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How To Flip Houses

Creating a Scope of Work

This article is the third part in a series on how I Flip This House.

When considering how to flip houses in this market I thought long and hard trying to identify the key points that were going to make this a successful house flip. Considering that I purchased this house early in 2009 - in the middle of a dire real estate climate - I knew I had to do much more than the real estate investing basics of paint and carpet if I wanted to sell it.

The following are the actual steps and pictures (see below) I took and I recommend you do the same if you are trying to figure out how to flip houses.

How to Flip Houses - Get an Inspection

You always want to get some kind of inspection when purchasing real estate. I say “some kind” because not all home inspections are the same. The type I used and I recommend for investors is an inspection done by a licensed general contractor or a home inspector knowledgeable in repairs and house rehabs.

This way you can get both an inspection of the house so that you can be aware of the status of the major systems while at the same time finding out how much it is going to cost to do the needed repairs. Many home inspectors do not provide you with a cost estimate because either they don’t know how much it cost or they don’t want to risk telling you something costs about $1,000 to fix and ends up costing 3 times that.

But as I have learned services for investors need to be tailored to investors. Make sure you get an inspection but get a useful inspection that will help you start putting together your scope of work.

How to Flip Houses – Focus on Your Exit Strategy

When thinking about how to flip houses and determining the type and amount of work you are going to do to the property you have to keep your exit strategy front and center. Every decision is going to be based on either budget and/or exit strategy.

Remember, you are not in this to loose money!

So you will choose the minimum amount of repairs and/or improvements that will allow you to achieve your goal while giving you the maximum profit.

From my initial calculations when first considering the purchase my exit strategy was to fix it up and sell it (flip). But I knew that the real estate market was tough; banks were not lending, homes were going into foreclosure left and right, people were loosing their jobs, etc.

If I was going to sell this house I needed to go above and beyond what any buyer would expect, the house had to sparkle and be better than anything else within a one mile radius. So not only did I have to fix all that was wrong with the house (plenty) I also needed to factor several upgrades in my scope of work.

How to Flip Houses – “Must Do, Should Do, Could Do”

Government foreclosures and foreclosure houses in general have been less than taken care of. So I had to break up the work that needed to be done into these three categories:

Must Do – these are basically anything that has to do with code violations, safety, proper operation of major systems (plumbing, HVAC, electrical, roof, structural), major cosmetic issues (hole in the wall) and the like.

In my case I had to replace all flooring, repair HVAC, lots of drywall repairs, replace appliances, fix front steps, fix back deck railing, pressure wash exterior and do all interior paint.

Should Do – now we get into a gray area, no set rules here because these are mostly judgment call areas. In this category I included re-surfacing kitchen cabinets, replacing kitchen countertops, replace ceiling lamps, fix cracked front door frame, upgrade to new HVAC, upgrade appliances, full exterior paint, landscaping, replace water heater (questionable working status) and replaced the patio door.

Could Do – remember how I said I needed to go above and beyond? This is where with the help of my general contractor we got “inspired”. I felt I would get my biggest return on investment if I put extra money in the kitchen, master bathroom and finished the basement. Smiley Faces

how to flip houses

As you can see above the kitchen was basic but fortunately it had plenty of space. Obviously the biggest upgrade would be to put in new cabinets and new appliances and tile the floor instead of vinyl. My GC had a great idea to remove the wall behind the stove, and relocate the stove therefore opening up the kitchen to the living room and also creating a breakfast bar.

flip houses master bath renovation

This bath view is the very first thing you see after you enter the master bedroom. The bath also had a skylight that made for great natural lighting. So I knew that if I changed this view you see here I could create a “wow” factor (the right kind of “wow” Smiley Faces). I knew I had to get rid of this old, nasty tub and put in something more modern and better looking.

basement before renovation

Although the house had a full basement it was in very poor condition and not fully finished as you can see here. To get the most money out of this basement I chose to finish it - including upgrading the HVAC system to make sure it could cover this area - finishing all the walls and installing a new shower in the basement bath. That was a major plus because it added a third full bathroom to the house – a major selling point!

How to Flip Houses – Create a Scope of Work

Now that I had all the above information, finalizing my scope of work consisted of putting down on paper a detailed list of the work that needed to be done. Two reasons for this: First, for me so that I have one list of everything that needs to be done. Second, for my contractor(s) so they know exactly what is expected of them, no more, no less. That way there “shouldn’t” be any disputes later on whether or not they did what you hired them to do.

In turn this will also give you a solid projection of your rehab budget. Take a look at my final scope of work and feel free to use this format if it works for you.

Armed with this document I now had a complete list of what I wanted to do and this would allow me to do an “apples to apples” comparison of bids from different contractors. I was looking at a budget somewhere between $28,000 to $30,000:

scope of work for flipping houses

Now it was time to start hammering away on this house flip, literally. I was planning on having this house in the market in the first week of May so that gave me about 7 weeks to get it ready to show.

In the next article I will give you the most crucial of all house flipping tips: hiring contractors...

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