Written by: Neva Williamson

One of the best ways to get into the real estate market is to rehabilitate a home in disrepair. But rehabbing a house from start to finish takes a lot of time, preparation and most of all, patience.

Whether you are flipping a home or are planning to live on the property, rehabbing a home is not without its difficulties. For every dollar you saved purchasing the home you will need to spend some of that dollar back renovating it and making it your own. Below is our rehab house checklist so you can be sure that the process moves along as seamlessly as possible.

Know What You Want vs. Need

Build a real estate rehab checklist list which details:

• Your wants
• Your needs

A “need” in the home would be having a second or third bathroom in the home depending on occupancy. A “want” may be granite counter tops as opposed to laminate.

You will be facing some tough choices in the upcoming weeks or months. By having this list handy, you will be able to stay focused on exactly what it is you expect from your property and whether a property – regardless of how idyllic it may be – will stand up to your expectations.

Inspect the Property Before You Buy

Make note of what is in good condition and what could use a bit of work, and take pictures so you can properly assess which renovation products you will need to take on in which period of time.

It is also important to have a reputable home inspector view the home so that he or she can advise you of what needs to be fixed up and in what period of time.

Determine Your Budget

Do not meet with a contractor or an architect before you know how much you have to spend on this project. Only then will you be able to figure out what is and what is not possible for the project.

Hire a Reliable Contractor

A great contractor is worth his or her weight in gold. Ask friends, neighbors, families and co-workers for names of general contractors or contractors who have done similar work on their homes that you want completed on yours. You can also consult the following websites to uncover contractors in your area:

• National Association of Home Builders (www.nahb.org)

• National Association of Remodelers (www.nari.org)
• Angieslist (www.angieslist.com)

Read the Fine Print

After you have interviewed at least 3 well-known contractors in your area and have singled out the right person for your project, go through the fine print of the contract carefully. Make sure that everything you want to be done is covered (or make alternative arrangements), and never pay more than ten percent upfront for a project.

All that’s left after checking or crossing off items on your rehab checklist spreadsheet is finalizing your household arrangements (i.e. where furniture where be stored, how you will prepare meals, if you need a hotel room for certain nights, etc.) and preparing for a bit of mess. After only a few weeks or months you will be able to sit back and witness your property transform into a home where you can raise a family, relax in your very own personal oasis, or plan an early retirement thanks to your well-planned investment property.

Did you know that it’s possible to run a successful real estate company all from the comfort of your couch? Brian Elwood completes over 75 rehabs a year and owns 25 rentals without having to leave his home.

In our recent conversation, he outlined his business model and how he is able to remotely manage his 10-person team.

Brian’s Rehab Business Model

Since Brian is investing remotely, he’s kept his investment strategy simple. “75 rehabs sounds really intense, but we don’t do expensive rehabs,” Brian said. “We’ve decided that $10,000 or less is the sweet spot for us.”

“A lot of times, we’ll just do five or seven thousand dollars. [We’re] just trying to get properties in rent-ready condition, put it back on the market, and either a landlord would buy it or someone who wants to move in and finish the renovation will buy it.”

In other words, Brian and his team buy a property, and no matter what the condition, they will put in a maximum of $10,000 before putting it back on the market. That doesn’t mean that he avoids the largely distressed properties. He just doesn’t perform complete rehabs. “It’s not that we wouldn’t buy a big-time distressed property, as long as there’s equity in it when we buy it,” Brian said, “as long as we can get it for a discount. It’s just that we’re only going to put the first ten grand or so that it needs into it, and then just put it back on the market.”

“If it was really distressed and needed to be torn down, we wouldn’t do anything to it. We would just buy it and list it as is. Sometimes it doesn’t make sense to put any money into a property, but in our experience, running a business virtually is tough when you’re putting $110,000 into a rehab and they’re opening walls and finding all kinds of different stuff.”

Brian said that typical renovations include things like paint, carpet, minor demo, cleaning the property up (taking out all the trash and doing some landscaping), and installing new windows if they are broken. All of which are very minor and inexpensive rehabs. “If a property is going to be listed and it’s going to be sold to a homeowner – someone who’s going to live there – then we’re going to just do the first $10,000 worth of work that’s going to make it livable for someone to buy. But if an investor’s going to buy it and do a rehab on it, then we may just clean it up and not do much to it.”

