By: Tom Zahalka, Licensed Wisconsin REALTOR®

I’ve recently completed my first rehab project at 229 E School Street, Belleville, WI. Conclusion: it was an arduous process that tested the very limits of my being (and was certainly not as sexy as it is on television). Although I took a class, read many books (thanks to Audible), analyzed many potential deals, listened to the Bigger Pockets Podcast every week (which is all helpful), nothing can FULLY prepare you for your first flip. Every house is different and in order to have a truly comprehensive understanding, you have to learn by doing.  

That first deal will provide an incredible education regardless of profit.  It seems many potential new investors are all reading/studying the same resources; I’m hoping I can summarize and help fill in the gaps with specific directions to help YOU be successful.  Learning from my mistakes throughout the last 14 months and counting since buying this house, here are the steps (in order) for flipping any house.

STEP 1 – Fix Your Mindset

      • Know your reason why.  You will lose hope and be demoralized on multiple occasions throughout your first flip project. So having your “Big Why” and your goals physically written down and in front of you every day is crucial.  
      • Think as a wealthy person.  We all become on the outside what we are on the inside.  
          • Think abundance, not Scarcity.
          • Think profit, not loss.
        • Think action, not worry.
    • Begin with the end in mind.
        • Your future is as bright as you want it to be.  The wake does not steer the boat.

STEP 2 – Assemble The Team

      • CONTRACTORS!
        • Your contractor is the number one most important role in your flip.  If you have nothing else, have experienced contractors in your contacts list with whom you communicate on at least a monthly basis as you’re looking for your first project.  Don’t bug them with every lead, but take them to lunch, buy them a birthday card, whatever. You will need their help before closing on any house.  To find a contractor, ask for a referral (I found my contractor through my trusted electrician).  Things have been hot since 2012 and they all have too much business on just referrals so rarely can you find an affordable contractor on the internet.  If you think you’ll be your own general contractor, you’ll likely have to be licensed. I thought I’d be my own general contractor but found out the municipality won’t let you pull a permit on a house other than your full-time residence unless you have a contractor’s license.
      • Real Estate Agent
        • Have a real estate agent who understands what you’re trying to accomplish.  In a perfect world, a real estate agent that also invests in real estate.
    • Lenders
        • Shop Construction Loans: there are many loan products available.  Befriend a lender that will loan out the ARV (After Repair Value) amount at 80% loan to value.  I did not know about this type of loan program during my first flip, I had a mortgage and a separate construction costs loan.  This made me cash poor during the project and I had to come up with additional funds as construction costs exploded.
      • Establish your 20% Down Payment:
          • Use Savings.
          • Establish a Home Equity Line of Credit (HELOC) on your primary residence through your mortgage lender.
          • Find a private lender (like your parents) at an agreed upon interest rate payable upon completion.  
        • If you have a full-time job and good credit, use SoFi Loans.  You can get a no questions asked personal loan at 10% interest and no points.  

STEP 3 – Procurement

    • Deal Evaluation
        • Understand the highest and best use.  Begin with the end in mind.
            • If the house is surrounded by rentals, think rental and perhaps use the “BRRRR” (Buy, Rehab, Rent, Refinance, Repeat) strategy.  
            • If the house is surrounded by well-kept single-family owners, think updated finishes, kitchens, bathrooms, and an MLS sale.
          • If the house has intense structural needs (foundation, exterior wall framing, staircase, joists, trusses) and was built before World War II, think tear down and rebuild.  Tear down and rebuilding a duplex would have been the best use for my first flip property.  
        • Estimate ARV (after repair value).  
          • Run comps (or have your agent run comps) on similar/comparable properties in the area.  Make sure the comps have similar finishes to your property post-rehab.  
        • Estimate repair costs.  
          • Use the app DealCheck and follow the steps. This app is absolutely amazing.  Take photos, run numbers, export PDF reports for private investors, calculate your maximum allowable offer, etc.  What used to take 2-4 hours now takes 10-15 minutes.
            • Understand property set-backs.  
              • Originally, I wanted to install a wrap-around front porch on the Belleville house.  However, I was too close to the street on to the east, and too close to the municipality’s property line set-back to the south.  I could not get a permit for the porch. So we instead built a cantilevered overhang, a concrete patio, and a “fence” for a railing.  A property owner can usually pour concrete all the way to the edge of the property, and our railing is permitted as a “fence,” so we were able to at least add some depth to the house.
      • Calculate MAO (maximum allowable offer)
    • Make Offers & Negotiate
        • Now that you have that 20% down payment loaded & ready, MAKE OFFERS, lots of offers. Finding deals is like pointing a shotgun, not aiming a rifle.
        • Trust your numbers, not the seller’s numbers.  I came in at ½ the list price of my first flip and happened to catch the seller in an anxious time.  I did not “get lucky” because I had been looking for months. A fisherman who catches a fish may appear lucky, but remember, they had their line in the water for a long time.   
      • Offers should be contingent on something you can control such as “Partner Approval.”  The seller does not need to know that your partner is your dog. But, your dog does require the Pre-Close numbers to work in the next step.

