The Step-by-Step Guide to Flipping Houses and High-ROI Home Renovations

Ashley:
This is Real Estate rookie episode 387.

Tony:
So you want to tackle your first flip, but you’re not sure if you’re doing it right? Stay tuned. I’m Tony j Robinson, your host for today’s episode, and welcome to the Real Estate Rookie podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Now look, we’ve had so many rookies who’ve had their first flip completely fail, or at best break even, which is why today we are speaking with none other than James Dard. James has done over 3000, yes, 3000 flips, and we’ll be sharing with us today how to plan your first flip for success. So Jimmy d, welcome to the Real Estate Rookie show, brother. Excited to have you on, man.

James:
Oh, I’m excited to be on. This is my favorite topic,

Tony:
And obviously you’re the king of doing this the right way. You learn a lot of lessons along the way, and I think the goal of today’s episode, James, is to talk about the ROI on the renovations, right? Because there’s a time and place where maybe certain things make sense and certain things don’t make sense. So I think our big question is what is it like when you don’t have a plan going into a renovation? And I’m sure you have some stories like that and how did that turn out for you? Yeah,

James:
The planning is essential for flipping. I always look at this as a couple of different ways. When you get into flipping, you’re starting a new business and it’s no different than any other business that you’re setting up. If I was going to go to go buy manufacturing, sell something on Amazon, I need to understand the cost and the plan for how to actually sell and make money on that. And so for flipping, you got to be prepared because you’re going to have huge, I mean, so when you’re flipping houses, there’s a high reward in there. There’s a very high return, but with high rewards and high returns, there’s high risk. And the better your plan is, the less risk you have in the deal. And so by setting up the right processes, you can substantially drop the risk.

Tony:
And I want to get into how you are coming up with these plans, but give us a horror story first, Jimmy, what’s maybe a flip that you jumped into or you didn’t build that plan out first? It really gave you this kind of come to Jesus moment of, okay, we’re only doing this with a solid plan in place moving forward,

James:
And we all have those. I hear a lot, they’re like, oh, well James, you’ve been doing this a long time. It is like people make mistakes and they’re like, they don’t want to even talk about it like, well, I made this mistake. I’m like, I made mistakes Every project, and that’s what everyone needs to realize is on every project you learn something new and you go, okay, I need to not do this next time. I’m having an issue right now in Newport Beach on a renovation that’s getting a little out of control. I didn’t plan it out correctly, but now I’m pulling it back in. But it can have massive downside if you don’t plan it out. When I was new, a new investor, I was a wholesaler, I was selling a lot of off market deals. I started transitioning to flipping. I went wholesaling to flipping condos, and that was simple.

James:
I didn’t have as big of a plan that was needed. The margins were smaller. I needed to do some flooring, some paint, some countertops, appliances, and then I could flip the house. And when you have a smaller scope of work, you can get away with that a lot more because a lot less variables in the deal. And then I made that detrimental step where I got a little bit cocky. I thought I was making a lot of money and I was really good at it. And I went from flipping a condo to flipping basically almost a borderline tear down because I saw stars in my eyes. The profit’s bigger, I’m going to go do this. So I tied up a deal off market. I wasn’t happy with what I was going to make on my assignment fee. I opted to buy it, and I was like, I’m going to flip this myself.

James:
I made the normal mistakes. We all make those key bad decisions, which I hired a friend to do the construction work. We walked through the property, me and him kind of guessed our way through our scope of work. We needed to do cabinets and flooring and just update the basics. And I hired him on time and materials. And again, a great friend of mine, I wasn’t worried about his integrity, but he also had never flipped a house and ran construction that way as well. And so fast forward, what had happened is a project that should have took six months and $90,000 if I had actually planned it, budgeted it, hired a general, went 12 months and it turned into $200,000 because there was no management and plan behind the cost. And in addition to during that time being exposed to a deal that long, the market blew up during that time and subprime mortgages went away 2008.

James:
And I went from selling this property and I had bought an amazing deal. I paid 2 75 for it. I was going to put in the 90, sell it for 500. That’s a hit. But I went from making money to then losing all of my money because my costs went out of control. My timetables went through the way extended. It took too long. Market adjusted on me, and it went from going to make a huge return to getting wiped out. I lost all of my down payment, all of my carry costs, any dollar that I put into that property was not returned back to me. And I sold it for barely the debt just to get out of it. And if I would’ve planned it better and walked into it with a solid plan, we could have executed a lot quicker. We actually would’ve hit the ramp up before the market burst, and I probably would’ve made double what I thought. And that was when I really had that going, okay, I need to do this different because I know I can make money doing this. But what I just did was a complete fail.

Tony:
I’m laughing James, because we had, well, first, I appreciate you for sharing the failures. I think you’re right. A lot of people don’t share those enough, but I think Ash and I have both on this podcast try to be vulnerable about when we make mistakes in our business. And I’m laughing at you sharing this story because I had a very similar experience myself last summer, summer 2023 where we had been flipping a lot of turnkey short-term rentals in the Joshua Tree, California market, and it had just been going bonker since covid, so we did pretty well in that market for a while. But the last flip we did out there, very similar to what you said, we had taken this property down, had a really good spread on it to begin with. Our usual contracting team was tied up. I think we had small peanuts to you, but I think we had four flips going on at the time.

