships product information, please visit www.profitable-partnerships.com email mentor@profitable-partnerships.com or call 877-COACH-50.

Sign up for their FREE e-course at www.BestRealEstateSystem.com

Add Value – What to Consider

Copyright 2008 Profitable Partnerships USA, LLC

 

As you become more experienced with your renovations and rehab projects, it becomes more advantageous for you to evaluate and examine the particular properties you buy to see what small ways you can add value without increasing your renovation budget substantially.

 

Particular things to pay attention to and look for that you will find as you walk through the various comparable properties in the neighborhood include salable metrics you can install into the property to make it more attractive than it is now.

 

One thing we want to emphasize with this particular case is to try to maximize value by changing what is already currently there. This means not to necessarily add new structures, but reconfigure or add some small improved touches to the current structure that already exists today.

 

Here are some things to consider and some ideas you may want to add to your different tier checklists depending on if the neighborhood sales will support it.

 

Keep in mind that these are things that do not require a lot of additional cost, but they do add a lot of value to the property and make it that much more attractive relative to the other comparable properties in the neighborhood.

 

 

Half Bathroom

 

Add a half bath to the main level of the house. In a lot of older homes, you typically find one full bathroom upstairs as the only bathroom on the property.

 

Consider adding a full bathroom in the basement or upstairs level in what might be the master bathroom. If you can arrange and design it so that the new additional bathroom comes very close to either the kitchen or the existing bathroom pipes, it makes it easy to minimize the expense you need to plumb it. Don’t run long lines of plumbing if you can avoid it.

 

 

Opening Up Spaces

 

In a lot of older homes, the design and layout of the floor plan is considered “broken up” and “choppy”.

 

By simply demolishing a few walls and opening up the living space of the home, you can make a tremendous impact on how people feel when they walk through the home.

 

Doing this generally adds a more open feeling, allows you to make certain rooms larger, and in some cases also allow more light into the rooms of the house. This goes a long way in adding value to the property.

 

 

Finishing a Basement

 

Something else to consider is actually finishing the basement.

 

A lot of townhomes and single-family homes come with full, unfinished basements. Finished basements go a long way to attract buyers. They add a tremendous amount of value and do not generally require a lot of expense to finish.

 

 

Decks and Porches

 

Another area in which you can look to improve on a property and add significant value without undergoing a ton of expense is a patio, porch or back deck.

 

These add a lot of character to homes. Retail buyers generally like to see these as they walk through and decide upon a home.

 

 

Parking

 

In some areas parking is a premium element of a property.

 

Some properties you acquire may have the ability to add off-street parking (OSP) to the lot or even a garage or carport.

 

In these cases, it is smart to examine the cost of doing so. Many times, with little effort, you can make a big difference to the attractiveness and the value of a property by simply adding parking or a garage.

 

 

Adding Value Conclusion

 

These are just a few elementary things you can consider to add value to your property.

 

Examine the comparables in your neighborhood. Take notice of the small things that realtors point out that help sell houses. Pay close attention to what people comment on. It could be built-in storage, opening up rooms or carving out particular areas of the house.

 

You want to consider what these different things cost and see if the return on the investment in this work is worthwhile. We can tell you from experience that it generally is. It will allow you sell your house faster and for more money.

 

Take special note of what sells in today’s marketplace. Whenever you acquire a property and are deciding what ways to maximize your property’s value during the walk through with your contractor, you should pose yourself the question: “If you were the one buying this property, what would make you want to live in it?”

 

See how you answer that question and perhaps how some of your friends, family, peers, and realtors answer that question. Once you have those answers, decide on which suggestions resonate with you and make the most sense for the house and your budget.

 

Small adjustments such as these can go a long way to help attract more buyers.

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Tom Zeeb and Will Lansing are active real estate investors, national speakers and mentors who coach students how to make BIG profits so they can live the lives of their dreams. They are the authors of the highly acclaimed home-study course the “Profitable Partnerships Success Library”. For information on having Tom & Will speak to your real estate group or for home study course and other Profitable Partnerships product information, please visit www.profitable-partnerships.com email mentor@profitable-partnerships.com or call 877-COACH-50.

Sign up for their FREE e-course at www.BestRealEstateSystem.com

Considerations to Add and Create Value to a Renovation – Part 1

Copyright 2008 Profitable Partnerships USA, LLC

 

Level of Finish – The Different Tiers

 

In our experience we have “bucketed” the types of properties that we do into three specific categories: Tier 1, Tier 2, and Tier 3.

