Our hard money rehab loans are meant for investors looking to flip houses for a profit. We work with both new investors and well established investors to help them secure the financing that is needed for this profitable business.
There are many factors to consider if you are flipping houses for a profit, but there are a few that we see all the time that can make or break a project. Two of the main issues we see involve valuing the property and estimating the cost of rehab. These two issues are very important to have right as both will have a direct impact on the bottom line.
Determining the value of a property is perhaps the most important aspect of profitable flipping. Knowing how much you can sell your investment for once the rehab has been complete is the basis for all your other numbers. It dictates how much you can spend to purchase the property, how much you can spend on the rehab and how long you can hold the property while still being profitable. If your after repair value, or ARV, is not accurate, all your calculations are going to be off.
To determine the ARV of a property takes a little practice. First and foremost, having a good real estate agent working for you will help. They can often times give you a price opinion as well as pull comps of sold properties in the area. You cannot stop there, however. You must be able to do your own diligence on the property and confirm the value they give you. This involves actually going to the property and driving the neighborhood to look at the sold comps you are comparing your property to.
Please see this blog post for detailed information about determining ARV.
The other main issue we see that has a direct impact on the profitability of a deal is estimating the cost of rehab. This is incredibly important, as underestimating this cost can not only cost you profits, but can throw your whole project into a tail spin. One of the best ways to ensure you have an accurate cost of rehab is by using a contractor that you know and trust. Over time you will develop relationships, and a contractor relationship is incredibly important. Once you find a good contractor that comes in on budget every time be sure to keep them!
So what if you are just getting started, or are undertaking a project in an area where your tried and true contractor does not travel to? You still need to ensure you have an accurate cost for the rehab. There are a few ways to help ensure this happens. First, you should ask for referrals. If you are in an investment club, ask other members. If you have a mentor, ask them. Check on review sites such as Yelp where you can see reviews of contractors. You don’t necessarily need the lowest bid, but you do want an accurate bid and quality work.
By asking for referrals and doing research you should be able to come up with a few contractors. Next get multiple bids. These bids should all be in a similar price range. If you are getting bids on a job that are coming in between $60-70k and then a contractor comes in and bids the same job for $20k, you need to find out why there is such a discrepancy. Getting the job done for as little as possible is a good idea, but not if you are going to need to hire another contractor to fix shoddy work or have to deal with overruns or work not being done.
Be sure to get an itemized list of what is going to be done. A line item breakdown that is detailed will ensure both you and the contractor are on the same page with regards to work that needs to be done. Walk through the property with your contractor, and while the work is being done be sure to visit the property regularly to ensure the work is getting done as agreed.
Taking all of these precautions will not guarantee that you will not have overruns, but it will help. The final piece of this puzzle is to have a contingency fund. You must have some additional funds available for overruns or additional work that comes up that needs to be addressed. There is always something that is not anticipated, and not having the funds to cover these unanticipated costs is a mistake you don’t want to make!
There is, of course, a lot more to successful house flipping. These are two of the issues that I see on a regular basis, though, and by ensuring that these two issues are covered and accurate, you should be well on your way to a successful transaction.