The Three Key Elements of a Successful Real Estate Deal Part 3: Executing the Business Plan
All across the state, but particularly in North Texas, real estate opportunities are available for astute investors with the right tools. Our blog series examines three elements that we believe are common to every successful real estate investment.
- Buying Right
- Aligned Capital
- Business Plan Execution
In today’s blog post, we examine the third of these three critical elements: executing your business plan.
1. Putting the Right Team in Place
It’s crucial that you have a good team in place to help you successfully execute your real estate business plan. Each team member plays an integral role in your success as a developer and investor.
- Selection of an Architect and/or Designer – Whether you’re building new construction or rehabbing, it’s important to have an architect and/or a designer that understand your goals as a real estate investor. Finding someone that is conscious of your budget and understands that you aren’t building your forever home but trying to create a design that appeals to potential home buyers. Architects will work with architectural control committees or homeowners associations to make sure that necessary visual concepts are maintained. For example: specific styles, themes, color palettes, materials. setbacks, height restrictions, etc. They will also be able to guide you through the permitting process, providing information about what city or county-related permits are required for your investment. In certain cases, new construction plans should be renewed by a person knowledgeable about any building code restrictions for a specific site.
- Selection of Contractors – When selecting a contractor, it may be tempting to go with the lowest bid, but we highly discourage this decision-making process. It’s important to check contractor’s references and make sure they have the proper licenses to complete the project. Selecting a contractor that is on-time, does above-average work and has a good reputation is the primary factor in ensuring a smooth execution. The contractor should also have sufficient liquidity to purchase materials or pay subcontractors prior to draws being funded.
- Selection of Real Estate Agent – When selecting a real estate agent, look at the agent’s production volume, if they have experience working with real estate developers and/or investors and if they feel comfortable offering guidance during the project and through completion. You may feel obligated to go with your friend as a real estate agent, but make sure you vet them under the same standards you would with other prospective agents. At the top of your vetting process should be experience and friendliness. For example, if other agents don’t want to work with them you may end up with an investment that sits on the market and doesn’t get regular showings.
- Selection of Title Company – Select a reputable title company that is known for closing deals on time and has a friendly staff that always goes out of their way to help customers. A good relationship with your title company can be invaluable in the vent you have any future title issues
- Planning and Scheduling – Careful planning and scheduling is imperative if you want to flip your new construction or rehab quickly. The longer you hold the investment, the more carrying costs you pay out of pocket.
- Detailed Budgeting – The more detailed your budget the better. A scope of work that includes specific details will help you obtain contractor bids that are more accurate. Your hard money lender will require an itemized, detailed budget to facilitate your draws. A great example is a kitchen remodel. Instead of budgeting that a new kitchen will cost approximately $20,000, list out every item that needs to be updated and/or repaired. This can include the countertops, backsplashes, appliances, sinks, electrical wiring, flooring, cabinets, shelving, etc. Having specific budget amounts for each line item will help you stay on track to meet your overall goal.
- Prepare your Game Plan – In the real estate investment world, time is money. You can’t afford to wait for each step to be completed before you begin the next phase. If you’re acting as the general contractor for your project, be familiar with what items can be done simultaneously to cut time and shave overhead carrying costs. For example, rough in electrical, plumbing and HVAC at the same time.
- Order Materials Early that May Require Lead Times – If you are using materials that require special orders, make sure to get a head start and order these items first. Delays happen. Anticipating that some items may be delayed and ordering them early can help your project stay on track and on time.
2. Staying on Top of Contractors
If you’re acting as the general contractor, it’s your responsibility to stay on top of subcontractors. If you’re not acting as the general for your project, you still need to monitor the work that the general contractor is doing on your behalf. Remember, you are ultimately paying for these services so you should be happy with the final product and the progress towards completion.
- You Get What You Pay for – Monitor the quality of the craftsmanship and work. If work is sloppy, potential buyers will notice these details and avoid purchasing your property. Setting the stage for your reputation as a real estate investor is heavily weighted by the quality of work that your contractors produce. Cheaper is not always better.
