3 Tips for Doing Your First Flip
By David Ivkovic, Realtor
After having just completed my first flip after many years in real estate, I thought I’d share my experience for those thinking about doing it themselves. (See video below. The little house of horror transformed into an awesome beach house in the Valley).
As with any reno/renovation/remodel/redo/redesign/flip/teardown, whatever you want to call it, assuming you have your financing in place, here are the three key things you need to have in place before you start any project: 1. a team, 1. a plan and 3. a budget. This applies to pretty much any type of renovation, whether you plan to update your own bathroom or kitchen, or buy an investment property to do a full-on flip.
1. The Team
For me the team started with a good friend who is a contractor. He and I had been talking about doing some type of flip for the past couple of years. The idea sounds great, but unless you have the cash, investors, or a loan, it is pretty hard to even consider the concept. My contractor friend fortunately had a client he had been working for who wanted to invest in a flip. She as luck would have it, is an artist and aspiring designer, in-addition to being a lawyer. Together we all brought a different sets of skills to the table; I could handle a portion of the financing, the real estate transaction which also helped us save on fees, organizing the inspections, and contribute to general labour needs. My friend would contribute his time/labor, and would be the contractor doing most of the work along with his crew. And the third partner provided the remainder of the financing, her law skills to set up an LLC, and would handle the design vision. Depending on what skills you bring to the table, it’s important to be able to fill in all the crucial roles. If you are just going to hire a contractor, make sure to interview several, and have them give you a detailed budget and timeframe for what you want done. Costs and delays can skyrocket once you start breaking down walls and discovering what’s behind them.
Having worked on an HGTV show along side many talented contractors and designers for a couple of years, and now working in real estate for almost 10 years, I see a lot of design and workmanship, some good, some bad. I have an eye for this sort of thing, but by no means am I a professional, which is why if you can afford to hire a designer and a reliable contractor for your team, I always recommend it. And remember there is a huge difference between a designer and decorator, so it’s good to know which one you’re getting. A designer usually has some type of construction or engineering knowledge.They should anticipate, understand and be able to explain why that big kitchen re-design you want might require taking down a load bearing wall, which will result in additional engineering drawings and permits. Having this construction knowledge is what makes the difference between someone who can pick drapes and pillows, and someone who can create a proper technical drawing of your new kitchen layout. If you plan to do all the design yourself, the key is finding a contractor that also has some design background. That way when you are describing your vision, he can work with you on how things will look and fit, and what types of finishes might work better in a specific space or style. Lastly, to do the job properly and with permits, you’ll need to have blueprints of your vision drawn up by an architect or engineer. It’s good to walk the space with the contractor, designer and architect all at once if you can. Each will offer their opinion on costs and feasibility for certain items and ideas. Depending on the scale and needed involvement of the project, the architect or engineer is hired at the beginning to do the initial drawings. If you run into issues as the project goes on, you may need to go back to them for changes. In addition to their initial rate, add some time for their hourly rate to the budget, that way if unexpected issues come up, you’ll be able to go back to them for changes. Which leads me to steps 2 & 3.
2. The Plan & 3. The Budget
The plan and budget work hand in hand. If you only have a certain amount of cash to work with, you need to factor in the cost of purchasing the property, closing costs, insurance, permits, technical/design/architectural drawings, labor, materials, equipment rentals and carrying costs such as water/power/taxes. Remember, the longer it takes, the more it will cost you. Once you have a grasp on the scope of the renovation you want to undertake, give yourself a timeframe to try and complete it, such as 3-6 months. If you’re going to hire the contractor, and manage the budget yourself, keep the receipts and start a spreadsheet because you’ll have spent a lot of money before a hammer is even picked up, or paint color chosen.
Finding a property in an area that works within your set budget may be difficult. Researching areas that are gentrifying, near good schools, have good highway/freeway access, public transportation, etc., can be a good place to start. Driving around neighborhoods is always a good idea. If you feel like you could live in the area, so will other people. In my case as a Realtor, I was able to set up MLS searches in two areas we were considering that fit our price point. One happened to be close to where the contractor lived which played a huge factor in our decision. Because it helped cut down on drive time and accessibility, and meant he could put more hours at the house, instead of on the road.
Once we narrowed down the area, we started looking at houses, making appointments and ‘kicking tires’. Investors have a bad wrap with some neighbors because they usually go in and tear down the old house and build a new construction style ‘McMansion’ that doesn’t go with the existing neighborhood appeal. These houses are often too big for the lot because in order to realize the highest return on investment they need to build to the maximum allowable square footage based on lot size and/or city setback and height restrictions. Local communities often fight to try and stop mansionization with mixed results in different areas. In some cases it helps make an area better, in others it can be an eye sore on an otherwise quaint street. In our case the budget didn’t allow for a tear down/new construction, plus we didn’t feel the area was ready for that type of home anyway. We found a perfect candidate that was in despair, had a lot of deferred maintenance but tons of potential on a very charming street.