Tony:
So that was all our crew could take. So we were just sitting on this project for, I dunno, three or four months while they tied up these other deals. Now, by the time they had finished that, the market had started shifting, shifting, shifting, shifting, and then we went over budget on this slip as well. So we ended up having to write a check and we didn’t even try and sell it. We couldn’t even sell it. The market has shifted so much. We wrote like, dude, I don’t know, I think it was like a $200,000 check we had to write to refinance this thing just to keep it. So we definitely learned the right and wrong way to go into a project with a business plan. And now I feel that we’re better investors because of it, man. So now I want to go back to actually building out what this plan looks like because it’s easy to say have a plan before you start a rehab, but I want our rookies, James to maybe walk away with some tactical steps of, Hey, how do I actually build this plan out?

Tony:
So if you can take us from the beginning, I want to know what it looks like as you build this plan, but we’re going to take a quick break to hear a word from our show sponsors and we’ll get to that after the break. Alright, so we’re back with James Dard and we just talked about some massive failures he and I both had when it came to rehabbing properties, but we want to talk about the actual business plan and how you put it together. So James, again, say you’re starting from zero clean slate. How do you actually go about building the business plan for a rehab project? Yeah,

James:
So as flippers and investors, one thing I don’t want to do is speculate and throw butt at the wall. And guess when you’re flipping a house, it’s funny because people look at a flip. They’re like, oh, you’re buying a house, you’re doing a full renovation, you’re going to make it beautiful and then sell it for all this money. That does happen sometimes, but also you can also flip a house numerous different ways. Sometimes we’re just cleaning the carpets, throwing a fresh coat of paint on and flipping the house that way. And that comes down to data, looking at a project and then making a tangible plan and going, okay, what do we need to do to make profit? How do we ize this?

Tony:
Yeah, I just want to say because you’re hitting on something super important, I want to make sure we really drill this home for every single person that’s listening, how much of a factor does emotion play when you’re building out your business plan versus data?

James:
Almost every decision I make in investing is all based on data. It is, we look at data and then we build the plan behind the data and where we make our profit is putting the right plan on the deal, not buying the best deal because that’s where we have a lot. What we like to say is we invent the returns. Everything is a mathematical equation in this business and then putting together the right plan. And many of the deals that we buy and we buy a lot of property in Washington are deals that anybody could look at. They’re listed on the market, they’re for sale. People walk into ’em and they’re looking at the data points. They can’t quite figure out the plan and they pass and then we buy the property and we make a hundred thousand dollars on it and it’s because we’re surgically looking through these things.

James:
And it comes down to just some very simple core steps. Like you can’t look at every deal the same, not every deal is supposed to be done the same. And as we’re trying to find that next opportunity or we’re committing to buy a property, we follow the same process every time. And we train our team this way from our acquisition brokers to our project managers, to our listing brokers, and for every property they would look at, we pull the comparable data and we actually pull two different sets. We look at what the highest price set is like, what is the highest possible value for this property based on square footage, bedroom, bathroom count and finishes. Then we pull our middle comps too, what are stalling for a little bit less and we actually pull those as well. What are the bedroom count, bathroom count, and what are the upgrades at that point?

James:
So we do this before we even go walk our potential investment because one mistake that investors make a lot of time is they get some off market deal, it hits market and they just race out to the project and they go, I want to look at this. I think it’s a good deal. Whereas we like to pull the information first and go visit the site with our printed out comparables. We then make two different written scopes of work when we’re walking through that project. We’re not guessing our way through. We’re going, okay, to meet this value, we need to match the same amenities, bedroom, bathroom count and upgrades. And we fill out our checklist going, okay, what do we need? Well, this house had new vinyl windows, we need 12 windows. This house has hardwood floors, it’s got new cabinets, it’s got new countertops, and we document that all out.

James:
Then we also do it for our middle of the road flip, which maybe it doesn’t have new windows, it doesn’t have new garage doors, but it has new cabinets, cheaper upgraded flooring and painted millwork all the way around. And so we list out the two different scopes of work. We then go back to our office and then we put ’em into a construction calculator going, how much is this going to cost to improve it this way? How much is it going to cost to improve it this way? And then we put it into a performa and we select the project based on the return, not what the highest possible price is. That is one mistake is people chase the highest possible price, but you can also way overspend to get to that. It’s it’s not identifying the right scope of work for the exit. That’s where investors getting themselves in trouble all the time and the data’s all there in front of you on your comparables. It’s about printing that stuff out and taking your time, listing it out.

Tony:
Jimmy, so much good information there. I want to go back and circle through a few things. First, I just want to really tie down on the fact that you said all of your decisions are based on the data. And I think a mistake we see from a lot of Ricky Investors is that they get way too emotional in the deals that they’re looking at, especially when it comes to flipping. Everyone thinks like HGTV, right? And they’re like, man, this house is so cute and I could see this and I could see that. And they let emotion start to drive their decision versus the data that they’re looking at. But I want to recap what you’re saying here. You’re saying that before you even go walk the property, you’ve already looked at the comps, identify what those comps have, and then you’re using that to build out your scope of work. And while I’m saying these things out loud, James, if you can maybe just define for us quickly what exactly is a comp and what is scope of work for Ricky’s maybe aren’t familiar with those phrases? So