- Make Sure They Adhere to the Schedule – Time is your money, not theirs so most contractors won’t care if they take longer. After all, they’re getting paid in the end so it doesn’t matter to them. Don’t assume that general contractors and subcontractors are adhering to schedules. Stop by your project regularly, check out the work and inquire about what is happening next. Take an active part in your investment so it doesn’t get out of hand and out of your control. If you don’t understand any part of it, bring someone who does and can advise you.
- Don’t Pay for Unfinished Work– If a contractor or subcontractor wants all the monies up front, don’t fall for this trick. Only pay for the services rendered once they are complete. If you pay up front, they have zero incentive to complete the work or adhere to a schedule.
- Obtain Lien Waivers from Major Contractors or Subs – Anyone who has worked on your construction project has the right to file a mechanics lien if the project is not paid. Establish a history of paying contractors and subs on time and then request lien waivers when appropriate. Keeping projects free of liens can be challenging, but since it is the general contractors responsibility to pay subs – you can see the problems that can occur.
3. Marketing for Sale
Your property is ready to hit the open market, but now what?
- Price it Right – Pricing your property according to fair market value is an essential step towards attracting buyers right off the bat. Overpricing your property in hope of finding the perfect buyer and hitting a home run too, often leads to stale listings and lower final sale prices than otherwise achievable and it wastes time. Don’t price a property too high or you’ll likely regret it later.
- To Stage or Not to Stage – The primary purpose of staging is to accentuate a home’s best features. It can also be to provide a vision of how a home or room may be furnished otherwise might be difficult to see. You’ll need to evaluate whether your property may benefit by staging either in the form of a quicker sale or a higher price.
- Collect Buyer Feedback – Any feedback you receive from buyers – whether it’s positive or negative – is something to consider immediately. If a buyer wants custom paint colors inside of the investment property and that’s enough to cause them to look at other properties on the market, is it really worth missing this potential opportunity? Think outside-the-box to come up with workable solutions. If the buyer wants custom colors, perhaps you could ask for a non-refundable deposit in case they back out and you’re not stuck carrying 100% of the costs. Working with an agent that seeks out buyers’ feedback creates an open line of communication for you to address any concerns in order to reach your end goal– to sell this property!
- Adjusting Price, if Necessary – Stay open minded about adjusting the price of your property. A minor price adjustment can make the difference between attracting and losing potential buyers. In the overall grand scheme of things, selling your property within a month at a slightly lower price is preferable to letting it sit on the market for a year.
4. Contract and Sale
Congratulations! You’ve finally reached the phase in your real estate investment where you have an interested party and contract.
- Negotiating Terms – While you may feel certain that the property is worth the number you listed it at (you DID just oversee and watch all of the hard work) try to consider all offers. Don’t take anything personally in real estate. Buyers are looking to score a deal, just as you’re looking to make money. While browsing each offer, identify if any terms are negotiable. For example, if a buyer doesn’t like the flooring and prefers hardwood to carpet, is there a way you can salvage the carpet that you have and get a non-refundable deposit for hardwood floors? If the buyer wants a 60-day closing period, is it possible to counter with 45 days? A first-round contract is just that – a first-round. It’s an offer. It’s negotiable. Be flexible, and communicate with your agent about the terms that work best for your schedule and your needs.
- Closing – Get the home ready to close by removing any staging items and furniture, turning extra keys over to your closing agent to give to the buyers once the funds are dispersed. If there are any outstanding repair items, make sure to get these done and verified before closing.
- Post Closing Items – Cancel the insurance you carried on the property and make sure any utilities are either transferred to the buyer or terminated. Keep all your important documents in a safe place so that your tax professional can look through them during tax season. If there were any items that you need to address after closing, such as a home repair warranty, make sure to do this according to appropriate timelines.
That’s it, you’ve made it through your first hard money investment! Now, the question is– are you ready to do it again?
About Bay Mountain Capital:
Bay Mountain Capital has been in business for more than a decade, closing approximately 2,000 loans over that time period. We specialize in financing all types of residential and commercial property investments throughout Texas. Using a common sense and value added approach, we strive to incorporate these principles into our underwriting and closing processes.
As a direct lender, Bay Mountain Capital can close a loan within one day after receiving clear title and a complete file. The process generally takes from two to three weeks, but can be accelerated where circumstances require it.
We are an asset-based lender, which means that qualification requirements are limited. Our rates and fees are among the lowest in the industry.