Tuesday, July 26, 2016

Flipping Work

Q: I am a new real estate investor, and I would like to get into rehabbing houses. But I don't know anything about home construction. Should I just stick with wholesaling properties?

A: If you are brand new to real estate investment and have no background in home remodel, wholesaling properties may be the best place in which to start while you learn more about construction, building codes, and liability. Of course, to be an effective wholesaler, it helps to understand the home-buying process, and to be comfortable putting a property under contract.

Often wholesalers develop a relationship with the rehabbers who buy their properties to fix and re-sell. You may be able to partner with them in order to learn more about the work that they do, or simply ask if you can visit the job site when they are working on their project.

Lending money to a more experienced rehabber is also a good way to become more familiar with the business of fixing and remodeling houses. The borrower will be required to share their business model and financial plan with you as the lender, and would welcome any inspections by you to visit their property during remodeling and/or marketing for sale.

You certainly should take advantage of any opportunity to expand your knowledge about fixing up a residential property. The August program at the Real Estate Association of Puget Sound, for example, is a great opportunity to hear from Tony Youngs, one of the most respected national trainers of real estate investors who rehab properties.

Inexperienced real estate investors typically underestimate expenses on their first remodel project, over-improve the property, and/or take far longer to complete the work than anticipated. Seek guidance from someone more experienced to review your financials and your scope of work.

When I first start flipping houses, I did not know much about remodeling a house. I had bought and sold primary residences, but did only minimal maintenance during the course of my homeownership. I did not even own a drill, and had no idea how to use one. My first contractors helped me put together my very own toolbox (with their old, throw-away tools!).

On my first remodel, my general contractor proposed training me and "getting your hands dirty," so I would better understand construction. I did learn a lot, even learned how to use a drill. And most of the subcontractors were also willing to help a not-so-young woman learn more about their trade. I actually made money, thanks more to a rising real estate market than to any particular skill on my part.

I was also lucky enough to serve as a personal assistant for eight months for a builder, developer, investor with many years of experience, and an active business. In that capacity, I did not so much as swing a hammer, but I was required to find, interview and hire contractors; draw up their contracts; inspect their work; and send their payments. I learned a lot more about contracting and remodeling during that time.

Sometimes, as in most things in life, it is best to just jump in and get on-the-job training, as you learn while you do. If you think you are ready to fix a house up for resale in today's market, then do not let fear of the unknown hold you back. Maybe partner with a more experienced rehabber or ask their guidance in reviewing your financials or recommending contractors. Interview lots of contractors until you get comfortable enough with price and experience to hire one (or more). Be sure to ask for or research their license information, and make sure they have the required licenses, bonding and insurance to protect you and them while on the job.

Back then, I would use unlicensed contractors or skip getting permits. But you open yourself up to all kinds of unnecessary risks by trying to take shortcuts. It is usually worth the extra money to make sure you do the job right, use licensed contractors and subcontractors, and get all required permits and inspections.

Be sure to have your contractors sign a release of lien when paid in full and work is completed, to avoid unexpected mechanics liens that may be placed on a property by a contractor who believes he was not paid fully for his work. Seek legal guidance if you must terminate a contractor before they have completed their work to your satisfaction.

Today, most contractors seemed surprised that I know as much as I do, when they first meet me. Attitude is a big part of that - as you gain experience, you will gain confidence, and you will project capability in your interactions with contractors.

So good luck on your first remodel! and Happy Investing!

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