James:
A comp is a comparable, so a product that’s within a certain radius of your property and things that you want to look at, homes that are selling in your immediate area, that could be a quarter mile, it could be half mile, it could be a mile out depending on your geographical location. We are looking for properties of similar architecture. If it’s a rambler, we’re looking for homes that have sold recently in the past six months that are a rambler that are like for homes that are selling that have the same bedroom bath count or they can have the same bedroom bath count. They’re within the same square footage within usually about 10% is what we target. They’re the same style of home. And then that gives you the data point to say, Hey, if I put these fixtures in, put these upgrades in the market is willing to pay this value for the property. So it’s recent sales solds, pennies and actives of similar homes that indicate what the value will be done. When you’re done with your scope

Tony:
Of work, do you put more value between the sold, pending and active? Does one hold more weight with you when you’re looking at the comparables?

James:
They do. It depends that the market that you’re in. So when the interest rates started skyrocketing about 18 months ago, we put all of our weight on pendings sold from because as the rate was going up quick, you can’t keep up with that. The market’s different. If you have a comp from three to four months ago with a lower interest rate, that’s a different environment. So you can’t really use those data points. So when the rates started skyrocketing, we only used pendings. In today’s market it’s stabilized out a lot more. So now we’re looking at pendings because we want to see is there any growth potential and any pending property. We talked to the brokers, find out how many offers they had, how many buyers came through. That tells us whether we think we can raise the value a little bit. What is the market activity in addition to right now there’s a lack of sales.

James:
Sales are down 30, 40% nationwide. So data points can be hard to find. And so we do spend a lot of emphasis on sales that were actually 12 months ago because we feel in our market, the market was actually worse 12 months ago. And the reason we like using those data points is our value indicators is because it gives us a lot more conservative underwriting. And so I would say it depends on the market that you’re in a flatter market. We use pendings in sales up to six months if we’re in a volatile market, appreciating our depreciating, we’re going to focus more on the actives and the pendings because telling you what’s going on in the now,

Tony:
I do think, and I’m so glad that you touched on that piece, James, because even for me, I see sometimes new investors using Fromm a year ago and it’s like, guys, the market has shifted so much in 12 months that you can’t use that as a good data point. So I want to get a little bit of insight. So the first step here is building out your set, using those comps to help you lay the foundation for the best business plan for this specific property. And again, you made an incredibly insightful statement, James, when you said it’s sometimes the higher sales price doesn’t always give you the best return or give you the most profit. So I love using that approach. Now, once you’ve actually solidified what your specific scope of work is, what the actual changes are that you’ll be making to this property when you’re starting a project, how do you actually stick on budget? Because I think that’s where a lot of people mess up. They say, Hey, I’m going to spend 50 grand on this rehab and it’s going to take six months and they end up spending a hundred grand and it takes a year. So what are you doing to keep your budget on track?

James:
Yeah, that’s a great question. And that’s been a painful thing the last 24 months construction. It’s been tough even for someone who’s renovated a lot of homes because there’s the pandemic hit, there’s a lack of resources and with lack of resources means it’s harder to find guys, it’s the harder to find, the more you have to pay. And so things that we do to stay in budget. So as we go through a project, we pull our comparables, we make our scope of work, we make two different scopes of work, we put it into our construction calculator and that helps us keep our budgets tighter. How we came up with how we compute our construction costs. This is a question I get all the time. They’re like, James, send me your construction calculator or tell me my rehab costs. But you’re in a different market with different labor, different materials and different expectations from the end buyer to buy.

James:
And so this is going to vary for every investor nationwide, but what doesn’t vary is a cost to install an item and an allowance cost of the finish that you want to put in your project. And so we spend a lot of times every 30 to 60 days we interview our contractors and talk to ’em. I’ll call up my furnace guy and say, Hey, what’s the going rate on a furnace right now? I’ve seen my bids starting to elevate up and he’s going to educate me on different types of things. Like hey, maybe the coils are in high demand or there’s a material that’s in low high demand and low frequency and is causing price to explode up. So we talk to our trades all the time and we update our pricing. Our construction sheet is based on what they tell us. So if I’m talking to my furnace guy, he’s going to say, Hey, the cost of the furnace now is now $2,500 and I charge $900 to install it.

James:
That’s how our calculator’s broken out. We need to install one furnace. We have the trade that gave us the install price and what the material cost was, and that calculates our cost. So the more granule we get, the tighter our budgets are. So how we’ve broken down our budgets, it’s broken down by install and materials. How you can control your cost is by having that broken out at any given time. I can swap out my materials if I’m going over, if my furnace guy is now charging me $200 more, well maybe I need to go source a furnace that’s $200 cheaper. And so that’s how we stay in budget. It’s broken down into the labor and the estimated cost of the material and it gives us as the investor rights to control things that we can’t control, which is maybe labor.

Tony:
So are you building out then, James, the entire budget from top to bottom before you close on the property or are you typically closing first and then kind of tightening up the budget from there?

James:
So we tighten our budget up before we close. We do it inside of our feasibility. And the great thing about the industry that we’re in, there’s a lot of resources out there that you can go in and fill out a construction calculator. Fairly simple like our project already. One, it’s fairly simple to do. We have our scope of work checklist, which calls out windows, how many windows we have, how much square footage it is, and it’s basically an input checklist for my team. They can go right over to my construction budget sheet and just fill it out and it automatically calculates those costs. The time spent is more the interviewing and updating the sheet every month because as long as we’re staying on top of the cost, it’s very easy for us to input it all in. And we know that these costs are all based on historical and what our trades are quoting for us.

