Quick post for the new and aspirational rookies as I am transitioning after my first chapter in REI!
1. Beware of "Handyman Specials"
1a) On your search for a property to rehab, understand there is a difference between properties that need minor-medium rehab vs. heavy/handyman specials/skeletons-in-the-closet properties. >>> I recommend avoiding relocating walls, demo'ing walls, properties with mold/termites/water intrusion, or unlevel floors requiring subfloor prep (i.e., jacking up the floor) for your first deal. Replacing roofs, and utilities, redoing floor covers, and demoing a wall for an open concept should be enough to chew on.
1b) It is easy to underestimate the condition and scope. There are many ways to walk into construction scope creep. >>> Establish protocols for Change Orders to be documented from Contractors, specify material selections in the Scope of Work, challenge your Contractor to provide options for problem-solving, and break up payments/draws by milestones (see Brandon Turner's template).
1c) If looking on the MLS, use caution when descriptions say "needs TLC", or "handyman special", or when a rehab estimate amount is mentioned. If using a Wholesaler, use the marketed rehab scope and estimate "directionally" and do your own due diligence before closing. People selling the property will have a different vision than you and the reality when you start the project. >>> Get a detailed SOW drafted and time + material quote from the Contractor or accept lump sums for construction line items. Using a Hard Money Lender's estimate template and walking through the format with your GC is a good idea so they can translate their quote to match the format.
2. Use Net30 and Credit Card companies for capital cautiously
2a) If you've underestimated the repairs, it can be tempting to supplement the additional costs with credit cards. Credit cards are tempting from Lowe's and Home Depot as they advertise 0% int. periods. Though the additional capital is easy and convenient, if your project goes left, you'll be overleveraged. Hoping on net profit after a flip closes, cash flow from the rents (BRRRR), or pulling out cash from the refi (BRRRR) will cover the overages is not a good contingency plan.
2b) Build a network of trusted support capital to borrow from a friend/family/colleague/private investor before buying the property. In many cases, borrowing from your close network and issuing a promissory note/loan agreement is 10x better than owing a credit card company (credit card companies can raise their interest and APR)
3. Have Multiple Exit Strategies and work them in parallel paths early
3a) Work out the #'s for the following scenarios: i) Profit after a flip if rehab costs go 20% over, ii) Cashback and net free cash flow after the refi, assuming rehab costs go 20% over
3b) Ask your long-term debt broker (for the refinance in BRRRR) to lock in your interest rate a month before your expected rehab end date. In this climate, expect interest rates and home values to fluctuate. Lenders are eager to lock your loan in vs. their competitors so seeing who is open to early rate locks and terms before the seasoning period ends can put that lender way ahead. Underwrite the deal with a 10%-15% reduction from the current ARV.
4. Optimize Due Diligence Period
4a) Get an inspector for your first property, even if the property is distressed. This usually costs <$350 and you can learn a lot walking the property with them. You can study the reports to sharpen your eye.
4b) This Especially applies if your local market is in a big city - call the permitting office and ask about the history of the property (what permits have been issued? What is the permitting process? What are the typical costs? Have there been stop-work orders issued? This is a MUST if you are buying a WholeTail property or if there has been recent work done to the house before you bought it.
4c) Walk the property thoroughly with the GC and don't let them rush your estimate. Ask them to revalidate it if they need to - make them really think and be conservative/realistic. Align on Contractor Agreement, payment terms (Require draws and try to avoid advances), 1099 form, schedule, and end date target, establish a "punch list" phase, and Communication Plan (establish a communication cadence to discuss schedule, scope, and spend; establish best modes of communication like text vs email vs phone call vs face-face).
4d) Get at least (3) three competing bids from GCs and read J Scott's rehab costs.
I am willing to go into more detail for anyone in who messages; the above barely scratches the surface of my experiences!
Good luck and welcome to the game!
