Buying a Home After Foreclosure: The Budget for House #7
Fix and Flip Tips for Foreclosure Investors
If you are buying a home after foreclosure for investment purposes your very next step after the closing is to put together a rehabbing plan. Unless you are in real estate investing to lose money, your plan needs to include both the scope of work (SOW) and the budget for this scope.
So, in order to pull off a rehab on House #7 these are the steps I went through to put together the SOW. I have gone into detail on some of these steps in previous articles so you will want to review those too.
A Thorough walk down and inspection of the house – it wasn’t just one, I did several walk troughs. The first one was during the initial stage of buying a bank foreclosure . Then, after purchase, I take that initial list and then probe deeper.
I fill in more detail, by spending more time at the house, poking and prodding. Whether it be testing the electrical, plumbing and mechanicals of the house…or peeling drywall to see the extent of mold/water damage…or punching holes through rotted wood inside and out.
I take note of everything in the house that is wrong, outdated or that can be improved.
The most important part of this for me is that I have a second or third set of eyes. This is very important when buying a home after foreclosure because you do not have a history of the property. A general contractor, a home inspector or a specific contractor (i.e roofer, HVAC, etc.) will help me quantify what I need to do and how much it’s going to cost.
Prioritize your repairs - this is covered on the How To Flip Houses page. Basically when buying a home after foreclosure, you are differentiating between those things that you definitely have to do (i.e. mold remediation in the basement) vs. the ones that are highly recommended but not mandatory (i.e. getting rid of the turquoise blue wallpaper in the master bath) vs. the ones that would be nice to do (i.e. upgrading Formica countertops to granite).
Interior paint is done. Cabinets and countertops are in. Next up is final round of plumbing, floors, then fixtures and appliances. Rehabbing houses rocks!
Create a detailed scope of work - you are going to be writing down item by item that is going to be worked on. How detailed this needs to be is up to you. I detail mine in such a way that there is no doubt between me and my general contractor on what needs to be done. You can see a detailed scope of work here and in the one below.
Determine who will do what- this might seem obvious but sometimes certain things can be done by more than one person. For example, I have to replace all the toilets in this house. That is something that can be done by either my plumber or my handyman. Heck, even I can do that
However, I only want a licensed plumber to install the water heater and only an electrician to wire a new circuit.
By assigning a trade to each task will also make it easier for me to know how many people I need to call and get estimates from and for what.
Estimate the cost of each repair - This is the second most important skill of a foreclosure investor (first one being estimating the after repair value). I go item by item and estimate the cost for both labor and materials for each one.
For some items I have a hard quote that “should not” change, like the roof replacement for $2,500 or the HVAC replacement for $3,000. Other ones I just have to estimate. In that case I always estimate conservatively and I also add a contingency of anywhere from 5 to 20% of budget depending on how confident I feel.
Put together a schedule – I did not schedule every detail for this house but some things have to happen in certain order. However, since I hired a general contractor for this job he was in charge of scheduling.
For example, roofing can get started right away while demolition on the inside is going on. Up next is mold remediation in the basement. Those guys need the house to themselves because they use respirators and spray the house with biocide. But we can do exterior carpentry while that goes on.
Once mold treatment is over then it’s time to drywall and start tile installation in floors and showers. And so it goes with coordinating everything else…
Here is my entire SOW and budget for House #7. Go back and look at the pictures of House #7 on the Buying a Bank Foreclosure page so you see where the items on this budget come from (click on image to enlarge):
CLICK ON IMAGE TO ENLARGE
The items in yellow are optional since they would be nice upgrades that would make the house more attractive but if I don’t do them the house would be fine still.
Following these guidelines when buying a home after foreclosure will make the fix and flip process a lot more manageable and hopefully more profitable too.