James:
And I know it sounds very overwhelming sometimes it’s like, wait, you got to interview all these people, but you don’t need to interview everybody. It’s more just your core cost items. I just need to know what my electrician’s charging, what my plumber’s charging. I know my appliance company can give me a quote for appliances. My cabinet company will tell me how much a set of kitchen cabinets costs. It’s not that hard. You just have to ask the question. And so by having it in the right format, you can go through input all these items from your checklist, and we can create a budget in 10 minutes in our office that’s going to be about 95 to 98% accurate.

Tony:
And I actually sold that process from you. You shared that with me a while ago. And now when we’re talking to our crews, I’ll say like, Hey, sit me down and let’s talk through what your different prices are for these different things we might need. And it definitely has helped with projecting out the budgets for these different projects. Now let me ask one last question, Jimmy, because I think for a lot of our rookies that are listening to this now they understand, okay, how do I put that budget together? But the other big challenge is how do I actually find the tradespeople to do this work? And obviously you’ve got a really strong network in the Pacific Northwest, but say I picked up James and I dropped you in Columbus, Ohio and you’re starting from scratch. What are you going to do to start sourcing these different tradespeople to start getting these numbers?

James:
And part of setting up your plan, right, is sourcing your vendors and your general contractors before you create your budget sheet. Because if you don’t know what the pricing is, you can’t really create the budget. And another very simple way to doing that is as a new investor, I can call three general contractors, have them bid two to three projects for me as practice, I can break it down price per square foot on scope of work and go, okay, roughly this is about where this guy’s going to charge. And so there’s just simpler ways of doing that as well. But the key is finding the right people because if you hire, there’s general contractors out there that work retail, right? They do custom work, they’re going to charge a lot more, they give a much more white glove service. It’s a different experience. There’s general contractors that are going to be set up for insurance restoration.

James:
They’re very expensive and you have to find the guys that work inside of your business. And there’s a mass group of contractors that work for flippers and investors and the reason they like it, they get volume, they get paid fast, there’s not a lot of personal opinion, they just have to do their scope of work. The homeowner’s not changing everything or saying, I want this my way. Now, they don’t want that custom features. And so you have to source ’em out. The best ways to do that is networking with investors. Who are they using? Who have they had great experiences with? The second thing to do is drive for dollars. People talk about driving for dollars is to go find an off market deal and it is to save money, it’s to create more profit that’s going and finding a deal, but it’s also finding the right resources. What we like to do is look at any potential flip property that was sold. We can see any fixer that was sold on market, we turn it in a drive list and we drive those and see who’s working there and talk to ’em. And that gets you general contractors that are working for investor on a flip and they understand your business. So get out there, pound the road, see who’s working, who are they working for, and then start building that database.

Tony:
So James, dude, I love talking to you every single time. I feel like I selfishly learned so much about the rehab process. So I want to get into how you’re actually putting the team around these slopes because I know you’ve got a really unique process for bringing the real estate agents into your rehab process to make sure you’re actually getting and making those right decisions. But before we jump into that, we’re going to take a quick break to hear a word from our show sponsors. Alright guys, we’re back with James Sander and he just gave a masterclass on how to budget and create your budget for your flip and how to find the people to actually do that work for you. But the other piece I want to talk about is that I think you’ve done a phenomenal job change of building a team around your entire flip process. And I know you’ve got a really good process for integrating real estate agents or brokers into your deals as well. So maybe just walk us through what that relationship looks like between your rehab project and the brokers that you’re working with as well. Yeah, there’s

James:
Two different ways. Investors like to hire brokers. They either want to be cheap and find that broker that wants volume and do it for a discounted listing, and they see that as a way to generate profit into their deal. And there’s nothing wrong with that. I think that’s reasonable. Hey broker, I’m going to give you volume, you’re going to list these when I’m ready to sell, we want you to take care of that and give me a deal. That seems fine. But for us as investors, what we have seen is the more experienced our broker is, the more they understand our business, the more value that they create and they’re going to three x that commission profit back to us. And so what we’ve done is any broker that works with us on one of our projects, it could be in our internal team, but a lot of brokers bring me deals too that we buy that are outside of our office.

James:
Now, anytime that broker brings me a deal, we will give them the list back, but we give them a set of expectations that we expect so we can have our project running smooth. And so we pay our brokers a full 3% when we sell, but they’re working with us from when we purchase the property all the way to the end, not just when we’re ready to list. If a broker just wants to list it when I’m all done and they didn’t have any input, then we’re going to work out a different type of commission split at that point. And so what we do is we have a checklist of our brokers what they have to do. So our real estate brokers, they meet us on site with our general contractors in the very beginning. They review what our scope of work is, what our comparables are, what our allowances are, and then they participate in the design with our comparables.

