A few weeks ago, we were visiting the BiggerPockets headquarters here in Denver. We got an opportunity to meet some of the team and see the amazing space they work in. I felt very comfortable there because our values seem to be in perfect alignment. After lunch we received the tour of the space and headed for the door when their CEO popped out to say hi. I met Scott many years ago when he spoke at one of our Investors Success Summits. I know him best, however, from his bestselling book Set for Life. Of course, we got to talking about the market when he said it. He said something I know I knew but never thought about: “the worst investors have been making the most money.”
Because the market is shifting, it will not be bailing out investors like it has for the last decade. Before now, the longer you took to complete your rehab, the more money you made. That is about to change.
Scott’s point was that because the market has been increasing so fast, fix and flip investors that were slower made more money in appreciation alone. Even if their deal was marginal and had higher holding costs, that double digit appreciation was enough for them to make money.
Going forward the investors that succeed will focus on speed. The faster you can get in and out of a deal the less likely you are to get caught in a market swing and you will be able to do more profitable deals. Here are 5 strategies to speed up your flip.
Have a plan – This sounds elementary, and it is, yet investors miss it. As a hard money lender, we focus on the exit plan. Knowing what you are going to do with the property and how you are going to pay back the loan. That is not the only plan to consider, however. The plan that helps you speed up your project is your rehab plan. What contractor will do what tasks and the timing and order of those tasks is important to keep a project moving. I would also consider how often you will check in, your draw schedule, and what kind of reporting from the contractor you will require. All of this should be included in your contractor agreement. It is vital to have a schedule with deadlines and penalties in your agreement as well. I have never actually charged a penalty, but it is nice to lean on and have as leverage if you need to help motivate your team.
Get bids – Even if you have done many flips and have confidence in your crew, you still want bids. This has many benefits for you. First, it helps keep an honest contractor honest. It forces them to keep their costs in line with the market. Second, it helps you keep up on pricing. Labor and material pricing has been volatile to say the least. It is challenging for investors to know what it costs to rehab a house anymore. It also allows you to stay current with the market. It gives you a chance to meet other contractors which can be vital if you need to make a change. Finally, it allows you to judge the contractor workload. By asking questions you can get a sense how busy they are and if they will be able to focus on your project. Be careful though. I have never met a contractor that said they don’t plan to hit their deadlines.
Order material early – This might be the one thing you can do that will speed up your project the most. Because of the supply chain issues we are seeing across the board; it is taking three to four times longer to get material. If you can buy items in stock, like an appliance package, I would buy and store it the day you buy the house. For the items you need to order, order them immediately. Things like doors and windows are taking months to get in. Work with your contractor and get all the material you need immediately. This should be part of your rehab plan. On a side note, store your material offsite if you can. It is common for material to get up and walk off a job site if it is just sitting in the garage.
Hire Slow and Fire Fast
Fire fast – The saying for hiring and firing in business is to hire slow and fire fast. That is true for real estate investors too! Contractors are notorious for over promising and getting sidetracked with higher paying work. They won’t tell you that though. In my experience, they will continue to give you new deadlines of when they will be finished and new excuses and promises. Even if you stay on them, these contractors will not get to the finish line. You need to remove them quickly. Although it is never easy, if you are going to be a successful fix and flipper you will need to get comfortable with this. I would not remove a contractor without a replacement, however. This is another reason getting multiple bids is important. You will have a back up plan. One final point on this is that you will need to be sure you have all your lien waivers signed so the contractor does not put a lien on your property for nonpayment. They will believe that you owe them more money than you do, so it is best to document the work that you are paying for when you pay it and pay as you go.
Bring Potential Buyers in Early
Consider the presale – As the market slows this will become more common. The strategy here is to start bringing potential buyers by once you are past your drywall phase. This way the floor plan is set, and the project is safe to walk through. These potential buyers can also see what the property will be. It is normally a waste of time to bring anyone in before this point because they cannot imagine the finished project. If you want, you can offer to allow them to pick some of the finishes to help secure your buyer before you are done with the project. Doing it this way will obviously speed up the process because you will have a contract on the house and can close as soon as your city inspections are complete.
Some downsides to this that are worth mentioning are:
- Their taste in the finishes may not be desirable. To hedge your risk here make sure your contract says that you have final approval and that the selections need to be neutral. I would also require nonrefundable deposits anytime one of their selections are installed. This way you have money in case they do not close, and you need to change the selection. You will also want to limit this as much as possible. Maybe paint color, some tile, counters, and carpet.
- Doing this makes them feel like they are buying a new home. New homes come with a warranty so be sure you communicate well that you are not providing a warranty and that you require that they get a home inspection before they close.
- You could miss out on some appreciation while you rehab, but for me I would rather know I have a buyer and my profit locked in then try to squeeze every dollar out.
- This will add some stress with a delivery date. Especially if you must remove a contractor. I would say try to give yourself plenty of time and communicate well. And never include a penalty to you for missing a deadline.
You can make money, a lot of money, as a fix and flipper in any market. There is no reason to be nervous or to stop investing, we just need to adjust to what is in front of us. Buy right and work fast.