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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 52 August 2023 F E A T U R E 5. Failing to vet contractors A nyone can slap a sign on a truck, but not all contractors are created equal. You may pay $30,000 upfront on your $100,0000 project, start off with six workers at your house, then pay the second $30,000 a few weeks later, but find only two workers at your house. This means that your contractor has taken another job and moved four workers somewhere else. Check references before signing contrac- tors, and make sure those references are re- cent. You are looking for referrals from clients who have seen the contractor's work in the last six to nine months and who can answer the hard questions, like "Did contractors finish on time, and did they perform quality work, or did they nickel and dime you?" 6. Neglecting to agree on a penalty if contractors do not finish on time G ive your contractors hard deadlines and penalties for not meeting them. When you allow contractors to procrastinate and pull workers to other jobs, three-month rehabs drag into six-month projects with no end in sight. To prevent this, build a penalty directly into the contract. For example, if a contractor tells me that a $100,000 rehab will take three months. I say, "Great, I'm going to give you three-and-a-half months. After that, there's a $200 penalty for each day beyond that three- and-a half-months." 7. Overbuilding for the neighborhood W hen you get excited about a property, it is easy to start what I call nesting, which causes you to overspend. The next thing you know, your $100,000 rehab has become a $130,000 project, and your margins have evap- orated. You were set to make $60,000 on the deal, but now you are only making $30,000. To avoid nesting, keep track of your num- bers religiously. Calculate the total cost for your project, and if you are tempted to make a sudden change in fixtures or finishes, see how the math impacts your running total. 8. Trying to sell a rehab property for over the neighborhood average W hen you price your rehab property high, you slow the sale and increase holding costs. The longer a property sits on the market, the more you pay. To avoid this, run a comparable price on your rehab. The service will give you a low price where the property is likely to sell in 30 days, an average price where it should sell in 45 days, and a high price that will keep it on the market for 90 days or more. While the home is on the market, you are on the hook for insurance, tax, and mortgage payments, meaning every month that passes without a sale eats into your profits. You will always make more in the long run by asking an average price rather than holding out for a top dollar offer that may not come. 9. Using the wrong type of mortgage I see so many people take loans against their home or 401(k) because they cannot use a conventional mortgage. A conventional mortgage will not finance a rehab house. Remember, we are talking about houses with a lot of hair on the deal—missing windows, missing doors, trashed cabinets, no flooring, etc.—and you cannot get a conven- tional loan for that kind of home. If Fannie Mae goes in and there is no carpet in one of the bedrooms, you will not get a loan. To keep out-of-pocket costs low, finance your rehab property with a bridge loan or a hard money loan, which lump the sale price and rehab money together. In addition, down payments on these loans are far lower, meaning you spend less upfront and obtain funding for repairs. You can access these loans more easily by joining a local real estate investor club. 10. Using low-quality parts to save money I f you skimp when you rehab a home, peo- ple will notice. Picture a gorgeous white designer gown with a minuscule spec on the hem—that is where your eyes will gravitate to. For an anecdotal example, I remember a woman once walking right under an $18,000 chandelier to point out a slightly misaligned piece of crown molding. You always want to show a home built with high-quality parts, but keep in mind the other side of this problem about getting emotionally attached to your rehab property and overbuilding. There is a big difference between high-quality parts and ego-based parts. If you are doing a $1.5 million rehab, use ego products like a Viking or Sub-Zero in the kitchen, but high-quality parts are what you want to use in most of your flips. The knowledge behind successfully flip- ping homes, rehabbing rentals, and owning apartment complexes fills entire book- shelves. These 10 tips are merely just the tip of the iceberg. Before you go out and look at a flip property, educate yourself. Take the time to read a book, pick a mentor's brain, and attend some seminars to equip yourself with knowledge you will not regret! There is a big difference between high-quality parts and ego-based parts. If you are doing a $1.5 million rehab, use ego products like a Viking or Sub-Zero in the kitchen, but high-quality parts are what you want to use in most of your flips.