How To Close On Your First Rehab (The Steps You Need to Take)

Pulling the trigger on your first rehab deal can be a daunting proposition. For new investors there is so much information out there and so many “gurus” giving contradictory advice, It can be hard to be sure you are on the right track. To help give you the confidence to close on that first deal, I have simplified it for you here. This is not a step-by-step guide, this is an outline. I want it to be simple to follow and get you on the right track.

Here are the 6 steps you’ll need to take to close on your first rehab deal:

1. Get Your Financing Source In Place:

It is critical that you do this first. I believe it’s the most important step because you can’t close on property without this. I am going to assume you don’t have any equity or private money partners who will fund 100% of your deals. The first thing you should do is get in touch with a few Hard Money Lenders in your area. Find out how much financing they would provide for a good deal. I am not as concerned here about ARV. I want to know what percentage of overall cost (purchase price and construction) I can get. For a good deal in my area that’s going to be 75%-80% of cost (sometimes higher for a great deal) but we’ll stick with these numbers for the sake of this example.

Next, you need to come up with as much capital as you can in order to fill in the gap between the lender's 75%-80% and funding of the whole deal. This can be your own cash, lines of credit, or raising money from friends, family, colleagues, and business partners. Come up with as much as you’re comfortable investing. Now you will know the scope of project you will be able to take on. For example, if you have access to 100k through a line of credit and your lender will get you 80% of cost on a good deal, you can do a project where your cost is approximately 500k. Be sure to factor in all of your fixed costs into this number.

Once you have competed this step you should have the confidence to start making offers and putting deals under contract.  Now you are no longer just thinking about investing. You are actually in the game!

2. Find Your Contractor

For your first deal I would strongly recommend working with a General Contractor. The GC will take care of everything for you during the construction. As you get more experience you can find your own subcontractors to take on certain aspects of the job. This will be cheaper but I personally wouldn’t do it. You will have to be more involved and that may not be a profitable use of your time. I believe in maximizing the return on my time. There are great contractors and too many not so great contractors out there. The only way I would ever select one is through referrals from other investors or lenders. A great place to start is at your local REIA (Real Estate Investing Association). You’ll find that they will be happy to give you referrals. If you end up working with their contractor they will look good and may get favorable treatment in the future. In my opinion the biggest benefit in acquiring referrals this way is that the contractors will have experience and a positive track record of working with investors. Get two or three referrals and interview each of them. Then choose the contractor that best fits your project.   

3. Find The Deal

There are so many resources out there on finding deals that I won't touch on this step in much depth. Whatever strategy you choose, pick one and learn to do it well. I believe there are deals on the MLS if you move quickly enough. Keep an eye on properties that are priced too high and will need to come down in order to sell. Have a realtor set up search parameters in the MLS that will automatically send you an email with a newly listed property as soon as it hits the market. This is a great way for you to learn your market and jump on a deal as soon as it’s listed.

4. Put The Deal Under Contract

Once you find deal that looks like is has enough of a spread between what you can get it for and what you can sell it for once fixed up, see it with your contractor as soon as possible. Walk it together and have him give you a rough estimate of what he thinks the repairs will cost. If everything looks good put in an offer and take it off the market. If it is a good deal you cannot afford to waste time. A good deal that’s listed in a hot area will be gone quickly, usually within 7-10 days. If you’ve given yourself a contingency period you can always back out if you were really off in your preliminary numbers. You don’t need to have accurate numbers in this step. You simply need to be in the ballpark!

5. Complete Your Due Diligence

You will run your real numbers once the property is under contract. This is where you will determine whether or not you will be doing the deal. You will do a more thorough walk through with your contractor and have any necessary inspections done. Use the numbers from your contractor to prepare a Scope Of Work. This will be a detailed breakdown of every repair line item that needs to be done. From this you will be able to create a budget and schedule for your project. If all of your numbers work and they indicate you will be able to make the net profit you desire for the required investment and projected timeframe, you have yourself a deal.

6. Close on Your Deal

If everything looks good during your due diligence period you will come in with the necessary funds and close on your first deal! Because you did a great job during the due diligence phase you have a detailed Scope Of Work, a budget and schedule that will allow you to get started right away once possession of the property is yours.

**I mentioned earlier this is not a step-by-step guide. If you are looking for that, look no further than right here on Bigger Pockets.  The Book on Flipping Houses by J. Scott has EVERYTHING you will need. Btw, I don’t work for Bigger Pockets – It’s just a fantastic resource.