James:
And so we’re giving them the comparable mockup that’s showing the new cabinets, the new flooring, the new paint color schemes. And then they look at that and they make their adjustments. Maybe they like a different paint color, maybe they like a different cabinet color and they’re working inside of that set comparable inside the pricing, but they give some design input. I have learned that brokers know selling properties a lot better than investors. Half the time they understand, they get more feedback. People are telling them what they like, what they don’t like, they’ve had enough negative and positive feedback on homes to where they can add some little extra bit of profit dust onto the deal by giving good advice on their personal experience. So the brokers have input into the design of the property. And we also like that because it ties ’em to the deal.

James:
They get emotionally attached. That’s their work that they’re working on. And so our brokers get our allowance sheet and then they select the specs inside of our allowance sheet and give us a design every time our floors, our cabinets, our countertops, our appliances. But by setting that allowance inside of my budget, that tells ’em what they have to be under. They’re not allowed to go above unless it’s approved by me. So I’m saying, Hey, if we have $3 foot floors going in, they have to find something that’s $3 or less. And so it allows them to design it. They’re emotionally tied in addition to they have to walk that site every one to two weeks no matter what. And they come out outside of even our contractor and project manager, and they take photos because they again see things that other people don’t going, Hey, this space feels weird.

James:
We make them walk all the spaces. Is it sellable? Is it livable? Do they think it’s being maximized? A lot of times our brokers will say, Hey, I think we should add one window in here. It’s going to add a lot more natural light in that we might’ve all overlooked and it makes a big impact. And then those brokers, at the same time as they’re walking it, they have to put us on auto CMAs every month. They are responsible to pull me a fresh new CMA for that property every month and send me the photos if there is an increase in value or a change in value, they go out and drive that property, walk through it, and then they list what that property has or doesn’t have that we’re going to have inside of our scope of work. So it keeps me in the now for values because one thing that investors make is they make this performance in the very beginning and they go, this is what I’m doing.

James:
But the market changes. And if the market’s going up rapidly and you miss that opportunity to upgrade your house inside your renovation, you could be leaving thousands of dollars on the table. If the market starts going down like when rates spiked and that you’re not paying attention to the values, you might need to make some adjustments at that time. So they pull the CMAs, they walk it, and then give us a report back of what those homes have, and then we can change our plan and look at the numbers if we should change our plan to try to either maximize or mitigate the loss on a deal.

Tony:
And I just want to, again, great information, James and I just want to define a term for our rookie audience. So James mentioned CMA, that’s a comparative market or market analysis report, which is basically almost like, Hey, here are the things that have been selling or that are active currently in this market. So you get an idea of what that property might sell for. And the practice of reviewing that CMA during the rehab process is literally something I’ve never heard before from anyone else, but I think it’s a really important thing for Rick’s to pick up on to make sure you’re maximizing that AR view on the backend. Now, one question I want to follow up with Jimmy, because obviously you’re a big volume client for a lot of these real estate, so they may be willing to do all the things you just laid out. Do you think that someone who’s brand new first time flipper could ask the same thing of a broker and get them to say yes? Oh,

James:
Of course. They just got to ask the question. Brokers want business, and it’s especially in today’s US, brokers are fighting over transactions. There’s not a whole lot going on. And what you’re doing and the thing that you want to explain to ’em when we create, I don’t just hire brokers, I create partners. I want that broker to understand my business because now they’re inside of my business and they are a partner with me for years. My listing broker, Megan that works with me on all of my projects, she gives me valuable insight and she is emotionally attached to each project and she treats it like it’s her own because this gives her a huge book of business. Like Megan at our office has over 45 million in listings with her banked for the next 18 months. That’s a great business for her. And so you can always ask because as an investor, those would be the two things I’d always ask for is do I get a discount or am I getting service? Because you’re giving them volume and it’s a fine thing to ask for. It’s a reasonable thing to ask for. And not only that, you’re giving ’em business for a lifetime, not just one transaction.

Tony:
And I love the way you phrased that. You said, I’m not just looking to bring them in as a broker, but I’m looking to build a partnership. And I think that’s the right context to have that conversation. Now, James, maybe you can give us some examples. What are some specific things that you’ve seen these agents call out as they’re looking over your scope of work or as they’re looking at maybe they’re physically walking the property, say, Hey, maybe we should change this, or, Hey, this looks a little off, we should do it differently. What are some things that you’ve heard them or seen them say? So

James:
Specific things? Well, we have a real life example right now. I was literally texting with somebody, my broker and my contractor in our group texts two days ago. And luckily for us, we’re renovating a property in Seattle and we had $175,000 budget, which was a normalized budget for what we were trying to accomplish there. We were doing all the mechanicals, doing all the upgrades, but our goal was to actually put out a little bit more of an affordable product in this neighborhood, which was going to be a target price of about 1.75 million at the time. Recently, Megan got a new comp popped up, and it came in at 2.2 million inside of our neighborhood, same bed count, same bath count, and she pulled all the photos and went and walked our site and she goes, okay, this property that just sold for 2.2, it is a customer renovation, so we’re not going to be at that level, but I do think we can get close to 1.9 to 2 million if we do some extra upgrades.

James:
So that list that she came back with was one was ac, we did not plant AC into the house. It’s not something that’s normal in Seattle. It helps us get a premium for that luxury buyer By adding that additional feature, we upgraded our fireplaces instead of just cleaning up the fireplace log set burner, we’re actually doing a nice insert now, so we’re adding some extra finishes. We’re going to expand our deck and put more money into our landscaping too. We have a nice big backyard. The comparable had the same thing, but they had paver patios and walkways to give it more of an experience. And so it was about breaking those things down and we’re spending $50,000 more. She gave me a list of the upgrades she thought we should do compared to the comparable, and now that’s going to get us nearly $200,000 to $250,000 in value.

