Seven Steps to a Successful Rehab Part 1

Successful Rehab Easier Said Than Done

Over the last month or two I've written several blogs on how to "Rehab for Top ARV" and "Rehab Mistakes to Avoid" 

What has occurred to me is that I never really delved into the actual rehab process itself.

Jack Rainmaker and 7 Steps to a Successful Rehab

There are REI Seminars taking place all over the Country. What's amazing about these seminars is they that charge you $30,000, to $50,000. Essentially whatever you have available on your credit cards, 401K, or, stuffed under mattress! They promote the Road to Riches and give you lots of examples , but what they really don't delve into, is the actual rehab process, the myriad of criteria and challenges involved, and what it takes to run a Successful Rehab.

How do you Learn what Constitutes a Successful Rehab?

I think that everybody just automatically assumes you should know what a nice house looks like, or what needs to be done in what order or what process. Of course, the advent of the various flipping shows on HGTV, Bravo, etc. has people believing that you can actually learn how to rehab a home, well maybe in theory, from television.

It's like thinking that you can learn how to conduct Plastic surgery by watching a Television's Botched, or practice medicine by watching the Hospital TV Shows with the doctor in action. ARE YOU CRAZY?

What is a Successful Rehab?

From most Flippers general perspective, it is a rehab where you do the Minimum for Maximum Return. On the surface most would agree by that idea or concept. It does make sense or does it?

I think that life is based on Results and that the Result is directly proportional to the amount of effort.

And when I talk about effort I am not talking about money, I am talking about time and creative thinking. Unfortunately we live in a Society that minimum in for maximum out includes our personal thought and or time. If you want a successful marriage do you just put in the minimum in hopes of a getting a maximum return? I don't think so. Well the same goes for a Successful Rehab. I believe that in order to be successful in any business endeavor, you need to provide real value, however that value is not necessarily reflected in how much money you have spent, but how you have applied a creative solution to the challenge. So is your rehab the result of the minimum of time and effort?

Albert Einstein and 7 Steps to a Successful Rehab

To quote Albert Einstein;

"Imagination is more Important than Knowledge"

Even in the building and renovation with enough Imagination and Creativity you can deliver Tremendous Rehab Value at an affordable cost.

What you will Learn

Over the next several blogs I'm going to share with you the Seven Steps to a Successful Rehab. I am go into tremendous detail regarding successful rehab renovations. I am going to explain the rehab renovation process, many of the pitfalls to avoid, and share some really cool, clever tricks that I've learned along the way. These tricks that can make a difference between a great successful rehab .... a fantastic final finished product, versus, a crappy rehab. Unfortunately I have lots of examples of Really Bad Rehabs that are currently listed for Sale.

The Quality of the Rehab means the difference between a quick sale for top Dollar, versus, a property sitting stagnant with multiple price drops and then selling at a Fire Sale Price, flushing a great money making opportunity down the drain!

For many investors, renovation can be a fun thing, maybe the first one or two, but after a time it can become quite tedious.

It's All About the Money or Is It?

Of course, the most dangerous pitfall in renovation rehab is money, and what I mean by that is, spending too much of it. Hiring the wrong guys, buying

Anchorage Street Kitchen View from Breakfast Bar

the wrong material, not being aware of the many pitfalls and trapdoors a renovation can have, and not accounting for all expenses properly. What I've done here is develop seven steps to a successful rehab. Why seven? I guess I could have made it eight steps, or ten steps, or even eleven. But the number seven is an easy number to understand and it actually makes sense logically.

A Quick Overview of The Seven Steps to a Successful Rehab are as follows:

Number One: What is your Objective? Normally the objective is set right at the very beginning when you first look at the house or potential flip. Are you just going to do a skin job? Are you going to do an in-depth renovation? What's involved? Is it going to be for sale, a flip? Are you working toward a top-dollar return or is it going to be a buy and hold rental?

Number Two: Develop Quick-and-Dirty. By quick-and-dirty I mean a quick-and-dirty look at the numbers. How do you develop them, is a matter of personal preference, but I've talked to various flipper investors, and one of the things I always ask them is what is their per-square foot rehab budget allowance. The Sanchez brothers, whom I have a lot of respect for, out of Dallas/Fort Worth, Texas, use $15 to $17 a foot for rental, and a number of $20 to $22 a foot for a flip. A lot of times it's going to come down to the condition of the property, but we'll come to that later. Right now what you do is establish a number that you feel comfortable with, $15 a foot, $17 dollars a foot, $20 a foot, and multiply that by the square footage of the home and come up with your quick-and-dirty. This will immediately be an indicator of the project's feasibility.

Number Three: Project Scope. Now that you have your objective Okay. Now, looking at the house, "What the fuck do I need to do it?" Make a laundry list of what needs to be done to the property and price it out. While you are doing this, take lots of pictures.