Brian’s business goal is to become outstanding in a narrowly focused niche. “I always hear the mantra that focus makes you rich, so we’re not trying to be great at everything.”

Brian’s Team Structure

Brian lives in Denver, CO, while his 10-person team is stationed in his investment market – Nashville. He and his partner sit at the top of the organizational chart. “I have a 50/50 business partner, so the work is divided up between the two of us,” Brian said. “I am over marketing and financing and operations, and he is over sales and renovations, so we kind of divided it down the middle.” Brian’s day is spent on the phone working with the marketing director, CFO, and COO.

In order to track performance, Brian said, “Each team member has their own dashboard where they have all their KPIs (key performance indicators) clearly displayed, that we look at on our call each week.”

The following are the KPIs that Brian said he tracks for each of his team members:

• Marketing Director – “Our marketing director’s key [performance] indicator of whether or not he’s doing a good job is how many leads he generated each week… He has goals for each quarter to get to a certain point.”
• CFO – “Our CFO is responsible for maintaining a certain profit margin – net profit margin – in our business and forecasting the revenue that we’re going to make against the expenses and saying, ‘Hey, the next quarter does not look good, so we need to make this or that budget cut of this amount to maintain our health margin where we want to be.’”
• Sales – “There’s would be appointments attended and contracts signed”
• CRO – “Another position we call our CRO, which would be chief revenue officer. He is responsible for pipeline revenue added.”
• COO – “We have one other [KPI] that we call our brand commitment score, and that is something that our COO [has]. He calls every customer after the property has closed and surveys them on how good of a job we did creating a certain experience for the customers, and it’s on a scale of 1 to 10.”

Brian has an assistant who is responsible for keeping track of all the different team members KPIs and creating a report each week. This report is posted for all team members to see so they know how everyone else is doing in terms of hitting their numbers.

Best Ever Advice

After learning about Brian’s remote and narrow focused business model, he said that most people ask him, “How do you do this virtually and you seem like you sit at home and you must be laying on the couch watching soap operas?” While Brian said this isn’t true, he also said that he doesn’t do a lot of stuff that he doesn’t enjoy because when he sets goals, he sets lifestyle goals rather than financial goals.

“Start with lifestyle as your number one goal when you’re going into business.” This includes performing an exercise he got from the book Four Hour Work Week, which has you write out your perfect day, keeping in mind the following questions:

• Where are you?
• Who are you with?
• What are you doing?
• How much time are you working?

After writing out his perfect day, he figured out what that lifestyle will cost, what type of business model would allow him to live that lifestyle, and worked backwards from there to build his business.

“In Four Hour Work Week, [Tim Ferriss] talks about the difference between being a CEO that makes $500,000/year working 80 hours a week and he’s gone all the time, or a dude who makes $50,000/year working ten hours a week from a coffee shop doing something that he loves,” Brian said. “Two extreme ends on the spectrum, and there’s no wrong answer as to where you should be on that spectrum, but it’s just a really important question to ask because there’s way too many stressed out, unhappy billionaire out there in the world.”

I’ve personally performed this exercise, so I can attest to its power. I advise you to stop what you’re doing right now and take the time to write out your perfect day. Then ask yourself, “Does that lifestyle align with my current trajectory? Or do I need to make some changes?”

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When an investor is first starting out, typically, they will focus solely on cash flow and creating passive income. The idea of having money flowing into your bank account, month after month, is an amazing prospect. However, the key to real, long-term wealth is adding equity to a property, and then converting that into cash flow down the road, as opposed to simply relying on cash flow alone. David Greene, who has 8 years of experience buying, selling, managing, and renovating properties, uses a simple tactic that enables him to increase the value of his investment properties. In our recent conversation, he explained how any investor could approach a deal and replicate his success.