James:
And so it was those upgrades, but she went through the mechanicals and says, Hey, look, this property all have ac. We don’t have that. We need to add that in. They have gas fireplaces. We don’t need to add that in. So she does the same format we do when we’re purchasing the property. But common ways to upgrade your house pricing that we do that are a little bit more simple ranges. I love the fake, I call ’em the fake chef appliances where they look like a wolf appliance. They got the knobs, the burners, but they cost fifth of the cost. So it’s we’ll upgrade our ranges going to a more commercial grad range. We upgrade our light fixtures a lot of times where we’ll spend a little bit of extra money on the dining room, light, the exterior lights, people’s eyes go right there. Upgrading the flooring is a common upgrade for us too, because we know buyers, they want to spend a little bit more.

James:
There’s a big difference between walking on an LVP floor and walking on an engineered floor. And so that will be the big delta on the flooring. And then doors and trim are actually a big one for us as well because do we go from hollow to solid that gives you the home a completely different feel? And look, you get different styles, it gives a different quality from the day you open that front door, they can feel the door better and it’s going to get you to that next level. And so just look at those finishes. If you’re ever questioning, just go where the buyer’s eyes go, light fixtures, tile yard, and then the feel. And those are easy ways to upgrade and do ’em in very tangible ways. If I want to go from a $3 foot forward to $4 a foot, I know what my square footage is, I know what the cost is going to be. I can make a decision really quickly and justify the price.

Tony:
We’ve talked a lot James, about controlling the budget, understanding how to get the maximum value based on what you’re putting into the property, but I know another kind of tripping point for a lot of rookies is the timeline itself. So I guess what are some things to maybe keep in mind when it comes to not just staying on budget but staying on time?

James:
And when you’re starting a flipping business, and again, I call it a flipping business, this isn’t a flipping hobby, it’s not a flipping, it’s you’re starting a business. You have to invest into your infrastructure. Part of that infrastructure is buying a construction, investing with an attorney that is going to make a contract that keeps your job site put together how we keep our job sites running smoothly and on time. And by no means does that happen on every job site. Again, it doesn’t matter how long you guys do this for, you’re going to run, I will always run into projects. You’re always going to have difficult events on your project working with third parties and third party businesses, and you don’t know how they run their businesses or control their books. And so there’s a lot of risk in that if someone’s not running their business correctly, they can take a long time that will affect your profitability.

James:
If they’re not running their business correctly, they could have liens come in, which could affect your property. And so by investing in a good construction contract that’s going to help prevent those things, it’s going to give you a template for how you expect the job site to be ran. It’s going to tell you how you need to make your construction jaws. It’s going to tell you your benchmarks for timeframe, what you expect to be done in a certain amount of time, and then it’s going to give some teeth in it to motivate to keep your job moving forward. Because on our construction contract, we have a penalty clause. If you are late, you get charged 150 to $300 a day. That motivates the contractor to show up in addition to they get the same bonus if they’re early. And so by having this good contract, it’s on paper.

James:
The contractor has clear expectations of when he’s supposed to be there, when he’s supposed to finish, what the repercussions are if he doesn’t finish, in addition to what his rewards are, if he finishes it early. And some of the best things that you can do to get your job sites moving forward is to bonus your contractor, offer them more money, give them a little equity in the deal, give them a daily rate charge. The more invested they are, the more you take care of them, they should take care of you better. And so throw out those bonuses, make sure they’re clear, but then also make sure that you have a clear expectation of what happens if they don’t show up. Because if they have repercussions for not showing up, it’s also going to make them think more on their feet. A lot of generals go, well, I’m late because my electrician didn’t show up. Well, we didn’t sign the contract with the electrician. We signed it with you. And your job is to make sure he shows up and you need to have a backup plan. If he doesn’t show up, where’s the next electrician? Why aren’t they starting? And so by having this on a contract, it keeps your job site running smoothly with expectations and timeframes. So by that construction contract, it’s worth every cent.

Tony:
And I think the managing of the people part is what also makes a lot of folks scared of managing the rehab is they hear these horror stories of contractors doing this and running off in the middle of the night. Just one quick follow-up question to that, James, is this like a real estate attorney that’s drafting this contract? Or what kind of attorney should someone be seeking out if they want to build this out? If

James:
You want to build a construction contract, use a real estate attorney or a construction contract lawyer, there are actually two different specialties, and the more specialized lawyer is the more teeth you’re going to have in your contract and more protected you’re going to. They’re understand your laws. And so typically we use, my real estate attorney is also a construction contract dispute attorney, so he’s been in lots of conflict and know how to resolve it.

Tony:
So that’s the people side of things. I guess. How does the actual scope of work itself tie into trying to stay on time, right? Because you gave the example earlier of the agent walking the property and saying, Hey, this other property popped on the CMA, we think we can get a hundred, $200,000 more. Do you take into account how those changes may impact your timeline? And if so, how do you determine whether or not it’s actually worth going after?