 

Each of these Tiers is specific to a particular value or level of property and thus, a specific type of finish that needs to be incorporated into the property. By setting up your renovation systems with three different tiers of properties, it allows you differentiation from house to house, while also keeping things standardized and systematized for your crews.

 

Tier 1 houses are those that typically have a price point on the lower end of the scale. The houses aren’t necessarily in a “war zone” neighborhood, but they are in the lower price points for your market.

 

In our home market, a Tier 1 house generally runs the $100,000 – $250,000 price range. In this level of home, our contractors are instructed to use more builder-grade materials. This involves lower cost finishes in the house. This is because the types of materials in the property that the buyers of these houses expect are cheaper. Please refer to the Tier Specification Worksheet in the appendix to see specific materials we place in each of our properties in the Tier 1 category.

 

Tier 2 houses are those that are typically in the “middle” of the price scale. These properties are going to be more for your middle class buyer and will have nicer material finishes than your Tier 1 house. These properties in our home market generally run the price scale of $250,000 – $450,000. Some of the materials in this tier class overlap with Tier 1 properties since the price points are so close. It makes sense to make the level of finish as nice as possible in this type of house while still keeping it priced relative to the market and market value.

 

Tier 3 houses are those that we consider the “high-end renovation”. These are houses whose price points are $500,000 and above in our area and would be considered the upper tier homes in your local market.

 

These properties are those that the upper middle class buyer can afford and have the more generally high-end materials used.

 

Within this category you can break down your renovations even further. In some properties you renovate, you will want to include very high end materials for the finishes. For the context of this manual, we will consider the lower price points of the “upper tier” homes; those that a majority of the upper middle class buyers can afford. When you get into mansions and multi-million dollar properties, you are going to be looking at more selective and distinguished grades of materials that we do not cover in this manual because it is beyond our scope.

 

The Tier 3 houses boast the nicest finishes and most “custom” features for the homeowner. Please refer to the Tier Specification Worksheet in the appendix to see the specific finishing materials for this and the other two tiers.

 

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Tom Zeeb and Will Lansing are active real estate investors, national speakers and mentors who coach students how to make BIG profits so they can live the lives of their dreams. They are the authors of the highly acclaimed home-study course the “Profitable Partnerships Success Library”. For information on having Tom & Will speak to your real estate group or for home study course and other Profitable Partnerships product information, please visit www.profitable-partnerships.com email mentor@profitable-partnerships.com or call 877-COACH-50.

Sign up for their FREE e-course at www.BestRealEstateSystem.com

Other Costs Associated with a Renovation Project – Part 2

Copyright 2008 Profitable Partnerships USA, LLC

 

Sales Commissions

 

Outside of the carrying costs and mortgage costs, you will also want to factor in the costs associated with actually selling the property. Namely the real estate sales commission that you will pay to a real estate agent.

 

You will fix this property up and take it to market in the retail marketplace. We encourage you to enlist the help and assistance of a local real estate agent. Factor this as a percentage of your out-sale price and cost of the actual renovation. When doing this, assume the percent paid is what is commonly accepted in your market.

 

As we talk about in our Selling Retail manual, one of the incentives you can use to help sell a property in a slower market is to add “buyer agent” incentives. So we recommend in a down market, you perhaps model this as a 7-8% line item. In an up market where things sell fast, you can most likely model it as a 4-5% line item.

 

 

Closing Costs

 

Next, you want to factor in the closing costs that are required to sell the property.

 

What will it cost once you have a contract to sell to take the property to settlement and close? This typically involves a portion of transfer and recordation fees. Typically you will be responsible for half of them for the new buyer as well as potentially some attorneys fees for transacting the settlement.

 

Other things to consider on this check list that we want you to think about are buyer credits. These are credits or concessions you make to your buyer to get the property sold once you have had it fixed up. This may include such things as some type of credit if they ask for one after they do their inspection of the property. Perhaps the level of finish isn’t up to their standard. Perhaps they want to see something additional done to the property before they buy it. To save time and energy and guarantee the sale of the property, you may offer them some type of buyer credit in lieu of doing the work yourself.

 

It can also be considered closing help when the buyer asks for to help with their mortgage financing. This is a line item that will come into play more often in a slower, softer “buyer’s market”. It is good to factor a small percentage (2-3%) of the total out-sale price for this line item in a softer market.

