On the last episode of the FortuneBuilders Real Estate Investing Show, JD broke down the 6 documents that are critical to the contact singing stage of a rehab, which is the 4th out of 7 stages of rehabbing a house. In this episode, JD returns to break the full 7 stages of a real estate rehab. JD has years of rehabbing experience and has mastered the process. Tune in to hear about each stage of a rehab beginning with the initial walkthrough of a property all the way to wrapping up with the finishing touches that turn a house into a home.
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The 7 Stages of a Real Estate Rehab
All right, everyone, you have got your old pal JD Esajian back in the podcast booth ready to drop some legit serious knowledge on you again. So expand your mind, get your pin ready, hit record, and put the cat down. Focus on what we’re talking about because we’re going to go through another major system within our business of residential redevelopment specifically focusing on something we’ve taught and trained on for over a decade. That’s the seven stages of the rehab process, a seven-stage rehab overview that we do every time we redevelop a property. Now recently, I talked about the six critical documents. And that’s one piece of the seven stages that we’re going to talk about. Here today. I’m a little congested, but nothing that a little DayQuil won’t help open up which I’ve already taken.
Term of the Week
We’re gonna rock and roll but of course, we have got to talk about the term of the week. it. You love it. You wait for it every week. You salivate thinking about what it’s going to be and this week I’m not gonna let you down. It is “change order”. Ladies and gentlemen, change order. Now, you may have heard that term. You may not have heard that term, but we’re going to get into it and discuss it in this week’s show. So let’s get into it.
What are the Stages of a Real Estate Rehab?
Today’s show is on the seven stages of the rehab overview system that we’ve been executing at CT Homes now for over 18 years and 1000s of projects. We’ve been teaching for well over a decade now if you are fortunate enough to have invested in and been to one of the rehab boot camps that I’ve taught over the years. For those of you that haven’t, we’re going to get into it. \
There’s a reason why we have systems. It helps give us a standard operating procedure. It helps manage and navigate better through problems. It gives you a course. It sets your boat toward a destination and you know where you’re heading. It gives you a target. These seven stages are what we execute every time we renovate a home. We may only get to some of them if we don’t buy the home but they’re the same, and we’re going to talk about them one at a time.
So I’ll go over an overview, then I’ll dive into each one a little bit more. Number one, when we buy, fix and sell a home, we’re going to have an initial walkthrough, that’s number one. Secondly, we’re going to construct and create a scope of work. The third one is the process of contractor and job bidding. Then, from that, we’re going to get into stage four of the rehab overview and that’s contract signing.
The six critical documents that I discussed recently, on an episode of the FortuneBuilders Real Estate Investing Show I discuss those contracts and that’s stage four. Number five, ladies and gentlemen, is the actual rehab process, the X’s and O’s of demo and cabinetry install and changing the plumbing and landscaping, roof, windows, whatever else you’re doing.
It’s not number one. I can’t say that one’s more important than the other because they all work together. They dovetail. That’s the rehab process. Stage five is a very important stage, but not not the only stage. Then number six is closing out the contracts. We’ll discuss what’s included in that. Last, but certainly not least, is the final touches. That is stage seven.
Stage 1: Initial Walkthrough
With that being said, let’s talk about stage one. That’s the initial walkthrough. Now, this is the first time you physically get into the home. It shouldn’t be the first time you’ve seen the home from the standpoint of doing your desktop analysis, because the best way to waste your time is to not use and leverage technology. When we’re looking at a deal, we can do a very thorough job of a desktop analysis.
When we started they didn’t have Google. It was called Google Earth when it first came out where you could zoom in on a property and go to the neighborhood. I think it’s just called Google view now. I actually forget what they call it. It’s where you can literally look at the aerial. You can walk down the street. Depending on where the house is located, you can get a lot of information about the property before you’re ever there by using Google.
That’s part of the desktop analysis, pull comps, and look at numbers. If there are photos online if it’s listed, you can get a general understanding of how much it may be to do work or how much it needs. That doesn’t substitute walking into the home. It arms you with more information and more knowledge about the property before you even leave your desk or your office to potentially waste time to go over there.
At some point, you’re going to go to the home for the first time. That’s the initial walkthrough. The things that are important in this stage and what you’re doing while you’re assessing the property, are you’re determining exactly how much it needs. You’re estimating repairs. You’re looking at it through the eyes of an investor thinking about buying it, but you’re also looking at it through the lens and the eyes of what a homeowner may see.
You’re tempering both of those things and determining what you’re going to do. If you’re meeting with the seller, you’re building rapport, you’re taking a lot of photos. If you’re meeting with the agent, you’re doing the same thing. You’re building rapport, and taking a lot of photos. You’re determining layout changes. You’re getting an understanding of what the numbers are of this deal. I personally like to do it after you drive comps. That is kind of a subsection of the initial walk-through. The reason I like to drive comps after is that now I have a sense of the property, what it is, what it isn’t, what it needs, and what it doesn’t. That can help further zero in on the value of the home when I drive the comps after.