Number Four: Permitting. Based on the project scope and what needs to be done to the house, you may need to apply for permits.

Number Five: Crew. Who's going to be working on the project house? Who do you need in terms of skill set? This is governed by the project scope, if the house has no meter, no breaker box, you're definitely going to need a licensed electrician and you definitely need to get permits and go through an inspection process. Your project scope will help you decide the trade skills you will need. If the whole house needs to be re-stuccoed, you need a stucco guy. You get the drift. We'll get into how to hire a crew more later.

Number Six: Material Sources. You spent a lot of time looking for and finding your investment, right? We all know if you buy it right you can sell it right. Sourcing material for your project is exactly the same. Material sourcing is going to be one of the most important jobs you have. I'm not just talking finish material, the fun stuff, flooring, cabinets, granite, wall colors. What about rough materials? We'll get into material sources a little later in depth.

Final Step Number Seven: Attention to Detail. I cannot emphasize enough how important the Seventh Step is. Not only attention to detail to the actual rehab itself; making sure that the work product is perfect, that the baseboard is straight, that the texture is not showing any blemishes, that wall plates and electrical outlets are lined up perfectly, I am talking about your organizational skills, establishing systems, processes, and procedures, and tracking all activity including expenditures DAILY. You can do fantastically well on the other six steps, but you can still fail because Number Seven will mess you up if you don't execute properly.

A Quick recap of the Seven Steps to a Successful Rehab;

1. What is your Objective?
2. The Quick-and-Dirty Math.
3. Project Scope.
4. Permitting.
5. Crew.
6. Material and material sources.
7. Attention to detail, organization, systems, processes, and procedures and tracking every expenditure.

Now, let's start at the Very Top

Step 1. What's Your Objective with the Investment Property?

As investors we do want to make a return on our investment and we want to sell the house for top dollar. Out in the world of flips and rehabs there seem to be four kinds of flippers;

1. Investors who do nothing, or as little as possible, and wonder why they keep having to drop the price of their home a year later because they did such a messed up rehab. Unfortunately I've got plenty of examples.
2. Investors who do an average job then wonder why they enjoy below average returns.
3. Investors who go over the top, and make over the top profits and set new selling records.
4. Investors who over rehab or, did they just get their number wrong?

Here is an example of Investors who do nothing or very little.

I have a property that a group of investors purchased December of 2015,

BAD REHAB! 1416 East Owens Avenue North Las Vegas NV 89030 for 3 bedroom, 1 bath, 1153 square feet for $63,000.

These Investors performed the world's shittiest rehab renovation. It didn't go on the market until July of 2016, it took them six months to do a poor job. Now, more than a year later, January of 2017 the project is still on the market and they've dropped the price I don't know how many times. Original list price, $139,000, current listing price is $105,000, and they countered my offer at $95,000. They purchased the home at $63,000. They are now under contract for $90,000. Because of the poor rehab I believe that they left $60,000 on the table!

BAD REHAB. 1416 East Owens Avenue North Las Vegas NV 89030 Living Area let's just paint to cover up this mess!

No Effort No Upside. if you want to make money in this business you have to add value! Their objective is obvious, do the absolute minimum and they are paying for that decision, quite literally. According to my Data, this house could potentially sell for $154,000, but not in it's current condition.

My first Question to you is, Mr. Investor, what's your objective?

Do you want to do a poor rehab, sell the house for bottom dollar year-and-a-half later? Or, do you want to do the best rehab renovation possible given your budget constraints and sell a brand-new house in an

BAD REHAB. Wow let's keep the bathroom ALL PLASTIC! With ZERO Appeal

established neighborhood? I'm not going to get into detail about why I think you should create a brand-new house in an established neighborhood. You can look at some of my other blogs regarding that, but the bottom line is What is the objective? Now My objective is to deliver a brand-new house inside and out, this is how I get top dollar. Remember people are payment buyers. What is your objective?

Now, of course you do have to take into account, will it appraise?

My flips always appraise at or higher than the selling price. I've gone into neighborhoods where the top-selling house in a gated community on a golf course sold for $109 a foot, and despite the rancor of my realtor, I list my Project and it sells for $139 a foot. Why is that? Because I delivered a brand-new house, inside and out, in an established neighborhood. I know what works but You do what you want.

Step 2. The Quick & Dirty Rehab Number

First of all, as an investor, you need to figure out what your objective is with this project. Now that you've established your objective, you need to do develop the quick-and-dirty. The Quick and Dirty is a rough Rehab Budget Dollar Amount. The quick-and-dirty is something that can't really be taught but you will develop a skill for it over time. I can however give you a measuring stick and it's better than just plain guessing, but the quick-and-dirty skill for is rehab number is really established over experience.