 

As you can see at the end, when we add all these costs together we are left with the gross profit from the deal. This shows us the summation of the other costs that we will incur as we go through the renovation project.

 

This quick snapshot is a good one to use. It tells you the gross profit you would look to earn on the renovation. It also gives you a good ballpark idea of what your net profit potential on the deal will be (before income taxes) as well as the net profit percentage as it relates to the sales price on the property.

 

 

The Net 10% Rule

 

A good rule of thumb on any renovation project is a quick gut check to ensure the profitability of the deal for you. In this particular scenario, as we walk you through the profit analysis of this renovation, confirm and ensure that the net profit margin you see is always above 10%. This tells you that you will make at least 10% of the sales price of the property.

 

A net margin of at least 10% will show you it is at least worth doing this deal. Otherwise, you run the risk of potentially breaking even or losing money if it falls below that 10%.

 

This takes into account potential market shifts and changes that may happen over the course of the renovation project.

 

It is always a good idea to stay above that 10% profit margin on any deal you do.

 

If the numbers fall below that number, renegotiate your deal to have a profitable transaction. If you can’t get better numbers than 10%, it is best to walk from the deal. In our experience, renovation projects that yielded less than 10% net return were large wastes of time where we made little to no money.

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Tom Zeeb and Will Lansing are active real estate investors, national speakers and mentors who coach students how to make BIG profits so they can live the lives of their dreams. They are the authors of the highly acclaimed home-study course the “Profitable Partnerships Success Library”. For information on having Tom & Will speak to your real estate group or for home study course and other Profitable Partnerships product information, please visit www.profitable-partnerships.com email mentor@profitable-partnerships.com or call 877-COACH-50.

Sign up for their FREE e-course at www.BestRealEstateSystem.com

Other Costs Associated with a Renovation Project – Part 1

Copyright 2008 Profitable Partnerships USA, LLC

 

There are other costs one needs to be aware of outside of the cost to simply renovate and fix up the property. This is the part of the business that many people quickly overlook and do not fully understand. This is the part of the business that a lot of the new reality TV shows about fixing and flipping properties fail to mention to their audiences.

 

The old model of “I bought a house for ‘X.’ I put ‘Y’ into it. I sold it for ‘Z.’ I made a profit of Z minus X minus Y” doesn’t apply here. There are many other factors one must consider through a renovation project. As we mentioned before, all of these different factors are things you want to consider before making the decision to either wholesale or renovate.

 

We include in this course a profit analysis sheet we encourage everyone to run through before purchasing a property they will renovate. We would like to walk you through that now. (Please see Profit Analysis Inventory Calculator in the appendix)

 

The areas that one must consider in the way of a renovation project in addition to the fix up of the property are the following:

 

Closing Costs

 

When renovating a property, much different than if wholesaling property, you will need to take title to the property. You will have to close and take ownership and record a new deed in your name for this property. A whole host of things come under the category of closing costs in the purchase of the property.

 

You will need to purchase title insurance, pay your local transfer and recordation or tax stamps, pay prorated parts of the insurance potentially and pay the property taxes. All of these costs go into what we consider to be the miscellaneous acquisition closing costs on the purchase.

 

 

Mortgage Expense

 

Another cost one must consider is the cost of the mortgage expense. Depending on how you finance the property, this could come in the form of a traditional construction loan, an equity line of credit or a hard-money loan.

 

You want to factor in the upfront points that may be paid for the financing as well as the appropriate amount of time and interest payments you will make to carry the property.

 

In smaller renovation projects that involve a cosmetic update that can be completed in two weeks to one month, we typically stretch the interest carry out for six months. This is the financing time needed to properly fix the house, list it for sale, and sell it. Factor in a carry time with an interest expense of six months.

 

In larger projects that entail a more substantial renovation where new walls will be framed, new full systems will be put in and the property is being reconstructed from the inside out, we typically like to see a full one-year term. That is the amount of time it will take to fix the property, list it for sale and resell it. Factor in 12 months of holding costs on this particular line item of your check sheet.

 

 

Carrying Costs

 

For carrying cost we obviously have the repairs we have talked about throughout this manual. We also want to talk about the carrying costs outside of the actual mortgage.

 

This includes ongoing builder’s risk insurance and hazard and fire insurance. The particular type of insurance you need depends on the type of renovation you will do on the project.