Addressing Functional Obsolescence

The best way that David has found to efficiently increase property values is to find homes that conform to the real estate concept of functional obsolescence. According to Investopedia.com, functional obsolescence is a reduction in the usefulness or desirability of an object because of an outdated design feature, usually one that cannot be easily changed. Examples of functional obsolescence in real estate would be a floor plan that is too small, a property with a square footage that is incompatible with the typical family size, or having one bathroom in a market that demands property’s with two or more bathrooms. So, David’s tactic is to identify properties that have functional obsolescence relative to the surrounding properties and perform the required renovations to address the deficiency. If done correctly, the value of the property will increase by up to 30%, but only requiring 5-10% of that money to perform the rehabs.

Real World Examples

For David, anytime he can buy a two bedroom, one bathroom property that has more square footage than the other two bed, one bath properties, he will apply this tactic. Typically, he will turn the formal dining room into a bedroom, bringing the total bedroom count to three. Then, he will cut into the wall in the back of the existing bathroom and tap into the plumbing in order to make a second bathroom. As a result, David expects to see the property value grow by 25% to 30% while putting in a fraction of that value increase into the renovation.

Another example, and one of David’s favorite ways to increase a property’s value, is to convert outdoor patios into additional livable space. In Florida, which is one David’s go-to markets, many properties have “Florida Rooms.” These rooms are outdoor patio spaces that are covered with screens to keep out the bugs. David loves to target these types of properties. For example, his last deal was a three bedroom, one bathroom house in Jacksonville, Florida that had a covered porch in the backyard that connected the kitchen and a den. This was an ideal situation because the roof extended out, there was framing in place, and the concrete foundation was already poured, so David could easily turn that outside area into an additional 350 square feet of livable space.

First, David converted the den into a master bedroom. Next, he took two-thirds of the outdoor area and turned it into a second bathroom. Then, with the remaining one-third of the outdoor area, he extended the kitchen in order to relocate the washer and dryer to a different part of the house. The entire project cost $17,000, but by adding 350 square feet of livable space and converting the property from a 3/1 to a 4/2, the property value increased $35,000.

These are only a few examples of addressing functional obsolescence and the resulting increase value. What are some situations where you were able to apply this technique and be met with either success or failure?

In a recent conversation with Troy Fullwood, who has been investing for over 20 years, he explained his best ever advice to fix-and-flip investors, which is to follow what he calls the “5-3-2 Model” of selling.

The 5-3-2 Model Explained

The 5-3-2 Model is very simple:

5 – Buy and rehab 5 homes

3 – Sell 3 homes through traditional means

2 – Carry back the note on the other 2 homes

That is, for every 5 properties that you purchase, sell 3 and “be the bank” for 2.

When you sell the 3 homes, it provides you with the ongoing cash flow for your business. For the other 2 homes, ideally, you want to pick out the best properties to carry back the loans on. If you do it correctly, you should have nothing invested in those two properties because you would’ve received all the money back through down payments and the profits from the other 3 properties you’ve sold.

Benefits of the 5-3-2 Model

The benefits of following the 5-3-2 Model are two-fold:

First, you receive ongoing, passive capital to continue building your business. You will continue to receive the profits from selling the 3 properties, as well as the ongoing interest payments from the other 2 properties. Also, since you are carrying the note, rather than being the landlord of the property, you are able to transfer the taxes, insurance, and repair responsibilities to that buyer. Therefore, the investment is completely passive, and also, technically, an infinite return.

Secondly, you’ve created residual value that operates like an annuity or retirement plan. Self-employed people, which include real estate investors, tend to forget the value of long-term retirement strategies. Instead, they tend to live deal to deal, rolling the dice, or money, into the next deal. Following this strategy allows you to get the best of both worlds: the instant gratification of realizing the fix-and-flip profits, as well as the long-term, residual income that can be a “safety net” for when the unexpected occurs, like unforeseen personal issues (health, family, etc.) or the market taking it’s next turn for the worse.

In my conversation with Ian Walsh, who is a partner at a private real estate, asset-based lending company that specializes in underwriting and evaluating residential investment properties, he provided tips for the fix-and-flipper that wants to run a successful real estate business. Ian provided tips on how he approves loans for fix-and-flippers, two factors that end up in borrowers not getting a loan, and two tips for managing the construction costs.

