First fix and flip experience?! Do’s and don’ts?

Question

Came across a property with some good numbers on paper that seemed like a good flip to invest in. I remodeled an older property for a rental and got the basic understanding of construction work. This property I came across is mostly updating kitchen and restrooms. It has some termite damage to a few walls (which has been treated) so changing drywall and maybe some wood is what we’re looking at. I’ve heard most newbies underestimate expenses and tend to eat up their profit. I’ve also heard some good and bad on first time flips and some even telling me to hold off. Any advice from those that have more experience in the game? I grew up helping my father work on his rentals and then inherited a property when he passed which I’ve been maintaining. I got the real estate bug over a year ago and started up my wholesaling business just this year. I’ll be partnering with another investor who’s also a newbie in the game. We’re pretty confident we can make this flip work.

Evan Polaski · Answer

@Kathleen Alonso basically everything @Aseel Yerunkar says.  My lessons:- Used a contractor referred by a friend.  Not just a referral, but the one my friend used many times and used after we used.  Unfortunately, we got behind on draws and his attention quickly moved to his mom's house that he just inherited and saw a big payday from.- Cosmetics bring you offers, but the "under the hood" stuff kills deals.  When I buyer has their inspection, if the HVAC turns out to be really old, the roof looks good from the ground, but when on it needs replaced, a sill plate is rotted, even a toilet tank that isn't fully tightened down.  These come up on inspections and scare buyers away.  As Aseel mentions, don't waste your money on a new roof, if you have a roofer tell you it is fine, but don't ignore it either.- We have gone over budget and over timeline on EVERY flip.  Sometimes timeline is only 2 weeks over, once it was 4 months over.  Budgets have gone up to 35% over, including my 20% contingency.  So really 50% over.  Granted, the big misses were on much bigger rehabs (guts + additions).  But we are still over on cosmetic rehabs with no structural changes.- Pull permits.  We never got burned on this, but thankfully our same friend with the contractor did right at a time when the market shifted and buyers were wanting to see them.  Granted, we are not seeing any deals with just cosmetic upgrades, so we are tearing out kitchens, walls, reworking baths, rewiring, etc.  But even if it is minor, buyers have become much more knowledgable on this and seemingly want to see them more.

Aseel Yerunkar · Answer

@Kathleen Alonso

My biggest mistake on my first property which was a flip was buying wrong (paying too much). My second biggest mistake was not having a solid team in place. And from what I've seen this is a pretty consistent trend amongst most people who are just starting out. You make ALL of your money when you buy. So for someone who is starting out I would say two biggest things are to

1. learn how to properly analyze a deal and if you are new to the flipping game BE EXTREMELY CONSERVATIVE WITH YOUR NUMBERS. Whatever you are calculating your rehab to be I'd tack on another 5-10k in the form of unexpected expenses.

2. have a solid team that you trust in place.

3. pay attention to the design and finishes. Assess the area where you are selling and do finishes that would suit your target customer.

4. this one is a bit controversial but if you are flipping don't spend money on unnecessary stuff that doesn't add value. Fixing up driveways, Installing new cabinets when the old ones could be reused, unnecessarily replacing the HVAC and water heater just to claim that your house has "new mechanicals", etc. You could easily use those funds towards more cosmetic based upgrades that will make your house way more appealing to the buyer. Owner occupant buyers are emotional buyers who don't really care as much for the under the hood stuff as long as its all functional.

Luckily your rehab seems to be pretty small and cosmetic, so you should be fine. Just again budget to run into unexpected things. Hope that helps. Hit me up if you have other questions!

Aseel Yerunkar · Answer

@Evan PolaskiAgreed. Knowing what to defer and what to pay attention to because it will kill you on the inspection is a fine art.

@Kathleen Alonso

To add to the point above I would take a look at your initial inspection and fix the items that REALLY stand out and are being given critical warnings by the inspector.

Jonathan Barr · Answer

I would just put into your model that the rehab will cost 25-30% and that same amount in additional time. Just make sure you have enough room for error.

Aseel Yerunkar · Answer

@Kathleen Alonso

Paying more than you need to in terms of interest and lender fees or purchase price? Are you using a hard money lender? If so, my biggest tip would be to really explore your options. Some hard money lenders can be a pain to work with and some are a breeze. For example, my lender does not require an appraisal before closing to determine ARV as they have an in house valuation team. If they are funding rehab, all they require are pics and video proof of progress before they release funds. Where as I know there are some other lenders who require an appraisal to determine ARV, and they require an inspector to go out and inspect the property for progress before they release funds which can be a major time hindrance.

Check with other investors to see which lender they use and what kind of experience they have had with them.

Where are you investing? I might be able to recommend someone.

Darius Ogloza · Answer

@Aseel Yerunkar has covered the main points really well above.  I would encourage you to take heed.  As to point 4,it is really hard to generalize about what is necessary/unnecessary without a granular appreciation of your customer base.  It is something you develop a feel for over time.

You are going to make some mistakes.  Accept that fact and approach your first flip as somewhat of a learning experience.  You will come out a much more informed investor on the other end.

Kathleen Alonso · Answer

@Aseel Yerunkar

Thank you for that information!

The property purchase price is 65k with an ARV of 150k. Our estimated expenses are coming to 25-30k at most. Seems like a safe margin for error! It’s a 3 bed 2 bath so I’m hoping our expenses remain on the low end as the main focus will be restrooms and kitchen. Im also purchasing with private lender which we’re waiting on the rate of interest we’ll be paying on. My biggest fear right now is paying more than I need to. Obviously being my first flip I understand my rate will be on the higher end. Do you have any tips on dealing and managing your funding?

First fix and flip experience?! Do’s and don’ts?

Most Popular Reply