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5 things you must do when buying rehab deals to flip | Blog of Real Return Real Estate

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5 things you must do when buying rehab deals to flip

There is big money in rehab flips. There can also be big loses too. The following can help increase the probability of success and minimize mistakes and unfortunate surprises.

  1. 70% max LTV – Make sure you have plenty of room to make mistakes, go over budget on rehab, cover payments on long holding costs, etc. Many markets you can find deals around 50% LTV these days. Find great deals, not good deals, great deals.
  2. Conservatively estimate ARV (After Repair Value) – The market seems to change almost daily now. You cannot trust comparable sales from 6-12 months ago. Try to stay within 3 months, stay within ½ mile of your property and very comparable homes. Active and pending do not tell the story, solds are much more trustworthy. And always take into consider the REO sales, not just retail.
  3. Get multiple rehab bids – At minimum 3 rehab bids. I know rehabbers that get 7 rehab estimates, then bid them against each other to get the lowest price.
  4. Align your goals – Contractors want to do the least amount of work and make the most amount of profits. Agents want to do as little as possible and earn as much commissions as possible. Pay your contractors well and give them bonuses or profit splits for finishing on time and on or under budget. Otherwise, penalize them. This will ensure they give you an accurate rehab bid and they will make value added repairs. Also, get your agent involved early. They are experts in the area and know what materials and items sell houses. They can advise you on materials and value added repairs. They will tell you what will help them sell the house fast and for a higher price. Pay them well, bonuses to agents who perform always result in extra profits. If you give an agent a $1000 bonus to sell it by this date and this time, these hungry agents will kill to make it happen.
  5. Reserves & Backup Plan – There are always surprises, delays, over budget items, extra costs, etc related to rehab. Do not get stuck running out of money, always borrow extra or make sure you have reserves to cover these issues. So what if it does not sell? It never hurts if the property cash flows really well so you can rent and hold the property. Multiple exit strategies are always good. Other backup plans are to lease option, discount and sell to an investor, refinance and hold, etc.

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12 Responses to 5 things you must do when buying rehab deals to flip

  1. Ken Zajac, AIA says:

    Ryan
    Very useful information.

    Ken Zajac, AIA

  2. Ryan Moeller says:

    Thanks Ken, glad to hear this is useful. Happy Investing!!

  3. Great points! The first thing to remeber is to stay un-emotional when bidding on properties! People tend to overbid when they get too wrapped up in just being the winner of the bid. This can kill profits! Thanks for a good post!

  4. Ryan Moeller says:

    Thanks for the comment Shawn. Investing should be completely unemotional. It is all about the numbers, a property is worth what you are willing to pay. It is recommended to stick to your criteria and when competition arises, offer what your criteria allows and go find 10 more deals like it!!

  5. Laura says:

    This is very helpful advice, Ryan — not just for flippers, but also for homeowners who are embarking upon remodeling projects to increase the value & livability of their homes. I always recommend that homeowners think in terms of resale, whether or not they plan to sell anytime soon. Focus on high-value-add projects, and make sure the upgrades
    “fit” the neighborhood. My credo is: Seek simplicity, comfort & value. I invite you to visit my web site & blog, and download my free report on the subject.

  6. Rick Erickson says:

    You say “Get multiple rehab bids” … trying to get the cheapest price …
    Remember, “you get what you pay for…” and if you go bottom dollar, someone looses!
    Find one rehab specialist, handyman or group of subcontractor and trust them to do their job. they know more about their scope than you do … all you do is point them in the right direction … types of finishes, price points, end result expectations, time requirements and budget. Threat them well and they will treat you well.
    It get’s lonely when you fish for the lowest price each time and you run out of bait ….

  7. Ryan Moeller says:

    Very good points Rick. It is important to build a team of guys you trust and too cheap can often lead to really poor work. A better way to say it would be “Get multiple rehab bids trying to get the most trustworthy and best value.” Thanks for the comment!!

  8. Ryan Moeller says:

    Hey Laura, what is the url for your blog? Thanks for the great comment and expertise!!

  9. Barb Mihalik says:

    Hey Laura: Great tips. I’m a home stager. I have to do quick refreshes on the cheap, but I’m also an agent first and foremost. I get asked by investors what to do. Now I can answer a little more intelligently. Thank you.

  10. Mitch Swanson says:

    Basic info, that most experienced general contractors should know. Location. Foundation, roof, structural integrity, windows & doors, plumbing and electrical. Then kitchen & bathrooms. landscapring. In that order, everytime. Leafy trees are hardwood they burn slower and don’t explode like softwood trees, (pine). If a company is not making a proffit they are too busy thinking about the next job just to pay their bills, they can’t focus on your project and provide the quality that you would like. And don’t hire a kid, they can’t know too much.

  11. Mitch Swanson says:

    Go to cslb.gov ,to check a contractors Lic. & Ins. status. I know, too easy.

  12. Rudy says:

    I look for remodelers from a list of city and state approved craftsman. They are quailfied and posess workers comp and liability insurance.

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