There are lot of variables you need to take into consideration

What's the lot size? How big is the lot? Because the lot size will determine how much money you're going to spend on landscaping, and fencing, and dirt, or mulch, or whatever you're going to put in the yard. How many plants you may put in, or how many trees. Maybe you have to redo the whole driveway. Maybe you have to put paving stones in from the front gate to the back of the house. I don't know, but the lot size will dictate how much you're going to spend on the outside of the house.

More Flip Profit by adding Square Footage

The interior is the same. Another variable is that the size of the home will dictate the timeline of the flip. In other words, how long the flip will take, and how much you're going to expend in material. There's really two components to a home renovation, time which equals labor and holding costs, and material which is a direct function of the square footage. Whereas a larger home might mean 20 gallons of paint versus 10 gallons of paint. But now you have more labor prep time and more labor application time. In my experience

Labor can represent 65% of the rehab budget, but it also hinges on what you are paying for labor and material.

Use a Flat Number

Typically I use a flat number for calculating rehabs based on severity and geography for prevailing wage. You choose a number based on your part of the country. Typically I am comfortable with anywhere from $16 to $22 a foot. Now this is for a basic "skin" taking everything out and replacing all finishes and fixtures. If I need to install new windows, another bathroom, take down walls etc. then these are expenditures added separately.

A lot of flippers look at the severity of the renovation. I've had houses that were infested with squatters. Holes in the wall, all the electrical cable gone, all the plumbing gone, so bad that you couldn't even figure out where the hot water tank went. That was 212 Elliot Avenue. Purchased it for $70,000. Rehab expense, like a brand-new house, $26,000. Sold for $135,000. You do the math. When I looked at the rehab expense on that house I calculated it out $22 a foot. 

Adding a New Roof creating an open kitchen area texture a brick wall and painting the Interior

Smaller lot, smaller house, 1,200 square feet, needed new windows all new plumbing, electrical and A/C. Pick a number.

My number is, in my automated system, $15 a foot because I'm just expecting to do a skin job, but then if I have to put in a new roof, that's an add of $7 a foot. If I have to put AC, that's another add of $2 a foot. If I have to do plumbing and electrical, that's an add of $3 a foot. Do you get where I'm going? So you start with the baseline, and then for every condition based on the severity of the property, you add $2, $3, $4, $5 a foot.

Typically the range on a quick-and-dirty should be anywhere from $15, $16 a foot to about $22 a foot based on the severity of the renovation. I've had many prospective investors say they can't buy anything, because they're used to buying retail, I ask them, "What are you using as an allowance for renovation in terms of square foot?" And they tell me. Sure if you paying retail and doing no research in the best deals for flooring etc. then yes I can see why you might think that. My advice, pick a number for your quick-and-dirty, start off with a base number, 15 and 17 bucks a foot, then use add-ons based on the severity of the renovation. You use the Quick and Dirty mainly as a tool for project validation. The real numbers will be part of the Project Scope Detail of Step Three.

Step Three Project Scope

Project scope is actually very important, and is the most exciting yet least exciting component of renovation. However, having a good, detailed outline of the project is really super critical because not only does it take all these ideas, and thoughts, and visions that are swirling around in your head, and put them down on paper, for estimating and costing. You can provide all Stake Holders a copy of your project scope. Every single member of the crew knows exactly what needs to happen to the house. A detailed project scope stops people working at cross-purposes now working toward the vision that you've laid out. The Project scope needs to be pretty detailed, but it shouldn't just be a written document but include visuals as well.

Project Scope is a Visual Document

How I build a project scope, is that I initially go through the entire house and I take a gazillion pictures. Then I look at each of the pictures and I mark on the pictures ... I use personally use Microsoft's OneNote. You can use any type of note-taking application. I mark on the pictures exactly what it is that needs to be done and how. If I'm going to knock a wall down, or move the kitchen around, or, open up an area, or add another bathroom. On the project scope I write exactly what the project is with pictures. I end up with a multi-page document with pictures and written in detail.

Whatever it is, I've taken a picture of it and I've written on the picture and to the side of the picture exactly what I'm going to do, this is the project scope book. This is very important because the project scope book is the basis of understanding between all parties, including your lender. This is what is going to be done to the house, but more importantly for you and the rehab crew, so no one is second-guessing, "Hey, should this wall go down or go up or go away? What is it that we're going to do?" Yes, I know. You don't see them do that on television. They just walk in and say, "Hey, we should do this and we should have that, and we should do this and we should do that." And the contractor just comes out with a number, "Oh, that's going to be $4,000," or, "That's going to be $8,000." In real life, it doesn't work that way. Remember Project scope. Never underestimate the power of the Project Scope it is great with keeping everyone focused on the objective and saves a lot of time, stops mistakes from being made, and helps keep expenses in check.

Now that you have your project scope we're going to go to the next step, which is Step 4., Permits and Permitting, which I will cover in Part 2 of the Seven Steps to a Successful Rehab.