Real estate rehabbing can be a very adventurous and profitable investment strategy for any real estate investor. The concept was popularized by shows such as Extreme Makeover Home Edition. However, it can also be very confusing trying to understand exactly how rehabbing a property works.
So, What Is a Real Estate Rehab?
A real estate rehab is when real estate investors buy property, improve it and then sell it for a profit. Investors can also hold on to the property and implement a rental property investment strategy. Such projects could take a few weeks or months to complete depending on the amount of work involved in renovating the distressed properties. If you require financing for buying an investment property, real estate rehab loans are available from many lenders in the market.
If you’re still hunting for the perfect property to rehab, visit the Mashvisor Property Marketplace today to find foreclosed homes, short sales, and more off market properties today!
8 Steps for a Successful Real Estate Rehab
1. Inspect the Property
After buying a fixer upper, the first step should be to carry out a thorough home inspection. Be sure to hire a qualified inspector based on online reviews or referrals. The inspector should assess everything in the rehab house, from the roof to the basement. Some of the things you need to include in your real estate rehab checklist are:
- Furnaces
- Air conditioners
- Basement water issues
- Windows
- The roof
- The septic system or sewer line
- Flooring
- Plumbing
The inspector should take photos of all the things in the investment property that need to be fixed. You can use these photos later to show potential buyers the before and after state of the property.
Related: The Ultimate Property Inspection Checklist for Real Estate
2. Create the Scope of Work
The scope of work (SOW) will give your contractors a good idea about the extent of your real estate rehab project. It should detail all the renovations and repairs that are needed, down to the last furniture, faucet, and fixture. Each renovation should be prioritized as optional, need or want. The SOW should also have the estimated cost for each project, whether installations, removals or demolitions. Don’t forget to budget for unexpected house rehab problems that may arise.
3. Hire a Contractor
The contractor can either make or break your real estate rehab project. You should, therefore, be very careful when selecting a contractor to work with. Qualified contractors can be found via job boards, websites, your local supply houses, building department or the local real estate associations. To attract the right contractor, you need to create a document that contains a background about yourself, your objectives, the scope of work, pay schedules, and what exactly you are looking for. Such details will show potential contractors that you are a rehabber that can be trusted.
You can assess a contractor’s suitability through pre-screening interviews. Find out details such as:
- Years of experience
- The number of workers on their team
- Equipment they own
- Insurances
- Licenses and permits
- Any bankruptcies
- Any subcontractors
- Willingness to provide referrals
After the screening process, ask them to send in their bids for the real estate rehab project. Scrutinize every bid and choose the person you want to work with.
4. Organize Your Paperwork
Once you have selected the most suitable contractor, you can then begin working on the necessary paperwork. The project should only commence after all parties involved have signed the contracts. Your paperwork should include the following:
- Independent contractor agreement – Contains all the details about the real estate rehab project
- Scope of work – Outlines the project’s extent and restrictions, including the materials to be used
- Payment information – When payment will be made
- Insurance indemnification form – Outlines insurance requirements for the workers for the duration of the project
- W-9 tax form – The IRS requires independent contractors to submit this form
Once the forms are ready, have a briefing with the contractor and subcontractors. This will ensure that everyone involved is in agreement with project details such as the budget and time frame. Encourage suggestions and deal with disputes right away.
5. Get Permits
Real estate investors might need to get some permits from local authorities before starting the renovation work on an investment property. For instance, you could require a permit for:
- Upgrading the electrical box or installing a new one
- Altering a load bearing wall or moving it
- Working on a public sewer line
- Cutting down trees
- Removing or adding walls in the property
- Adding windows or doors to the house
- Re-roofing the house
- Changing the plumbing
Visit your local authority to find out what is needed. If you decide to do some improvements without a license, you could get fined or have a lien put on your investment property. Furthermore, you might be ordered to tear down the renovations already done. To avoid such risks, just comply with all the requirements of your local authority.
6. Manage the Real Estate Rehab Work
The actual job of rehabbing a property involves several crucial stages:
- Trash clean up and demolition – This could be cleaning out damaged items such as piping, toilets, floors, and walls. Outdoor cleanup would include decks, fences, bushes, and dead trees
- Framing and foundation issues – Adding poles and beams to reinforce the real estate property, fixing basement issues, moving walls, and adding a new roof
- Electricity, plumbing, and HVAC – Once this stage is complete, a building inspector should check if everything is in order
- Insulation – Insulation should only be done after the plumbing and electricity inspection is complete
- Trimming and painting – These will be the last stages of your real estate rehab project
7. Closing and Final Payment
A walk-through inspection should be done at the end of the project to confirm that the contractor completed everything listed in the agreement. If you are happy with the project, ask the contractor to sign the final waiver of lien. Make the final payment and take possession of the investment property.
8. Staging (or Renting Out)
After several weeks and months of repairs and renovations, it is now time to sell the property. Stage the living room, kitchen, master bedroom, and bathroom. The exterior of the home (fences and lawns) should also be presentable. Leaving potential property buyers with a good impression will enhance your chances of selling quickly.
Ready to sell your investment property? List it for free in the Mashvisor Property Marketplace.
Related: Home Staging and How It Can Amplify Your Return on Investment
Alternatively, you may wish to rent out the property. If that is your strategy of choice, take photos of the property and choose a listing website or even a few to ensure you find a tenant in no time and start generating positive cash flow.
Conclusion
The overall real estate rehab journey can appear intimidating, especially for beginner real estate investors. However, breaking down the process into different stages makes rehab real estate investing look more achievable.