There’s definitely a discussion to drive the comps before us. If you’re meeting with the seller, you can sign a contract and be up to speed on what the value is going to be. I agree with that. If that isn’t the case, and you’re not meeting with the seller to potentially sign a contract, the property is vacant or you’re going with an agent right then, and you’re going to write an offer later, then I would drive comps after. So again, step one is the initial walkthrough, You’re taking all the desktop analysis information that you pulled before you left your computer, and you’re taking the real information that you see at the property and determining repairs, layout changes what it needs, what it doesn’t, what you’re going to spend, what you’re not going to spend.
You’re also assessing the neighborhood as well. That’s part of it also. Now again, the reason that these steps were created early on for our business is that we didn’t have real estate experience when we started but we needed to follow a protocol and a system that was going to help keep us structured and safe. That’s what this has done. It served very well in our business even now after over 18 plus years of experience now, almost two decades, and 1000s of properties at CT Homes, and also for 1000s of investors that we’ve helped teach and train the same system over the years, it served as well.
Stage 2: Scope of Work
After you go through the initial walkthrough, the next stage is the scope of work. That’s you taking the information that you determine from the property, either at your desktop analysis, and also when you went to the property for the first time, and creating a comprehensive list of everything you’re going to do. It’s also one of the six critical documents that get signed when you sign contracts with the contractor.
With the scope of work, we’re determining and writing down everything the home needs. That’s important because if you’re going to get bids on the job before refining your estimates of repairs, you’re going to ultimately execute the job because you bought the home. You need to have a document that says everything you want and the item numbers. I describe it as like the screenplay to a movie. The scope of work is to list out the item numbers and skews and paint colors and layout changes etc, etc, etc. The term of the week is change order.
A change order is described or defined as any change or alteration to the agreed-upon work from an initial contract. That’s a version of the definition. Work that you decide to do or that needs to get done that was outside the original scope of work that was agreed upon contractually and signed for. That happens all the time in rehabs and renovation and in residential redevelopment.
The clearer you are in your scope of work, the more defined you are in that document, the more you can reduce change orders and also have a system for how to handle them. A change order again as a term of the week is a change or alteration in the agreed-upon contractually signed work in this arrangement of renovations. That has to get dealt with. It’s either something that you decided to change that’s going to take more time and more money or has to get done because of something that gets discovered in the home. How we handle that is important. That’s something that we spell out in an independent contractor agreement which is one of the six critical documents.
The best way to handle change orders since it is a term of the week is to get it agreed upon in writing before the work gets done. Negotiate the pricing. Preferably, that’s my suggestion to you, in my experience. Sign it up in writing and add it to the contract. If there’s any extension of time needed, make sure that that’s noted as well. Everything gets agreed upon in black and white before the work gets done. That’s important. That was the term of the week which lends itself very well to stage two: the scope of work that we’re talking about here.
Stage 3: Contractor and Job Bidding
Number three in the seven-stage rehab overview is the contractor and job bidding. This is where you take the information from your initial walkthrough. You take the scope of work that you created. You have the job bid out either because you want to confirm your estimate of repairs, or you actually know you’re going to do the home or do the project. You need to get contractors to bid on it so that you can use that information to create contracts and get the work started. You want to have a minimum preferably of three bids.
When you’re getting work done, whether it’s the overall scope, the electrical piece, or plumbing, however, you’re bidding the job out. You’re probably going to have to send more than three contractors by the home to get three bids. It’s good to have a detailed scope of work because that way they can bid apples to apples, know what they expect, know what you want, and what you’re going to expect of them. Then we can get them to bid on the job. That’s stage three.
Stage 4: Contract Signing
Once we are in a situation where we know we’re going to buy the home, then we’re going to proceed to stage four, which is contract signing. That’s where “hey, we’ve either already owned the home or we know we’re going to buy it and we’ve already bid the job out”. Of course, we’ve already created our scope of work and been to the home initially in stage one. Now we’re going to lock in contractors, or a contractor to do the work.
As a refresher from a previous show I did on the six critical documents, within the seven-stage rehab overview, number one of the six is the independent contractor agreement. Number two of the six is the scope of work that I discussed a moment ago. Number three is the payment schedule. Number four is the insurance and identification hold harmless agreement. Number five is the W-9 tax document and then the sixth critical document that will get signed in stage four of the seven we’re talking about on this show and contract signing is the lien waiver.
So stage one, initial walkthrough, stage two scope of work, and three, contractor and job bidding for the contract signing. I haven’t talked yet about the actual rehab process. But do not fret, ladies and gentlemen listening around the world, boys and girls, because that’s next. Notice that there are four very important things we do before we work on the rehab.