James:
Yeah, and that’s a great question. We all can forget about, okay, when you make a change, change creates delays and there’s a domino effect on each one of your projects. You can make one change and it can affect your complete schedule, can affect your complete budget. And you always want to think of what is that domino effect. And so what we do is when we prepare a new scope of work for that contractor or an add-on scope of work, we list out what we want, like a quote for ac like I was talking about. We want to upgrade the fireplaces, we want to upgrade the landscaping, we submit what we want done and then they give us a written bid back for that work. So we can evaluate the profitability in addition to, they have to reference what that’s going to do to the timeline and go, if we are changing the scope of work, it’s this price and it adds 2, 3, 4 weeks, whatever the timeframe is.

James:
And that is all sent back on the quote on our construction contract. It references that any change order has to reference the date and what it will extend by, or if they don’t, they have to stick to their original date. They get no leeway there. And so by knowing that timeframe, we’re going, okay, this is our upgrades. We know what the costs are, we can add in the timeframes, then we go back to our performa, we change our debt cost, we add in our budget, and then we can see did we make more money? Are we making a higher return? Is it worth doing?

Tony:
And just so folks have maybe a sense, James, if you look at maybe the last a hundred flips you’ve done, what percentage of those did you actually have to enforce that penalty because the contractor was late or delayed on the job?

James:
That’s a tough one. Okay, so what I like to do, I really only enforce that damage clause if the jobs getting lost and they clearly did not show up or prioritize that job, I would say there’s probably about five to 10% of those projects are probably in that realm sometimes when they’re running late. What I prefer to do with my late clause, you can two x, this is actually a little flip tip for everybody. Contractors never want to take less money, they just don’t. And so let’s say he’s 10 days late at 200 bucks a day, that’s $2,000 right there. Instead of taking a $2,000 haircut, I might say, Hey, look, okay, you’re late. There’s $2,000. You either need to take this off the invoice or how do you feel about building me a fence back here?

James:
They almost always elect for the work and the fence would cost me $4,000 and I’ll pay ’em in full on their contract, and now I got a fence instead of the 2000 and I could almost two exit every time. So we use it more as like a negotiating tool going, or if we had overages on the property, Hey, we had these change orders. Okay, well, how about I only pay for material, you do the install for free and we’re going to wipe out your late fees. And so it’s a way to kind of control your costs in different ways too. I very rarely actually take it from their final bill. We try to work it out in different ways. I would say we pay our guys more often bonuses than take from them because we’re also very reasonable on their timeframes. If a contractor tells me 10 weeks, I write the contract at 12 because I’m not trying to set up my job site for a bunch of conflict and issues. Again, contractors are your partners. I want these guys with me for longer than two projects. I want them with me for a couple years. I mean, some of our generals have worked with us for over 10 years. We do that by being reasonable with them. We just want a job site to run smooth. We don’t want to burn through our guys either. So

Tony:
We talked a lot about the team, we talked a lot about the budget itself. I just want maybe some final advice from you, Jimmy, on the actual design process, right? Because I do think there’s a lot of different things from the design perspective that probably allow you to run this project smoother, get a higher RV on the back end, maximize your profitability. So what are some of the things you’re seeing from a design perspective that maybe new flipper should be considering?

James:
We take our design. I mean, I would love to design all my houses a little bit differently if it was my own personal house. I’m having fun renovating my house right now because it’s looking different. It’s a different budget, but we stick to the core theme of what the comparable data is as far as finish level goes. Now the design, we do stay on top of trendy. We do know 12 months ago if you had a white house with black windows, everybody wanted it and they were going to pay a lot of money for it. Now it’s starting to lose its flavor. They all look like Oreo cookies throughout the whole neighborhood, but I’m like, I can’t see one more house this way, but yet I probably just painted two houses that color scheme.

James:
But it’s that little things that can add bang for your buck are a soap niche. We like doing those in our showers. The reason being we’re already tiling the whole bathroom. It doesn’t cost that much more to add it in. We can add a little bit of accent inside that soap niche. We can go from a subway tile, which is a cheap affordable tile to keep our costs down and then slap some penny tile in the soap niche, which is 10 bucks a foot. So you add this little bit of flavor into a more affordable surround and all of a sudden it looks custom and you didn’t spend custom tile pricing. Other things that we like to upgrade, which are actually budget savers, but also people feel like their upgrades is we take our uppers off our cabinets a lot and throw in shelves. Shelves cost a lot less than cabinets, but it gives it that architectural dimension that people are like, this is cool.

James:
This feels good. You can kind of switch up the tone of your house. Other things that we also like upgrading are just our light fixtures. You can spend an extra $25 on a fixture and get a huge bang for your buck, but it comes down to making those upgrades when you have the data, not just because you want to, because the a hundred dollars upgrade can kill your budget. I hear this all the time. Well, it was only a hundred dollars more. It was only $250 more. And let’s say you do, let’s say you spend $250 more on some fixtures and you do it 10 times, that’s 2,500 bucks. If your budget’s 50 grand, that’s 5% of your profitability. You just threw out the window unless you’re getting that back. And so I always like to train my team and train myself, is the dollar spent? What’s the percentage of profit? Because it sounds like a much bigger impact than just $250.

Tony:
James, last question for you, and I think this is an important one that ties into what you were just talking about, but where should rookies be going to get the materials for their property? Is Home Depot fine Wayfair? What are the places that you feel a rookie should be going to source? Flooring, fixtures, trim work, all these different things that they might need?

