NUTS & BOLTS
REHABBING
Success byDesign
THE DECISION TO RENOVATE IS A BIG ONE. SAVVY INVESTORS UNDERSTAND THE BEHAVIORS THAT ARE ESSENTIAL TO A WINNING CONSTRUCTION PROJECT.
by Kelly Edwards and Chris Edwards
I
n his best seller, “The 7 Habits of Highly Effective People,” Stephen Covey provides seven concepts to guide the reader toward self-mastery and business success. The general theme of the book is that, in order to achieve success in one’s life, certain habits should be implemented. A successful life can be built by design. In the world of investment real estate, as in life, winning doesn’t just “happen.” Choices must be made—early and often—to ensure that one’s investment will be profitable. The decision to purchase a property that requires a substan- tial amount of rehab work is a big one. Some get it right, some do not. The good news, for investors, is that there is a success “road map.” Let’s take a look at seven habits that savvy investors can employ when rehabbing investment properties. 1 BEGIN WITH THE END IN MIND Have you ever purchased a property and thought to your- self, “Worst case scenario, I’ll just rent it for a while”? Caution! Buyer beware—of yourself! Savvy investors have a plan and adhere to it as strictly as possible. As an investor, you should be cognizant that market conditions change from time to time, and you need to have a clearly defined rehab goal to help nav- igate the uncertainties of the real estate market. Ask yourself this question: “What is the purpose of the project—rehab to rent or rehab to flip?” This question should be answered before the first dollar is spent. 2 ESTIMATE CONSERVATIVELY A number of methods can be used to estimate rehab costs, with some being more accurate than others. It’s not uncommon for new investors to “estimate” a project’s cost by simply going room to room creating a list of items that may require work. This method works well for newbies because it’s easy to catego- rize the costs on a “per room” basis. Another investor may feel comfortable using a per-square- foot calculation as a gauge for estimated renovation cost. This method, while more of an average and often less accurate, should be used by more experienced rehabbers. Such investors
have a firm grasp of their real estate market, subject properties, comparable sales and the local economic climate. When using a per-square-foot method, it’s wise to have a sol- id understanding of your contractor team and associated costs. Our team utilizes a very detailed estimating process whereby each work component is categorized by construction cost code, or line item. This method is the most time-consuming but also the most conservative, as it guarantees a more accurate and detailed rehab estimate. Remember, the estimating process doesn’t just include the proposed “material” numbers. Contrac- tor labor estimates must be accounted for before a total project budget can be finalized. 3 CREATE A SCOPE OF WORK (SOW) The scope of work (SOW), sometimes referred to as the statement of work, is essentially the “road map” for your proj- ect. It’s arguably the single most important component of your renovation plan. The SOW outlines, for your contractors, the specific tasks that are to be completed to ensure a successful project. Developing the knowledge of a renovation project and its processes can take time and, therefore, the ability to generate a quality SOW is typically reserved for experienced real estate investors. New investors should work closely with their general contractor to gain such knowledge. The length and level of detail of the scope of work will vary by each investor, the project and work required, and the contractor team. Our team prefers to include enough de- tail to clearly state the work rules, requirements and expec- tations, but generally strives to keep the length of the SOW to one page (and no more than two pages) per contractor trade, where possible. It’s important to note that the SOW should be included in the contractor agreement and should be signed by the contractor. 4 BUILD A PROJECT BUDGET New investors sometimes confuse the estimate with the project budget. Contractor estimates, when fine tuned and fi- nalized, are used to create the rehab budget. Be sure to account
110 | think realty magazine july :: august 2016
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