Recently we had a client that approached us about doing a fix and flip loan for a property he was considering. We do these a lot so I was glad to help him and began asking him a few questions. When we got to the subject of how much financing he needed he said he wasn’t sure. He said he could guess the amount, but he wasn’t sure what to consider when estimating the rehab costs.
Trust me, when it comes to a fix and flip loan, you don’t want to borrow too little or too much. Either way can get you into trouble. I can’t tell you everything that you will need to consider when you begin estimating the cost of a rehab, but I can give you some general places to look. First of all, go to the Tools and Resources section of our page and download a rehab estimate form. That should give you a detailed list of items that you might need to address during the course of a regular rehab. In addition, here are three things that will get you pointed in the right direction.
Consider the Contractors.
If you have ever worked with contractors then you know that prices, experience and skills vary. Material costs as well as labor costs can get out of control fast if you work with the wrong company. There is also the problem with time. Overtime, missed deadlines and delays can be costly and can soak up money like a sponge. The longer it takes you to complete your rehab, the more it will cost you in property insurance, taxes and interest payments on your fix and flip loan. Working with a reputable company or an individual will go a long way in getting rid of a lot of these worries. For more information on how to find and manage contractors, please see our our previous blog.
Bells & Whistles.
Everyone wants a property that is aesthetically pleasing, but how much is enough? Will there be Vinyl flooring or tile? How about wood molding? Shall you consider granite counter tops? All of these are selling points that factor into the asking price, but they also affect the bottom line.
To strike the right balance study the most recent sales in your immediate neighborhood. The general rule is to start looking within a mile of your subject property if it’s located in the suburbs and to narrow your area if you are evaluating a Washington DC property. Study the properties that are sold at or close to the price you have in mind and model your rehab after them. If you see modern kitchens with granite counter tops, recessed lights and skylights, consider incorporating similar features in your rehab. If such improvements are above your budget, concentrate on a few expensive items and do away with the rest. However, consider adjusting your price down if the competition offers more bells and whistles. Remember, as a rehabber, your goal is not to fetch the highest price, but to make the most profit.
Specialists such as architects and licensed contractors can drive up the price of work. However, for larger size projects that involve additions and/or located in areas such as Washington, DC you would be better of working with the folks that are licensed. If you need a permit, they can help you navigate bureaucracy and avoid major delays. However, you need to investigate in advance whether you should hire a licensed contractor or – as the majority of our clients – can get away with a skilled jack of all trades who will charge you less. Factor this in when you prepare to apply for your fix and flip loan.
Finding the right investment can be an incredibly rewarding experience, but you have to work for it. Take time to really look into the costs associated with your rehab. Then accurately predict what you need from your fix and flip loan. When you are ready, we’ll be here for you.