One of the best ways I know to have a rehab go sideways or to not have the outcome you want or have more problems than you need to have is to not be clear, detailed and follow a system that I just went through of the first four stages before you do work. If the home has already been started on and you haven’t signed contracts or verified insurance or created your scope of work, then what are they rehabbing? How do you know that you’re getting what you want and that they’re not doing things they shouldn’t do or doing the things that you need them to do.
Stage 5: The Rehab Process
The next stage, which usually is the longest stage of the process, is the actual rehab: the demo, the framing, the rough plumbing, new plumbing, new electrical flooring drywall, insulation, roofing, windows, whatever the home needs, cabinets, whatever the scope of work was, the actual work. Now again, it’s usually the longest stage of the seven for sure, because that’s where the work goes down and that’s where the magic is happening, as they say.
That’s going to be the longest stage in stage five. It doesn’t need to be the most problematic or difficult or challenging or frustrating. It can be more fun if you follow a system like we’re talking about here and execute things before you actually do the rehab. Ideally when you’re buying a home, you’re doing a lot of things. You’re running numbers. You’re working with closing agents and attorneys for escrow title. You’re raising funds and doing paperwork. You’re doing a lot of things.
Ideally, when you’re going to buy, fix and sell a property, you would want to get through the first four stages that we’re talking about in the show before you own the home because if that’s the case, then if you’ve done all that work, you can actually start the rehab as soon as you own the home and activate insurance the day you close on the property. You already have done the contract signing and the job bidding and the scope of work and the initial walkthrough, of course.
Now you can hit the ground running really fast (like thoroughbred fast) to the rehab if you’ve done those first four stages. If that isn’t the case and you couldn’t access the property again. You are slower to get some of these things done or whatever it is that happens, then you want to get through those first four stages as soon as you can after you close on the property. That’s the goal. That’s stage five: the rehab process.
Stage 6: Contract Closeout
When that gets done and the property is completed or very close to being completed, we move to stage six which is the contract closeout. The contract closeout is what it says in terms of booking the contracts but there are also some other important key ingredients. Those ingredients are what you as an investor have to go through the home and do something called a punch list. Create a punch list that is a list of things that either got missed in the scope of work, need to get fine-tuned, or cleaned up better because they’re not up to the caliber you need them to be. It is all those hopefully little things that need to get done by the contractor before the house is ready, finished, and up to the standards that it needs to be.
You and I as the investors create that punch list and the contractor completes that punch list. In that exchange, once the punch list is done, this is part of this contract closeout. They sign the final lien waiver, and we issue the final check to them. Also in this discussion is that we want to get any final inspections and permits that are needed for the job, depending on your area, your scope of work, and what was needed in terms of city involvement.
In this stage six, contract closeout, it’s not just that the contractor says they’re done and you check that box and move on. You create a punch list. You make sure that punches get done. You have them sign the final lien waiver, and then they get a final payment, whether it’s one contractor or multiple. Before you issue the final payment, you want to get a copy of the original inspection reports and final permit sign-off that was needed from the city, county, or building department. All of these stages are important.
Stage 7: Final Touches
Once that’s done in stage six, boom, the final stage, which is stage seven: final touches. There are a lot of things that happened here that I’ll talk about that are equally as important for the home to showcase in its best light. Final touches usually revolve around: the home is done, we already had the final inspection from the city if that’s what was needed, and the punch list is done. The home is done, but it’s not perfect yet. Final touches in stage seven are professional cleaning, like white-glove style cleaning.
You want to be able to eat off the floor. Then we stage the home. At CT Homes, all of our properties are staged because an empty renovated home isn’t the same thing as a staged property. When you renovate a home, it’s super clean, it’s empty because no staging or no furniture is in it. It’s just a nice-looking renovated right house. Staging makes a house a home. It creates warmth. It creates emotion. It pulls people in in the photos. It gives them a place to sit when they go to look at the property. They can imagine themselves living in the home as opposed to this open space that’s nice and clean and renovated. Staging makes a house at home.
Remember the term of the week was change order. That’s an alteration or addition or subtraction or any sort of adjustment to the agreed-upon scope of work that was signed contractually. We talked about how to deal with that. Effectively, that’s a term of the week reminder for those of you that are more or are hungry for more training around finding and funding your deals. I talked about the way for you to register for that: FortuneBuildersShow.com. For those of you that are listening and watching, you can click the link to get more information and register for one of our excellent classes from one of our top trainers around finding and funding deals. Last but not least, like, subscribe, share, comment, and all that good stuff around the podcast. We really enjoy delivering information in this fashion and the more feedback we get, the more you share, the more you like, the more you help others subscribe, then the more we can spread that message and share information. Thanks for joining us today as always, I’m super excited about upcoming shows and you better believe you’re gonna see JD on a future show. Take care everyone.