James:
I think it depends on the market You’re in the more expensive markets, you have to give it a little bit more flavor, a little bit more customized so people don’t feel like it’s one of the masses for them to pay you more. And so we don’t do a lot of Home Depot for finish work. Now, do I use Home Depot for certain projects? Of course I do it. It’s a good way for you to wrap your brain. The beautiful thing about Home Depot is you can walk in and you can see the different pricing on materials right there in front of you as a new investor. You’re going, okay, LVP is $2 a foot, laminate is two 50, engineer hardwood is five. And so it gives you that baseline for allowances inside of your scope of work. And then we use the Home Depot as our allowance a lot of times because we know we can almost beat the price.

James:
And so worst case scenario, we can go to Home Depot and buy it. Where I tell investors to shop is you need to shop what’s on clearance and what’s on sale. There’s not one place that we go to. It’s we are going where the best possible deal is if there’s flooring at a certain shop that’s on clearance. I’m going to look at that. If there is Home Depots running a big sale, we’re going to look at that. But I would say Home Depot’s going to give you that baseline finish level, and if you’re in a more affordable market, there’s nothing wrong with it. You can get a vanity, a countertop, a mirror, and a faucet for $300. Sometimes a Home Depot. That’s a great value there. And so you want to kind of list out your different suppliers all the way through, but go to your clearance shops, go to Home Depot, make your material lists, and then talk to investors.

James:
Where are the investors shopping typically, like in Seattle, most markets in general, your big metro cities are going to have a building supply area, right? Ours, it’s in the Soto district of Seattle. And if we go on this street, there is cabinet suppliers everywhere for investors. There’s countertop suppliers, there’s discount flooring stores, they’re wholesale shops, and that’s where you want to shop because you can go to a cabinet. If I go to Home Depot and buy my cabinets, they’re going to be more onsite. They’re not going to feel as special, but I can go to my wholesale shop and pay probably 30% less and they’re going to be all wood box cabinets. They can be customized a little bit more. They have any color, every different style that you need, and they do it in volume and they’re looking on a small, small spread. So find your wholesale shops and then also you guys, those areas, those wholesale districts are the best place for you to get subcontractors. One thing that we do is we have a project manager sit outside cabinet supply shops in our whole district, and I have an air card with him. He works all day on his laptop and any general that goes in, he gets out of his car, he goes, talks to him, find outs. What he does, he interviews him, done lead in our system for a new general contractor, and he’s shopping at the right places. And so it’s a good indicator whether they’ll hit your budget.

Tony:
Dude, that is such a ninja trick. To finish off this conversation, James, always a lot of value when we talk together, brother, we talked about creating cohesion in the property, right? Like the bathrooms matching the kitchen and how that leads to higher values. The huge impact of having a realtor start at the beginning of the process with you and how they can lead to hopefully higher returns to the backend going where the buyer’s eyes are going and how that can lead to higher returns. Understanding that this is a business, like you said, not just something that you’re dabbling in. You’ve got to build that right infrastructure. And I think one of the biggest things that I want rookies to take away from this episode, James, is you have to all of your decisions based on data and sometimes the cute house isn’t always the best deal.

Tony:
Sometimes the higher RV isn’t always the best deal. So it’s all about looking at the data and truly understanding what that looks like. So James, thank you brother for coming on. I just want to quickly highlight to you if you guys want to go back and learn more about James from the Rookie podcast. He was on episode 1 65, which is all about estimating rehab costs. So if you really want to dig into that topic, 1 65 and then episode 1 66, we brought him back and that was about finding contractors and more red flags about renovating. So James, thank you for hopping on today, brother, as always, appreciate all the guidance you shared with us.

James:
Yeah, and Tony, I have one more tip for the new flippers out there because the construction is hard. It is a hard, the more projects you do, the more you learn in e systemize it. One of the best things that you can do as a new flipper is go out and interview contractors that have been in this space for a while and have them come in the deal with you. The more you build that team behind you, it’s better to offer a little bit of equity and make them a partner in the deal than to mismanage and let the job site get ran up on change orders and timeframes. And if they’re connected in the deal with you, they’re going to be a partner. They’re going to look at it like you would and they’re going to help protect your investment. It’s a great way to mitigate loss. And you get to learn, even if you’re giving away 50%, they’re going to be teaching you a lot through it and your money’s going to be protected. So look at those partners. We do a lot of partnerships too with general contractors in Seattle. It gives me time, it allows me to scale, but it also helps my job sites run smooth.

Tony:
James, now you just opened up Pandora’s Box to have all of our rookies in your DM saying like, Hey, let’s partner on a deal together. So don’t be surprised if you get the onslaught of people reaching out to you, brother. Well, James, as always, brother, like I said, appreciate you hopping on Man Guys rookies. Please, please, please go learn more about James. Listen to those other episodes. If you want to connect with him, check these show notes for today’s episodes. We’ll have his contact info down there below. If you guys want to connect with me on Instagram, you can find my contact info there as well. And James is also co-host of the BiggerPockets on the Market podcast. So go check that out. If you guys want to hear James talk more about real estate, the economy, things that are going on, and more about real estate investing. So that is it for today, guys. Again, my name’s Tony Robinson. I will see you guys on the next episode.