The Science of Flipping - 3 Best Practices For Rehabbing

Episode Date: November 23, 2020

Rehabbing has a crazy amount of small intricate details that play into the entire process. But above all, there are three things that you absolutely must prioritize during your rehabbing!

What's up, everybody? Welcome back to the Science of Flipping podcast. I'm your host, Justin Kolbe, and this podcast is always about giving you the best tips, tricks, strategies, processes, and systems to implement into your investing business right now, today. So welcome back to another episode. I want to go over three best practices when rehab flipping. These are the best practices when you are actually going to be buying, rehabbing, and flipping a property. At the end of the day, what I would say about this is you are wanting to be more cautious than bullish. That is why I want to be giving you guys these three tips. If this happens to be your first time reaching my podcast, welcome. Hopefully you enjoy.

There are hundreds of other episodes for you to dive into. And if you have not gone over to thescienceofflipping.com, I'd highly encourage you to do that as there's a bunch more free giveaways over at thescienceofflipping.com. So let's start with the first best practice tip. And that is, if you are financing your deal with private money, whether it be a friend, family, or otherwise, make sure your paperwork is tight. Make sure you have everything lined up, such as if you were doing an equity split with this partner of yours, that is outlined that you are profiting what the profit share is.

And if there are any loss incurred, what type of losses are shared between the two of you? Make sure both parties are named, meaning whoever may be lending the money in the equity partnership profit share and who is the equity partner. Then make sure your paperwork is tight. You don't want to go down the path of having some loose word doc paperwork that you throw together with what you believe to be sufficient enough because it's your uncle or your best friend or your dad or whoever it may be, and you don't feel like you need to do it, I'm telling you now, I know by the mistakes I've made, make sure your

paperwork is tight and outlines every single component of that, whether it be a lending or an equity partner coming in and bringing in the money, make sure it's clear. Make sure both sides know what happens if there's a big profit. Make sure both sides know what happens if there are losses. Be very, very clear with your paperwork. Now, most people would have the question, well, Justin, do you have something I can review what I will tell you based around my past experiences?

I have done that for my own loans where I've used someone else's paperwork years and years ago, and it didn't work out so great. I would tell you to go get a lawyer involved. There are companies like Rocket Lawyer that can give you pre-templated forms, things of that nature. But you if you're going to go buy a home and spend hundreds of 1000s of dollars buying it and rehabbing it, it's worth spending 300 400 $500 for a lawyer to draft out this document. So both sides understand what exactly is at stake and how it is all broken down. That is, you know, hack number one, super, super important. I know a lot of you out there that are rehabbing, you do have private funds that you are using,

again, family member, friend, colleague, what have you, make sure that the rules are laid out very clearly in this document. And like I said, if you're going to buy a home for hundreds of thousand dollars and put tens of thousands into the rehab, make sure the paperwork is tight. Hire a lawyer for three, four, $500 to draft up the paperwork. Make sure both sides are clear. It will make your life easier in wins and in losses. And for anyone who ever said that you've never lost money doing a rehab flip, well, it's probably because they've done one rehab flip and they made money on it. So if you do this enough, you will thank me that this is the right way to structure your paperwork. All right, so let's get into best practice number two for your rehab flip. Hire a good contracting company. Do not allow your contractor or the person who's going to be rehabbing your property to be haphazard, to be okay. Make sure you get what

you pay for here. I know a lot of people try to skimp on their rehabs and hire their buddies or someone you find at Lowe's or Home Depot. And I can understand that. But I will tell you, after doing almost 500 of these rehab flips in my career and over 1,600 deals total, you get what you pay for here. If you go the cheap route, you will get the cheap result. And you never want to get in trouble, right? You never want to hire someone who may not be licensed. You want to make sure that they're licensed, which usually means they will cost more. But here is the big, you know, hack that must happen for us to work with a contractor. and I encourage you to do the same, they must have an itemized, detailed out rehab budget. I don't wanna go or see a contractor give me,

okay, it's gonna be $40,000 for the rehab and submit a $40,000 invoice with kitchen 15 grand, bathrooms 10 grand, flooring five grand. No, no, no. I wanna know exactly per item, what you're spending it on. How much are you spending on the cabinets? How much are you spending on the sinks? How much are you spending on the Island? How much are you spending on the flooring? What kind of flooring? Where are the, where is it? If you're doing tile versus wood

versus carpet, um, I want to know how much we're doing with paint. What type of paint? I want the itemized breakdown to door jams. I want doors. I want handles. All of it. I want it broken down on an itemized bid from the contractor. That is standard operating procedure. You must have that from your contracting crew. If your contractor does not give that to you, you probably have the wrong contractor. Okay. So you must have a licensed contractor and make sure that they are giving you an itemized bid. And then the last hack for running your rehabs for standard operating procedures or best practices here is make sure you're not paying the entire rehab upfront, break it in minimum three payments. You can even break it up into

four. Now, why would you say to do that? Well, because there are some individuals out there that are less than honest and potentially are going to run away with your money. I have actually had several investors here that I'm aware of that some contractor basically was bidding out these jobs. Several of the new fix and flippers paid the whole thing in full and no one heard from this guy again. He took the money and ran. So do not do that. Again, along with the itemized bid, you will then agree on a payment plan. I would encourage you to do a minimum three pay. I'd like four pay even better. But how I personally structure that is I pay roughly a third, a third, a third at times, depending upon the project that we are doing, we may be heavy on materials on that first payment.

So we got to come up slightly higher. We might do 50% out front and then 25, 25. The reason why potentially you have to come out more upfront is like I said, if you're heavy on material, you're doing a bigger project and they need to be able to buy that materials that may take some time to get in, then you want to be heavier on that first payment so they can order the material ASAP. And then the last payment is not to finish the job. The last payment is once the job is finished. The last payment is once the job is finished. I need to walk through the home. I need to make sure I approve everything. Everything's gone the way that I want. There's no minor details left unturned.

And I now need to say, good job, guys. I approve and I will cut the check for that last payment. So these are some best practices. These are the three that I feel are incredibly important if you're out there rehab flipping. If you're not rehab flipping yet, make sure to re-listen to this before you actually go rehab your first property.

These are three of the best practices for rehab flipping. Hopefully this helps. Rewind this, take notes if you absolutely need to. If you have any questions, obviously, go reach out to thescienceofflipping.com. I will take care of them there. And hey, you would be doing a massive favor if you can give me a review, as well as check out my daily videos over on YouTube.

Justin Colby, youtube.com forward slash Justin Colby. Check out my daily videos over there. And hopefully you will like those as well. I will see you guys or we will talk soon on the next podcast episode. Peace.