 

It is important on renovation projects that you do not get your standard homeowner’s insurance. You want a builder’s risk or hazard insurance policy. Talk to your local insurance broker about which policy makes the most sense for the type of project you will complete.

 

The other things to consider in carrying costs are your other utilities like electricity and water that need to remain functioning on the property while you do the work.

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Tom Zeeb and Will Lansing are active real estate investors, national speakers and mentors who coach students how to make BIG profits so they can live the lives of their dreams. They are the authors of the highly acclaimed home-study course the “Profitable Partnerships Success Library”. For information on having Tom & Will speak to your real estate group or for home study course and other Profitable Partnerships product information, please visit www.profitable-partnerships.com email mentor@profitable-partnerships.com or call 877-COACH-50.

Sign up for their FREE e-course at www.BestRealEstateSystem.com

Pricing and Estimating a Renovation Project – Part 2

Copyright 2008 Profitable Partnerships USA, LLC

 

Understanding from the Start – The Telephone

 

In time, it is important for you to develop the skill of understanding what it would cost to renovate a property based upon the telephone conversation you have with your sellers. This is the point at which you want to get to.

 

In order to get comfortable with this step you must exercise all the recommendations discussed so far: Visiting rehab projects of other renovators, understanding timelines of projects, understanding costs of varying scopes of works and level of finishing. All of these ingredients allow you to accurately establish the costs of a renovation project by simply talking with the seller on the phone and getting basic information – at least to the point where you can frame your offer subject to a visit to the property.

 

As we have discussed in our other courses, you want to convert your sellers on the telephone and get them to the point that you have made them an offer before even leaving your home or office.

 

There is no better way to do this than to have the skill set and ability to understand the costs needed to renovate their property while you have them on the telephone. This should be the target for you as you mature in the business.

 

Understanding how to talk to a seller on the telephone and assess their repairs as well as being knowledgeable with your renovation crews and the work they are doing is the point where we want you to get to with the use of this manual and these suggestions.

 

_______________________________________________________________________________

Tom Zeeb and Will Lansing are active real estate investors, national speakers and mentors who coach students how to make BIG profits so they can live the lives of their dreams. They are the authors of the highly acclaimed home-study course the “Profitable Partnerships Success Library”. For information on having Tom & Will speak to your real estate group or for home study course and other Profitable Partnerships product information, please visit www.profitable-partnerships.com email mentor@profitable-partnerships.com or call 877-COACH-50.

Sign up for their FREE e-course at www.BestRealEstateSystem.com

Pricing and Estimating a Renovation Project – Part 1

Copyright 2008 Profitable Partnerships USA, LLC

 

Pricing and estimating your renovation project is something that you will get very good at in time with practice. When you start out, it is a bit tricky to understand the various prices that will be associated with the various types of fix-up you will complete on the property.

 

To start and be comfortable we suggest that as you walk through properties, enlist the help of a good contractor. Have them walk the property with you to get a solid, firm quote on the price of repairs that will be needed for the house.

 

When you do this, it is important to not waste the contractor’s time. Make sure to pay them for the hour or two they will spend with you at the property. A good contractor who wants to earn your business will do this with you because they know that as you get into the business you will use them for your contracting needs.

 

We encourage you to engage this same contractor on your first few visits to get a comfort level with what things will cost for you to renovate. The more you walk through properties with these contractors, the more comfortable you will become at identifying the various costs of repairs.

 

As you walk through properties to assess the extent of the renovation, it is very important to write down what you see. Take notes and take photographs to remember what things looked like and the extent of the repair. For each property keep a separate file with these notes and photos.

 

As you take your notes and photographs of the condition of the property, also make sure to complete the Property Renovation Worksheet from the appendix. This worksheet will give you a good estimate as to the amount of money needed to renovate the property. This renovation worksheet will also prove to be useful in the way you price your property in negotiations with your sellers.

 

The Property Renovation Worksheet breaks down the various areas of the property, and then line itemizes the details of each area. As you walk through the property during your inspection, you simply note the kind of work that is needed in each area and then at the end of your walk through tally it all up to give you your cost estimate for the repairs.

 

To assist you in the line items of what things costs, we have also included our material cost matrix to refer to (see Repair Cost Matrix in the appendix). With this and your experience walking through job sites with contractors, you will get comfortable at pricing out your renovation projects.

 

Practice with these tools. Use them each and every time you walk through a property. As you do this, take particular note and pay close attention to what work is needed. Formally calculate out on your spec sheet how much it will cost. Vet this calculation with your contractor to make sure you are in line with what things really should cost.