After our initial preview of the property, we felt this was a house we could work with, and set a top offer amount that worked within our budget. There were multiple offers, and some back and forth, but we eventually won the bid. The listing agent told me after that there were over 40 offers submitted. Which told me we made the right decision, because if that many people saw the potential, then wait till they see what becomes of the place!
We decided we would keep the existing structure as is, go back to the studs, and at most build an addition to the back of the house since it had a large lot and dead space in the backyard. What we discovered as we began the renovation was that the neighbors stopped by thanked us for fixing up the place. It had become on eye sore on the street, and was not cared for by the previous owners. In our case, the neighbors welcomed the updated home which brought added curb appeal to the area, and added to their own property values.
This brings me back to having a plan and a budget. As we toured the house to discuss the scope and timeframe of the remodel, and since we knew we only had so much cash to spend, we decided to forego a costly addition, and just add a second bathroom in addition to the new kitchen and main bathroom. This would add to the desirability for buyers looking for homes with more than one bathroom, and make the house stand out compared to other similar homes for sale in the area.
When you’re working with a team, it’s important to discuss options of where to best put the money and all agree on the list of priorities. If you put all your money into the kitchen as an example, you might run out of cash for other things. Creating a list of priorities for the reno is essential. Of course there will always be hidden costs as the work progresses, so it’s important to work closely with your contractor or architect, and make sure to over estimate on everything! As you start the demo work, the true costs will start to present themselves. There may be old wiring you weren’t expecting, poor plumbing work that needs to be redone, foundation issues that got missed,etc. As well architectural drawings may need to be re-drawn causing further delays and costs. Whatever the case may be, it’s important to understand that these issues will come up, and you should deal with them properly, otherwise they will come back to bite you, I promise.
As each stage of the remodel progresses, it’s important to constantly check-in with whomever on the team is managing the budget. This will affect how long or short your list of priorities will be. If you have spent more than expected on the new bathroom, maybe that brand-new fence isn’t going to happen anymore. The main items buyers always look for are kitchen and bathrooms, so if you can pull those off, you’re already ahead. Pride of workmanship is important, and will help your project stand out from a cheap flip another contractor may have done in the area. But if you become too emotionally attached to each decision or item, you’ll lose focus on the end result, which is to sell the house and make a profit.
Once the demo work is done, and the bones completed by professional plumbers and electricians (it’s important to hire pros for these tasks) and drywall is installed, the fun part begins. You should have already worked with your designer/architect or contractor to have an idea of the kitchen and bathroom layouts. But only once the drywall is installed will you be able to truly measure and figure out the best way to layout these items within the updated blank space. Kitchen and bathrooms can be very expensive, so unless it’s a high-end neighborhood, picking mid-range fixtures is more than adequate. In order to stand out from the boring ‘builder beige’ cheap-flip, it’s nice to have some design features that stand out. That way buyers can see there was some thought and purpose put into the home. It will definitely add to the re-sale value, and help your flip stand out from the crowd.
As you close in on completing the essential large items on the list, now is a good time to address the lower list of priorities and tackle them all at once based on the remaining budget. Will you re-surface the driveway, or just pressure wash it. Do you add a contemporary new fence, or just do basic wood boards. Do you add the stunning glass garage door, or go for a basic one? The list of items can be endless and costly, so in the end you need to learn to just cut it off at some point, and remember you are not the end user. It’s okay to leave something for the buyer to tackle, they understand it is not brand new construction, and there will be items left for them to undertake.
Finally, as you prep the house to go to market, this is when you’ll need to decide if you want to stage it or not. As a Realtor I always recommend staging because a staged home will command a higher price than a non-staged home. In our case, the budget had become so tight, we decided to only partially stage the home. The designer had a bunch of great personal items in her own home that she brought to the house, which saved us thousands of dollars. And ended up working out, while still adding some extra flare to the house and not breaking the bank.
I ended up listing the house and had multiple offers in less than a week. It went over our list price and sold for the highest amount of any previous sales for that area. We were really proud and ended making a modest profit once everything was said and done.
I guess the take away is, if you approach your first flip as a learning experience and not a get rich quick endeavor, you’ll be better off for it. If you can get your money back and then some, consider that a success. You will have learnt the do’s and don’t for the next one, and will hopefully be able to realize a greater profit the second time around. For me, it gave me a much better understanding of construction, remodeling, and design, which I can now pass on to my clients when they are looking at houses to buy or invest in. If you have any questions about my experience, or would like to search for a property to invest in, please contact me: firstname.lastname@example.org