What are you going to get from this? I’m going to give you 5 steps to absolutely maximize the profit in all of your future deals.
Maybe you’ve already done a few fix and flips or maybe you’re just getting started. No matter how much experience you have, there’s ALWAYS a way to add profitability to a deal. So here we go!
So let’s say you’ve got a deal and want to make the most money from your investment. What are the steps you need to take in order to have the most control over your process while seeking to maximize your investment profit?
STEP 1 – Build Relationships With Contractors
Most people who are in their first few deals will seek out contractors and try to get bids, but then have a hard time getting quotes back. You would think it’s easy getting quotes, but it’s not always the case.
When you set up that first call with contractors, explain that you’re trying to build lasting relationships and repeat business for them. It’s like you’re trying to add them to your family of contractors, people that you can count on, and they can count on you for continued business.
You let them know that you do a lot of flips and are looking to build a team which means you’re looking for consistent and reliable pricing on each deal. If they are giving you good pricing, they will get to see more deals from you. Make it a win-win.
The next thin after establishing that you’re trying to build a team is setting expectations, and the one thing you’re going to absolutely want to do is request that they provide a line item bid for everything–that’s right–you’re going to ask them to literally line item each piece of business, because that will help you maximize your profits.
For example, in a room you will have them line item how many lights in a room, how many outlets, how many windows, etc. Get it all broken down.
With line item pricing from the general contractor, you can determine whether you can do it at that price or at a better price yourself or with a subcontractor, so you essentially get to cherry-pick the best parts of the deal. Keep in mind that while you’re trying to cherry-pick the best parts of the deal you cannot take more than 20% off his bid. Taking too much from the bid will hurt your chances of creating long-term relationships, so only pick the best parts where you can get the maximum profit potential.
Some contractors will price certain line items higher because it’s not their specialty, so the pricing may come in higher and it gives you an opportunity to get it done at a lower price.
Let’s say that the GC gives you a bid, and the pricing for painting is high. Maybe the quote is 5k to paint, but you have a sub that will do it for 2500. Now you can connect then to the sub, help create a new relationship for them AND save yourself a bunch of money.
These pricing opportunities come up because GCs all have things they are strong at. When they get in a field they are uncomfortable with, they mark it up.
There are different ways to cherry-pick, but it’s always got to start with a line item bid. You never know when you could get hit with a change order (like termites are discovered) where there could be an extra charge. If it’s not written in the bid then you have protection.
Look, it’s your deal – so make sure everything lines up. Tell the contractor to bid out line items, and because you should be the one deciding what happens with the house, create your own SOW and they can use your scope of work and bid it.
STEP 2 – Create Your Own Scope of Work
As I said, it’s your deal and you should be the one deciding what happens with the house so it should start with you creating your own scope of work. That means you’re going to do a room by room review of the property. You breakdown by room or section and breakdown by contractor. To see an example of what I mean, you can head here…
For the exterior, I always label it as a room as well. So that means anything that has to do with the exterior, like boxwoods, installing the American flag, koi pond — needs a category. And it counts as a room.
Let’s say you are scoping the living room. You review it and you determine it needs painting, needs outlets upgraded, (**and a side note here–you always always always want to put new outlet and switch covers in rooms, it’s one of the best ways to make a house look new and updated!) and needs new carpet. You build out your line items for it.
For a dining room, you might determine it needs a new chandelier or new flooring (maybe you want to refinish the hardwood), or it needs new electrical outlets and crown molding. What I’m trying to hammer away at here is you need to go room by room and have your own detailed analysis of each room, so that it is ready to hand to the GC when you meet them the first time. If you don’t do the walk-through and do your own analysis you can forget about things, which can then cut into your profits.
Say you wanted hardwoods but you forgot about it and the GC quotes carpets. You can’t get upset at the contractor because it’s your fault because you forgot to line item the hardwoods out. Be meticulous about going through each room and determining what needs to be done in order to give you the best chance for profit maximization.
You need to do the work! Don’t just call the contractor and tell them to line item everything and let them do it. You have to know what you want to do in each room in the house that allows you to get a better scope of work put together and it will get you a much better proposal from the contractor.
In the next 2 steps, I’m going to get into the Do’s and Don’ts of maximizing profits.
STEP 3 – Do’s
In most markets, these “Do’s” are the general rules of thumb:
Maximize the square footage – meaning that adding bedrooms and bathrooms will always add value to the home.
If its a 1200 sq ft 3 bed 1 bath and I make it 2 baths, it raises the value. If I buy a 2 story house with 1 bath, it’s almost always on the 2nd floor, it might affect the purchase if I can’t sneak a bathroom on the bottom floor. So find a way to get that bathroom in there because in a 2-story house, 1 bathroom is the kiss of death.
Adding baths maximizes value! But when adding a bathroom look for the least amount of walls you need to change (less is more) and keep in mind that how far away the plumbing is will dictate how much the bathroom will add to the sale price. The further away, the more materials like piping, fixtures, and drywall will be needed.
***There are very select markets where adding additional square footage may add significant $$ to the sale price. Ask a realtor for the average sq ft price, calculate what the average sq ft price would be to put it on there because the smaller the addition the higher the cost per sq ft. And you don’t want that. Always be sure you get back ROI on an addition.