STEP 4Pre-Close (IT IS VITAL THAT YOU READ THIS)

I literally skipped this step entirely, mainly because I had not established my #1 team member from above, my contractor. Had I found a contractor first and properly completed Step 4, I’d be on my 4th flip by now and have $100k more in the bank.

  • After an accepted offer, write a detailed scope, have a contractor(s) walk the house with you and provide a quote for price and duration.  Then add 15% to the price (for contingency) and double the duration.  
    • Coming from the commercial construction world, I wrote a detailed 30-page spec book for contractors to use during pricing… no wonder I couldn’t get anyone to bid the project.
  • Get the specific ARV (after repair value) from your Agent or an ARV Appraiser.
  • Once you have the accepted offer, your repair quote, your professional ARV, and your loan terms; you can recalculate your numbers and if everything still works, go to closing.  If not, amend the offer-to-purchase with a lower offer citing the added construction cost impacts, if the seller does not accept you can cancel the deal citing a contingency.

STEP 5 – Construction

      • Your contractor will take care of design drawings, permits and other paperwork outside of your expertise.  So don’t focus on it. The contractor will ask you what colors you want, etc. based on the scope of the quote.  (If you want granite countertops, establish that when you’re walking the house prior to the quote).
      • After demolition, you’ll likely uncover unforeseen conditions and will have to cover a few change orders.  This is what the 15% contingency is for.
      • Your contractor’s pay apps should be broken out into different scopes of work called the “schedule of values” that coincide with the original quote so you can easily follow along.  Change orders should be listed independently at the bottom of the schedule of values. If the pay apps are not shown in this fashion, have your contractor revise.  Otherwise, you’ll spend weeks at the end piecing everything together trying to reconcile and balance the books.  Pay apps should be approved by you, and then sent to the lender & title company.  Your lender will release payments directly to the contractor typically in 4 draws (pay requests).  
    • Completion Date: hold your contractor accountable to the completion date.  I recommend touching base with your contractor once a day.  Remember, the contractor has other projects and the squeaky wheel gets the grease.  If you don’t push it, there will be plenty of days where nothing is happening on your project.  Some people have a liquidated damages clause in the contract with the contractor, something like “$150 per calendar day if not complete by xx/xx/20xx.”  Others may include an incentive clause for finishing early. I believe the best time to negotiate that is after you get the quote for price and duration. You’ll scare away residential contractors if you say “liquidated damages” right off the bat.

STEP 6 – EXIT

      • Notice I did not call it “Sell.”  Your exit strategy can change, but regardless, once construction is complete it’s time to implement that plan… Rent or Sell.
      • Stage the property.  Worth every penny. Honestly, after construction was complete, I thought we had a nice building, but it did not seem like a home.  Sitting empty it was hard to see, for example, where the dining room table would go or how a queen size bed would fit in the master.  After staging, we got the wow factor we needed. Staging will pay itself back x5. It’s a great investment. We used The Cozy Home LLC and they did a fantastic job.
    • Run comparable real estate for sale and/or rental and establish the highest reasonable price for the listing.  Your agent can help with this. Luckily for us, the market went up during this long-term flip and our ARV followed suit.

Step 7 – Repeat

    • Make money or lose money, your first flip is complete and you are now more experienced than 90% of aspiring investors out there.  Don’t waste the education, put it to further/greater use.

Disclaimer: This general information is not intended to provide advice or recommendations relating to any other specific facts or circumstances.  Please seek competent legal, tax, and real estate professionals for specific advice.