Luck is said to be when opportunity meets preparation. If you want to get “lucky” doing property rehabilitation, (i.e. Flipping Houses), you need to prepare in advance for when the right opportunity is presented. You can also help yourself get the right opportunities via your marketing strategy – but that is another topic.
Let’s use an example to help make the point for planning, and make the assumption that you have all the leads, offers, and accepted offers to properties you need, and now you have an opportunity. In this hypothetic situation, let’s say that a home you made an offer on gets accepted and you now own it. Let’s also say the home has an After Repair Value, (ARV, which is retail for a home in move in ready shape, determined by comparative evaluations), of $250k. You bought the home as a distressed property, used your Home Inspection Checklist (that is preparation) when you did your walk through. You made your Scope of Work based on your walk through, and have now verified with your Contractor(s) that your estimates are close, and you even put some contingency to compensate as your risk mitigation strategy. If you purchased the property for $150k, and your estimates for repair, including contingency fund are $25k, you have the potential to make $75k. Not a bad profit.
You are now prepared to start, or are you? Have you done everything you can to make this rehab project go right? Remember every little issue that involves ‘hidden costs’ is going to reduce your profit by these costs. Maybe you are very good at what you do, and you have it all in your head, or you let your contractor go and just use your Scope of Work document as the guide. Maybe you hire a ‘Project Manager’ (PM) to manage the project and that was included in your estimate. Just because someone says they are a PM, does not mean they have Project Management knowledge. Be sure to inquire what Project Management education they have, and even better if they are certified by an accrediting agency.
Assuming you know the PM and the Contractor, and have evaluated them as highly qualified, is there anything else you can do to keep your project on track for Scope, Budget, and Time? Yes, of course there is. You can model the entire project in advance. If you use a Project Plan to lay out your schedule and resources, (both people and purchased components/supplies/services), you can walk through the project step by step to assure each step in the plan accounts for the proper sequence, allows for mitigation/reduction/or acceptance of your risks, aligns with everyone’s calendar (days off, holidays, vacations, etc.), and implements each itemized requirement in the Scope of Work.
As you review your Project Plan, you may discover things that were not in the Scope of Work, but need to be included. It is better to find these ‘hidden tasks’ sooner than later because hidden tasks are risks and equate to potential hidden costs, which will reduce your profit, if the risk is realized and becomes an issue. (NOTE: A risk becomes an issue when the risk is realized). If you find risks before they become issues, you can adjust your Project Plan, make a change order, get the resources, get the sequence and your project will go more smoothly. The cost will be greater if the risks become issues, as opposed to being discovered as a risk and accounted for in the Project Plan used to model of your project.
Remember we said your projected profit is $75k. If you have a risk discovered during Project Planning that cost you a change order expense of $500, your projected profit just dropped to $74.5k. If that risk is allowed to become an issue because it went undetected, (perhaps because you do not have a project plan), it is likely to cost you 5 to 10 times more, reducing your profit to between $70k and $72.5k.
Having a nearly reusable continuously improving Project Plan will significantly increase your risk understanding, and significantly reduce the issues you realize in each subsequent project. So, if you run into just 5 issues on each project, costing you around $10k to $20k per project, and you perform 4 rehabs a year, you have just lost between $50 to $100k. In 10 years this could add up to a million dollars.
While risks that you discover early, (after agreements with contractors and project managers), will still cost you something, they will be far less than the costs if you just let the risks occur and become issues. For example you may have performed work that has to be undone, does not pass inspection, or becomes unacceptable. I will take the cost of a model change up front (dealing with risks) every time, over the cost of an implementation phase change due to running into an issue.
As you create a Project Plan for each new rehab project that you have, you will have the opportunity to use your experience (lessons learned) from other projects, and make sure those lessons are incorporated into your newest rehab project in preparation for implementation. If for example you ran into an issue with galvanized pipes in a past project that cost you a lot of money to replace as the result of a building inspection, you can make sure in every new plan that this item is accounted for as a risk, and mitigated. You can add this risk to your Inspection List, and to your Project Plan, in preparation. Knowing in advance that galvanized pipes will need to be replaced means that you will have it included the cost of galvanized pipes in your Scope of Work, and this will not affect your profit on future projects because it is planned in the work, and accounted for in the cost, yielding a better defined estimated profit. Now add all of the risks and issues to your Project Plan that you discover over the years, and you can save yourself from making a million dollar loss due to the cost of issues in your accumulated rehab project profits.
While your Project Plan is not exactly repeatable for every project, you can use a prior Project Plan as the start for your next project. This will give you a head start, an accumulation of your lessons learned, and a continuously improving nearly repeatable Project Plan. Tailoring the nearly repeatable Project Plan will cost you a few hours of work. The Project Plan when copied will obviously have to be edited for the specifics of the rehab in the Scope of Work, but everyone on the job will know where, (what task, is performed by who, when, and how sequenced), you are in the project, and they will be able to comment back to you if they see some risk potential. The end result of having a Project Plan every time is you are better prepared. Your team finding risks is the best outcome you can have, because you now have continuous improvement in your preparation. If you look at your marketing pipeline and continuously improve your opportunities also, you will be so lucky.
As a Certified Project Management Professional by the Project Management Institute, with many years of experience and many hundreds of hours of training, I can tell you with certainty that you will make more money in the long run if you use this advice.
Best of Luck to you.
Skip MacKenna, PMP 