When it comes to flipping houses, having a team of knowledgeable professionals at your disposal can save you time and money. In this section, we’ll describe the four members that you should consider for your house flipping team.
What will a realtor do for me? Can I do it without one? What will they cost me?
Many rehab borrowers align themselves with a small group of realtors that specialize in selling bank owned and distressed property. These make perfect properties for rehabbers. These realtors generally know about real estate listings and new rehab properties on the market. You can find these realtors by doing specific internet searches for REO real estate agents and brokers within a specific geographic area. Picking a great realtor to build a relationship with isn’t easy, but it’s definitely worth it.
Your realtor can do a lot for you and your house flipping project. They can play a central role in your marketing plan and can provide you with a Comparative Market Analysis on a property you are interested in. This will provide you with information on closed sales in the area along with the characteristics of those properties in comparison to the one you are thinking of buying. With that information, you can make an educated calculation to come up with the approximate after repaired value of the property. This is how you’ll know how profitable the project could be.
A realtor is generally paid by the seller of a property, so it should not cost you anything on the acquisition side of the deal. When you go to sell the property, be loyal to your realtor if they did a good job for you and give them the listing on the sale. Generally, realtors are paid about 6% of the selling price by the seller when a property is sold.
What should you look for in a general contractor when flipping houses? What they will do for you? What should you expect from them?
Hiring the right contractor can make or break your project. Here are ten tips for finding the right person for your rehab project:
1. Get References from People You Trust
A recommendation from a friend in the business, a colleague, or a neighbor is one of the best sources for finding reputable and trustworthy contractors for your flipping team. People you know will give you an honest account of their experience and sometimes you may be able to take a look at their work.
2. Have the Contractor Provide References
Ask the contractor for a list of references who are not related or affiliated with him. Make sure you get at least 3-5 so you know you are getting legitimate testimonials.
3. Obtain 3 Bids
Ask each contractor that you speak with the same questions. The lowest bid will not always save you the most money and the most expensive bid does not guarantee royal treatment. Because of the fixed costs of materials and labor, a stunningly low bid can be a red flag. Go with the contractor and bid that is the most economical and makes sense to you.
4. Compare Apples to Apples
It is best to make sure written bids cover the same line items. If one contractor added additional items or left certain items off of the list it can be hard to compare each contractor’s price quote evenly. Tip: Create your own itemized spreadsheet and put each contractor’s bid on it to make the comparison easier.
5. Check to Make Sure They Are Licensed & Insured
Ask for proof and then check with your state’s contractor’s licensing board for verification. There are many contractors that are operating their businesses without the proper licensing and insurance requirements. This step will help to filter out the unqualified so you know that you are working with a reputable contractor.
6. Treat the Bid Appointment Like a Job Interview
This is your opportunity to evaluate the overall professionalism of the contractor. If they show up 30 minutes late, it may be a sign that they do not manage their time well. Are they rude on the phone when you call? Maybe they will not be the easiest to communicate with during the project. Ask specific questions to see how they answer and make sure they are addressing your concerns. Trust your gut feeling and if someone makes you feel uncomfortable, it’s advisable to move on to the next one.
7. Know the Time Frame and Parameters of the Bid
It is important to find out the specifics about when the project will start, how many days per week will they be working, and how they expect to be paid. Make sure that you are on the same page regarding price, terms, and time schedule of the job. Include a monetary penalty in the contract if the work is not done on time (ex: $50-$100 off the final payment amount).
8. Understand How the Payment Schedule Works
When it comes to money, make sure you that both you and the contractor agree to the terms and that you have them in writing. Find out what happens in the case that a new part is needed or if you provide your own materials. It is best not to pay upfront for work that is not yet completed. Check with your state to find out the laws regarding what percentage a contractor can ask for up front for material costs.
9. Make Sure the Contractor Can Do the Job
As simple as this sounds, there are still many people who hire a contractor that did a great job on a friend’s house, only to find out that the project was in a different area of expertise. For example, make sure that the contractor who did the plumbing and electrical job for your friend knows how to properly install doors and windows if that is what you are hiring them for.
10. Check if a Permit is Required
Many contractors will assure you that a permit is not needed for a certain project. This can be a warning sign and is certainly something that is worth double-checking. Check with your local building department to find out for yourself if a permit is required for the scope of work you are hiring them for. It helps to do the extra research and familiarize yourself with the permit requirements in your area.
Do I need a CPA for house flipping accounting? What will they do for me?
Whether you want a CPA or accountant for your house flipping team is entirely up to you. There is no absolute answer to this. Although most small scale rehabbers may use a CPA to prepare taxes, they do not have them actively involved in their deals. If, however, your rehab business is sizable, and/or your full time job, you may want to have an accounting professional more involved in the day to day business.
An accountant will advise you of tax advantages and requirements of different types of business structures, including sole proprietorships, limited partnerships, limited liability companies and corporations. They will also assist you in tracking your business expenses and preparing tax statements.
What are my options for a lender? What are the differences?
Your first choice for a lender, from a cost perspective, should always be your bank. Traditional banks will have the least expensive rates for a loan and you already have a relationship with them. Unfortunately, most banks will not lend on rehabs and the few that do, will take up to 120 days to underwrite and approve them. This time frame will kill most rehab deals before they even get to contract. As a result, many rehabbers borrow from private money lenders and hard money lenders.
Many people in the property rehab business think that private money rehab lenders and hard money rehab lenders are the same. They are different in many ways and by understanding the difference, you can choose the type of lender that best fits your needs for rehab projects.
A private lender will generally review a potential borrower and collateral property using the three “C’s” of the lending world – credit, capacity to pay and collateral. This means that the private lender will need to qualify the borrower financially by reviewing the borrower’s credit history to assess the borrower’s habits in paying back creditors. The better the credit score, the more inclined a private lender will be to make a loan. The private lender will also review the borrower’s income and cash flow, in order to determine the borrower’s ability to pay back the loan. In contrast, the hard money lender will not be too concerned about credit and capacity to pay.
The last “C”, collateral, is looked at by both the private lender and the hard money lender. The typical hard money lender is looking at the collateral as the primary source of repayment of the loan if the borrower does not pay. Alternatively, the private lender makes loans that it expects the borrower to pay, with the collateral serving merely as the backup plan to repayment if something unexpected happens and the borrower does not repay. Accordingly, the private rehab lender may be willing to lend a greater amount on a particular project than a hard money rehab lender, as the private lender is more confident of the borrower’s ability to repay.
Money from both private rehab lenders and hard money rehab lenders are more expensive than traditional lenders because it is high risk and labor intensive from the lender’s perspective. Traditionally, the private rehab lender will be able and willing to offer more favorable loan terms than the hard money lender. They are generally more willing to tailor loan documents and programs to fit a borrower’s needs as well, as the private lender has been able to mitigate its risk by fully underwriting the borrower financially.