Asset-Based Lender’s Approval Process

The main advantage Ian and other private, asset-based lenders have over traditional banks is that asset-based lenders do not require w2’s, tax returns, bank statements, or any other financial documentation on the borrow. They loan solely on the basis of the asset. For Ian’s business, if a fix-and-flipper has a deal and wants a loan, all they have to do is email or call Ian and provide three pieces of information:

1. What is the property’s address?
2. What are the construction costs that will bring the property up to the resale value?
3. How much will the property be purchased for?

With these three pieces of information, Ian is able to underwrite the property, shoot them a number back, and see if it works for them. If they say yes, then Ian will precede with preparations for closing.

The number Ian “shoots back” is the maximum amount of money he is willing to loan, which is typically 65% of the after-repair value (ARV). For example, if the ARV is $200,000, then Ian is willing to loan up to $130,000. However, Ian wants to see the borrower’s skin in the game, so asset-based lenders typically won’t provide zero money down loans. Following the $200,000 ARV example, if the property is under contract for $70,000, the construction costs are $40,000, and the closing costs are $20,000, which brings the all in price to $130,000, Ian would only provide a loan of $110,000 and ask the borrower to bring the additional $20,000 to the table.

Having the borrower put their skin in the game, as well as having equity in position is how asset-based lenders are able to offset their risk. In return, personally having a low credit score, high debt-to-income ratio, etc. won’t disqualify you. However, if you have a disconcerting personal financial situation, like a 300 credit score, the asset-based lender will offset their risk by asking for a larger down payment. For example, for an individual with a 300 credit score, Ian would have no problem loaning $100,000 on a $1 million project, but wouldn’t provide 65%, unless the borrower brought on a co-signer, put up collateral, or provided some other source to buffer out the lender’s risk.

After Ian has underwritten the property, provided you with the loan amount, and you are okay with the numbers, then the only steps between you and closing (in most situations) is reviewing an EUF (estimated use of funds) that shows you the breakdown of costs and how much you need to bring to the closing table, and the LOI (letter of intent) that states that the lender is going to fund the deal.

Two Factors that Disqualify Deals

1. Not Actually a Deal – The majority of deals that Ian passes on are ones that aren’t actually deals. An investor will present a deal that they think is a deal, but when Ian underwrites it, he sees that it is not a deal at all. Therefore, to avoid these types of situations, you have to understand your numbers. You have to know that you are looking at a deal without guessing or using information that you obtained from Zillow. The information on sites likes Zillow is inaccurate, so you need to have access to the MLS to get the real detailed property and sales information. If you call Ian and say that a property will resale for $300,000, and he underwrites the ARV at $200,000, then he knows that he is working with an investor that doesn’t know what he is talking about. However, as long as you are within 10% of Ian’s number, he is willing to work with you to make the loan happen.
2. Incorrect Construction Costs – Construction costs make or break the deal. Ian has seen deals that are amazing on paper get knocked down to nothing due to incorrect construction budgets or the mismanagement of contractors. Therefore, you really have to manage your contractors, know your contractors, and take the time to vet your contractors. And when you find solid contractors, you have to do whatever it takes to keep them happy.

Two Tips to Calculate Construction Costs

1. Don’t Get Your Money Ahead of the Contractor – If you give a contractor $4,000 and they have only done $2,000 worth of work, assume that they are going to disappear and that your $2,000 is gone. You never want to be in the position where you are going to lose money because you paid a contractor too much in advance. Many of the fix-and-flippers that Ian works with will only pay upfront for the materials and then have an agreement to pay the labor costs upon completion.
2. Always Build a Buffer – As a fix-and-flipper, you will almost always face a situation where you knock down a wall and find an issue that you didn’t anticipate, which is why it is vital that you build a buffer into your construction budget. If you are wrong and everything goes according to plan, then you make more money. If you are right, then you anticipated it, budgeted for it, and are in the clear. However, if you didn’t anticipate it, you are losing money, and you might as well have paid more money for the property.