 

Early on, it is also a good idea to contact or visit your local home improvement store. Lowes, Home Depot and some of the other larger home improvement stores conduct classes on renovations and have handbooks available for you to reference in order to have a good feel for what things cost to replace or renovate.

 

Utilize these resources and read the manuals they provide in their stores. These types of resources also help give you good ideas on how you can renovate your properties and also show you some effective hands on “how to’s”. We suggest you take full advantage of these free resources.

 

While you are attending these classes, or referencing the information such stores provide, spend some time pricing out cabinets, countertops, appliances, toilets, fixtures and bathtubs. All of these things are important to know.

 

Equally important is the look and quality of the materials. You want to be comfortable knowing what certain types of cabinets and countertops, floors, appliances, windows, and doors all look like. This will help you so that as you walk through properties you can envision what the property needs to look like and what it will cost to get it to that point.

 

In addition to our checklists and materials on renovation costs and visiting local home improvement stores and accessing their resources, it is also a good idea to spend time with local experienced renovators. There are people at your local REIA clubs who do a lot of renovations. They will help you refine your knowledge of what local materials cost and what renovation projects local to your marketplace should look like.

 

Ask if you can come along with them one day on the job. Offer to take them to lunch or dinner so you can pick their brain about the various renovations they have done and what suggestions they have in renovating properties. Make your time together worth their while and not an interference with their schedule.  Offer to do some work for them on an ad hoc basis. See if they will allow you to visit their jobsites so you can see what things look like in progression and what things end up costing to be completed. See the work they do and examine the different renovation budgets they go through.

 

This real-life in-the-trenches on-the-ground experience of seeing it firsthand will help you absorb what is needed to be known about renovations faster and sooner than people who will learn merely through course materials.

 

For people who are starting out in the business, practice everything we have talked about. Walk through renovation projects of other investors and estimate what it is costing them to do the work. Practice with your spec sheet (in the appendix) and get comfortable and confident in estimating costs.

 

When you are done practicing, practice some more. Practice to a point where you can walk through a property without your spec sheet and know what it would cost to renovate the property.

 

In addition to pricing, it is also important to understand the timing as you budget out your renovation project.

 

Some projects will take longer than others. Depending on the area of the property and level of renovation, you have to factor in how much it will cost to fix the property and how much it will cost to carry the property while you do the work needed and necessary on the house.

 

The more renovation projects you do, the more comfortable you will become with the speed of your construction team. You will become familiar with the various timelines that are needed to complete different sized renovations.

 

As you become more experienced, you must factor in how long a simple bathroom, carpet and paint update might take versus a full-gut renovation where you install all new electrical, plumbing and HVAC, insulate, drywall and finish a property. Those two projects require a very different renovation project in the way of dollars. They also require a very different renovation budget in terms of timing.

 

It is important to get the experience to understand how long the project will take you so you can properly plan your holding costs calculation and what your potential profit will be once the house is sold.

 

You will also become more seasoned in the level of materials that will be put into the property and you will be able to quickly identify based on a particular type of house, not only the timing the renovation will take, but also the grade of materials, and thus the cost that will need to go into it.

 

An important factor to understanding estimating the renovation project and timing is how this falls in line on the calendar year or seasonality of the real estate market.

 

If you buy a property in the later part of the year, in October or November, which is a full renovation or “gut job,” you know it will take you three to four months to complete that project. That puts you in the early winter months of the following year. They are statistically the worst months during which to try to sell a property. Therefore, you must consider in your structuring of your deal, how long it is going to take you to sell your property. This is going to weigh heavily into the costs affecting your bottom line that are discussed a bit later in the course.

 

Understand the budget and timing involved with your renovation project. You may decide it isn’t in your best interest to renovate that property, but to wholesale it or flip it to another investor to make quicker and easier cash. We will also talk about this in a later part of the course.

_______________________________________________________________________________

Tom Zeeb and Will Lansing are active real estate investors, national speakers and mentors who coach students how to make BIG profits so they can live the lives of their dreams. They are the authors of the highly acclaimed home-study course the “Profitable Partnerships Success Library”. For information on having Tom & Will speak to your real estate group or for home study course and other Profitable Partnerships product information, please visit www.profitable-partnerships.com email mentor@profitable-partnerships.com or call 877-COACH-50.

Sign up for their FREE e-course at www.BestRealEstateSystem.com