You’re new to flipping houses, and you’ve already heard your share of warnings about one of the biggest pitfalls in the business: underestimating repair costs.
Those warnings are true. Unexpected repair costs are going to find their way out of the woodwork when you flip a house, regardless of how careful you are. But that doesn’t mean you can’t enter the house-flipping battlefield with a foolproof plan of attack.
If you’re looking for a checklist that will help you anticipate all the repair costs of a fix-and-flip investment property, you’ve found it. Read on to arm yourself against the worst known budget-saboteurs in house flipping—and the unknown ones, as well.
The first thing most of us think of when we think “repair costs” is the house itself. That’s the easy part. The less-than-easy part is this: What exactly do you need to fix?
The answer literally runs the gamut from “almost nothing” to “almost everything,” whether that means a simple cosmetic paint job, changing out a few fixtures here and there, or gutting the entire 1970s-era kitchen. And sometimes the things you need to fix aren’t always the things you can see. We’ve all seen that house-flipping episode on HGTV where they take a sledgehammer to the wall and find ten years of mold lurking in the shadows beyond it. Your fix-and-flip investment will probably have its own share of surprises. So how do you make sure you haven’t overlooked anything?
You create something called a “budget repair sheet.”
Budget repair sheets are also called “cost estimate forms.” They are basically spreadsheets that keep track of what needs to be repaired in different areas of your house. With your budget repair sheet in hand, you do a walk-through of the property with your general contractor (who will help you figure out what to put on the list), making note of the things that need to be fixed.
It might still be tricky to spot the mold in the walls, but as far as estimating physical repairs goes, a budget repair sheet is definitely your safest bet.
The General Contractor (GC)
You probably noticed that, in the example above, you weren’t walking through your investment property filling out the budget repair sheet by yourself. You had a general contractor with you. And there’s a good reason for that. When you’re new to flipping houses, sometimes “you don’t know what you don’t know” about construction. Usually, trying to wing it on your own will end up costing you more money than if you just hired someone who knew what to do in the first place.
Keep in mind that you’re not looking for just any GC. You want a general contractor who will get the job right and stick with your project to the very end. Ask around your social network to get some recommendations, or contact the local public works and building department for some reliable names. You can also check online referral sites for promising reviews.
A good general contractor will make your life a lot easier, and will also free up your time so that you can start hunting for your next investment property. Just don’t forget to add the GC’s salary to your estimated total repair costs for the flip.
You’re also going to need to pay a few different subcontractors to take care of the specific repairs in your fix-and-flip. Your subcontractors are your painters, plumbers, electricians, and so forth. If you have a general contractor, then you’ll have some help getting fair quotes from all of the subcontractors that you’ll need when you flip your house. Many GCs will even find the subcontractors for you so that you don’t have to deal with the hassle of it yourself. But you’re still going to have to foot the bill.
New fix-and-flip investors sometimes overlook carrying costs. Repairing your investment property is probably going to take a few months, and during that time, you’re responsible for basic upkeep. That means that you will have to pay utility bills (gas, water, electric), as well as insurance and property taxes. Depending on what kind of property you have, you could also have to pay HOA or condo fees.
So, not surprisingly, the timeframe is key when it comes to estimating your carrying costs. You and your general contractor will want to keep an eye on the subcontractors to make sure they’re finishing their jobs on time and on budget. Create a schedule that everyone agrees to in advance, and then follow up on it to make sure that your subcontractors are sticking to the plan. If one subcontractor falls behind a couple weeks, it could cause a domino effect of delays—and carrying costs could sabotage your budget.
Expect the Unexpected.
Even when you’re careful, it’s almost guaranteed that part of your renovation will throw you a “surprise party”—and then send you the bill. Always expect the unexpected, and build a buffer into your total estimated repair costs. After you’ve calculated everything you can according to the checklist above, set your budget to be 10% more than the number you come up with.
You might not always see the sneak attack coming. But if you account for what you know, and plan for what you don’t know, you’ll come out on top at the end of your fix-and-flip experience.
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This information was originally published on Auction.com, the nation’s leading online real estate marketplace. Kristine Serio is a writer and editor specializing in business and real estate. Her real estate roots stretch back to her grandfather, who launched a profitable second career as a real estate investor during the 1950s. Kristine’s authors and entrepreneurs have been featured in The New York Times, O: the Oprah Magazine, and the San Diego Union Tribune.