Make sure that everything in the house is clean and updated.
Maintenance-free is a bonus. And desirable.
The key is to know your buyer’s market and what those buyers want. If its a sub-$150k market, you don’t need to put in granite countertops – the buyer in that market wants good and clean but doesn’t know the difference between granite and formica, and they don’t need solid wood floors, carpet is ok.
Knowing the market really well and not over-improving will save you money.
Make sure to service existing stuff, like HVAC and keep it clean
You want to make sure everything is clean and operational so it passes the home inspection. You don’t need to totally revamp unless you have to. You KNOW the home inspection will most likely come up with something to repair, so wait for the buyer to ask you to do it rather than buy a new HVAC, clean and repair it first instead of replacing it.
Maximize the value of the kitchen and master bathroom
The kitchen and master bathroom will sell the house. It’s that simple.
Figure out how to make it nice and clean without gutting it. You can keep some existing fixtures and work around them – maybe a new toilet or a new tub. Sometimes with bathrooms, all it may take is a new toilet or vanity and some paint to change things drastically, which can be the difference between a $1550 upgrade and a $4k renovation.
People will often concede to buy things that are clean so if the tile is neutral and clean – keeping it in may not keep the buyer from buying the house. So instead of ripping out tile, give it a good cleaning.
There’s definitely a delicate balance between frugality and what gets the deal done.
STEP 4 – Don’ts
My top don’t is – don’t over improve for the sake of ego.
There are investors who literally pick out every tile, pick carpet samples, and have 10 sets of cabinets that they use differently. It’s an absolute waste of time.
True rehabbers know if you do and sell something a certain way once, you do it again. They make it a consistent, repeatable process.
If you are a rehabber and doing it as a business – hire a reasonable interior designer to walk through Home Depot with you, and choose items that are timeless, like colors that last a long time, flooring that’s popular a long time, etc.
They create a professionally selected list that they use over and over again until it becomes old or outdated.
Don’t move walls unless you absolutely have to
A huge expense is people ripping down walls. Even if you take down a non-load-bearing wall, you still have to do drywall and trim repairs and possibly plumbing and HVAC. If you take down a load-bearing wall you will need supports, engineers, architects, etc. A load bearing wall could add too much additional cost top your project.
Don’t over improve the underground space (sub-terrain space) – BASEMENTS
Hear this – ROI will NEVER be given to you in underground space.
It will only appraise at 50% of the above-ground space so don’t over-improve it – sometimes all you need to do is just paint the walls and put loose carpet down.
One thing you need to know is that a basement is always going to take on some water or humidity. You can’t stop it, you can only control it.
Anything sub $250k, the buyer isn’t expecting it to be fully finished, so give it a good cleaning and leave it at that. You also never know what they will want to use it for so don;’t spend money converting it into something they won’t use anyway.
DON’T gut the house unless you have to
If there is ever a scenario where you think you need to gut the house to the studs, you should be walking away from that deal. No, you should be running away from that deal.
Don’t do something way over your head
You don’t want to gut a house to the studs! Anytime you are thinking “let’s start with a clean slate” — 90% of the time its ego talking. Your ego will kill your wallet.
No excuse for gutting
You can retrofit plumbing, HVAC, electrical, insulation. Almost anything you need to get into a wall that requires taking wall down can be retrofit. If a contractor says differently, get a 2nd opinion.
Don’t hide problems
It will never work in your favor. If you find a problem, fix it! Why? Because people will come back and sue you and you will be held accountable. Don’t turn a blind eye to problems that can come back to haunt you.
This is similar to the one above. Look, if you find something – fix it. I’m not saying to over-improve it – just find and fix it.
If you find a leaky pipe – replace it, don’t slap epoxy on it.
People that do rehabs and feel like they got away with something, will find that it eventually comes back to haunt them.
STEP 5, Market it
Ok, you’ve done everything I’ve said to do. Here’s where many people get lazy at the end. They fail to market the property properly.
In order to market your property effectively, make sure you invest in professional photos, and at a MINIMUM, some staging.
For properties selling at higher price points, make sure to pay for real staging (paying $5-8k for professional staging for an $800k house is an investment, not an expense)
For something special about the exterior – lake, boat slips, pool, landscaped yard – you may want to use a drone – again, this is for premium-priced properties.
You absolutely have to have a great marketing plan with your realtor – and I don’t recommend being your own realtor. Stay focused on what you need to do, and let the realtor do their part:
- Doing open houses
- On your team to cover for you
- Social media marketing
- Create a good plan to sell into the price point
Let the realtor use their experience and market knowledge to help you price your property right. The most effective rehabs are priced at comps–but look better. If you’ve properly scoped and gotten the most out of the rehab with updates and have a cleaner, more updated property that is priced similarly to the comps and looks better than the comps it should sell in 2 weeks (**depending on market)
You want to be the “new one” priced at the same as used, and you will sell quicker.
And when you sell quicker, you can move on to your next project with more money in your pocket to invest — provided you’ve followed these profit-maximizing steps.