Operating a real estate investment business can be challenging at times.
Have you ever attempted to add value to a property for the purpose of rehabbing and selling or rehabbing and holding?
It is not always as easy as they make it look on television... is it?
There are many different variables involved in purchasing a property and producing a profit, but for this specific post I want to touch on one major department... and that is the renovation.
The construction department of your business is an integral part of your companies success
I am sure you guys have all heard of horror stories, where an investor buys a property, attempts to rehab the property and ends up losing his ass on the deal.
Well, I will tell you what.. this happens much more than you may think.
Sometimes this is due to the fact investors fail to buy and evaluate properly, other times it because the repair budget is under estimated and the project runs past schedule.
Although this can be a very lucrative business, if you fail to plan and implement systems that be used on all of your renovations, your projects will fail to run on budget and on schedule and if we can't make money doing this, then why do it?
One of the biggest problems newbie investors encounter is properly estimating the rehab costs on the project. This is why we want to take the time today to go over the 4 tools that we use (and you should be using to) in order to put together an accurate rehab budget and schedule so we can ensure we make our mandated profit on each job.
Whats The Most Important Aspect After Buying Right..? Rehabbing Right
1) Scope Of Work
This is where the planning process begins.
Before we get into the final scope of work that we put together, I want to touch on something we called a "preliminary scope of work".
This "preliminary scope of work" is to begin being created the first time you go out and visit a potential deal. During your first initial walk through of a property, you want to take pictures, possibly a video and begin documenting everything you feel needs to be done to the property. This document does not need to be extremely detailed oriented, but detailed enough that you are able to get a good understanding of what it is going to cost you to renovate the property. We have just created a basic PDF document to bring with us to every sales call, which allows us to document the repairs we feel will need to be made on the property.
(PS.. You will want to use the pictures and video to further elaborate on your preliminary scope of work when you get back to the office).
We typically run these sales calls with our project manager or general contractor(s) (sometimes our real estate agent) to determine where we need to make repairs to add the most value.
Ok.. Now let's fast forward. Let's say from our preliminary scope of work, we decided that this property was a no brainer and we put the property under contract. (Within your contract, you want to have a 5-7 day inspection period).
During this 5-7 day inspection period is when we will put together our final scope of work. Typically on the first day of our 5 day grace period, we will head back over to the property with our team and begin elaborating on our preliminary scope of work. This is where we begin to get detailed orientated, take measurements and pin down exactly what we are going to do to the property (either division by division or room by room- whichever you prefer). This scope of work is going to allow us to get apples to apples estimates from our contractors and allow us to put together our next tool... Your Material List.
2) Material List
So now that we have put together our scope of work and we will be able to get a good understanding of exactly what the labor aspect of the job is going to cost us, it is now time to figure out exactly how much the material for the project will run us.
Now compiling an accurate material list has a couple different components. We are not saying these are the systems that you need to use for your business but I am going to discuss how we compile our material lists in order to streamline the process.
A) Material List- We start off using the document that we just created, your scope of work. From our scope of work, we are going to go line by line and determine what material is going to be needed to complete that specific task. At this point we are not getting detailed on the exact material we are going to use on the project, just note what material is needed.
For example, if in our scope of work we have to install 100 sqft of LVT. Then depending on the condition of the subfloor or if we can lay over existing. We know that we are going to need 100 sqft of LVT, possibly some plywood (if rotted), possibly grout if we are using in bathroom.
You get the point.
If you are unfamiliar with what material is needed to complete a specific task, ask or work with your general contractor that will be on the job.
B) Material List Catalog - Why do you think Ray Kroc of McDonald's was so successful? I'll answer that for you, because he created a systematized business that could be replicated throughout the whole country. You could get the same cheeseburger in New York that you could get in Australia.
So, what we try to do on the majority of our flips is create a cookie cutter like atmosphere depending on the resale value of the property. If we are selling a property under $100,000 we will use our "basic" finishes. If we are selling a property between $100,000 - $175,000 we will use our "medium" finishes and if we are selling a property for $175,000+ we will use our "quality" finishes.
(FYI.. These are the price ranges that we work in with in our market)
So, what we did is created a material list catalog (online & binder form) from all the vendors that we use and separated all the material that we use on our properties into these categories.
For example, we have 3 types of flooring for our "basic" finishes, 3 for "medium" finishes and "3" for "quality" finishes. Within our catalog, each piece of material will have a item number that the vendor uses to easily track and order what we need. (we'll touch on this shortly"
This helps us eliminate the stress of design, understand our numbers better and compile our material list in an efficient manner.
C) Vendor Material List- Once you know the material needed on the project and the exact material you will be putting in, we use our vendor material list to compile all of the material that we will need from each vendor and put together an easy to understand list to hand off to our contacts. This is a simple excel document that we turned into a PDF that basically states the vendors name, property address, item number, quantities and description. Once this list is created, we bring the list to our vendors, they put together an estimate for us and compile all the material we will need on the project.
3) Budget
We are making good progress here. Now we have a great idea of what it is going to cost us for the labor and material on the project. Our goal is to get these numbers compiled before our 5 day inspection period is up, just in case we underestimated the project originally, we still have time to back out.
After we have created our material list and scope of work, we want to combine these figures to determine our total cost of the project, this is where we turn to the budget.
Our budget is a simple excel sheet that we put together that separates each task and the labor and material associated with that task.
Once the budget is in place, we can determine how much money can be spent on each task of the project. Since we have a good idea of what each task is going to cost us from our material list and scope of work, we should be able to put together an accurate budget and completely understand that costs associated with the project.
Another advantage of having a budget is that we will be able to prioritize which tasks are most important, which tasks have to be done and which tasks we may be able to eliminate due to cost. If the funds we have available for the project indicate that enough money may not be available to complete all aspects of the project as desired, our budget will allow us to prioritize which parts of the project can be completed and which parts need to be eliminated.
4) Schedule
Last but definitely not least is our project schedule.
Today there are bunch of different free schedule software's that allow you to put together project schedules.
Our schedule will be created using our scope of work.
When creating a schedule, you will have to understand that order of operations of a project and also be familiar with how your contractors work. We suggest that you create your project schedule with your general contractor who will be taking on the majority of the work.
Just like we did with our material list, we want you you to go line item by line item and create your schedule.
Your schedule will force detailed thinking and planning among your contractors and allow you to hold your contractors to a specific start and finish date on the project.
You will also see an improvement in communication between you and your contractors as everyone will or should be on the same page when it comes to specific tasks starting and ending.
Most importantly, your schedule will let you know when your project is going off track and will allow you to make adjustments to put your project in a position to finish on schedule.
With a good solid schedule, you will reduce holding costs, increase productivity and see problems early. This is one of the most important documents that you will create during your due diligence period that will allow your rehabs to excel.
Wrapping Up | 4 Systems To Make Your Rehabs Run On Schedule and Budget
If there is anything that we want you take out of this post, is that planning is vital to your success in this business. We also want you to understand that there is no 1 way to plan, so test different ways and find out which option works best for you. If you put in the work up front, you will reap the rewards of a project that comes in under budget and on time. This will increase your profit per project and give you access to more lending opportunities down the road.
HS Property Funds
Funds to Help, Problems to Solve
(315)516-8023
www.hspropertyfunds.com