Budgeting for Renovations & Creating An Accurate Statement Of Work

So if you think about this example of laying tile, in a bathroom, you're telling the general contractor, the general contractor is telling their right hand man or woman or their foreman, the foreman is telling the person that owns the tile company. And then that person is telling me actual personally, that's four or five different individuals that things might get completely lost in translation. So with that, you're able to tell them, this is the exact type of tile that's going in the bathroom. 

This is the direction that you want the tile laid, whether it's horizontal or vertical, there's also the thickness of the grout lines and the color of the grout. Again, there are an exponential kind of number of ways that things can kind of go sideways. And so even if something is wrong, and you have the contract to eat that cost, you've obviously lost a bunch of time. And as we always say, time is money, or you have a pissed off contractor that says, Well, you didn't tell me how to lay the tile out. And that's true. And so there's probably going to be a change order. 

So you're going to be paying extra money so that room by room statement of work is really really important. Welcome to raising the flipping bar. My name is Derrick Marlon, and I've redeveloped over 80 properties in metro Denver. I've bought and sold 115 multifamily doors in Cincinnati, Ohio, and my team has done just under 300 single family rental acquisitions for our clients. On this show. My goal is to help you make more money, save you a bunch of time and create a well oiled flipping machine. Let's dive in. And if you want more information, head to fix and flip dot show.

Welcome back to today's episode, we're gonna be diving into rehab budgeting and building out a statement of work as a part of what we call the Big Four of project management. We talked last episode about inspecting properties, but this one's going to dive really deep and show you how to walk a property or inspect it in under an hour and hit within about 95% accuracy. The thing I always kind of crack up about is when you also see people walking around properties in kind of staring around not taking any notes, not having an iPad and then just kind of blurting out a number, we're going to be the opposite of that. Because, you know, ironically, those people are usually off by 10s of 1000s of dollars and wonder why their projects aren't profitable. 

Again, it's not really going to be a recap, but it's going to be a seamless continuation of how do we dive into budgeting for renovations of all sorts. So let's get started. On today's episode, let's kind of go over some top line considerations and quick math that we'll be able to help you out a ton. If you're doing cosmetic flips, you're going to be spending about $40 per square foot. Again, for context, this is Metro Denver, this is 2023 labor prices are ebbing and flowing a little bit. material prices are ebbing and flowing a little bit. But for cosmetic properties and projects, you're going to be spending about 40 bucks a square foot, when you jump into more significant rehabs, you're going to be spending about $65 or so per square foot. 

And the way that we like to break that out is that that's going to be you replacing or redoing roughly two to three of the major systems within a property. So on one home, it might be a sewer line and some windows on another home, there might be asbestos and it might need a full H fac replacement or repair. You know, you might be doing a roof on another one. But on average, you're going to be you know, fixing up roughly two or three of those systems. And that's going to get you to that 65 bucks per square foot. really diving into the top line numbers. Again, I kind of joked opening the episode about somebody wandering around and kind of budgeting inefficiently in my opinion, you really want to focus on the major systems, clients are typically going to spend an average of 60% of the rehab budget on one of six main areas. 

So we're gonna go over those right now you're going to want to really take out a pen and a pencil, put some notes in your phone, whatever you need to do to take down these specific information pieces. The first one is the sewer line, that's definitely going to cost you potentially 10s of 1000s of dollars. So you're gonna want a sewer scope, every single property. I know a lot of times people are out there dealing with wholesalers. There's a lot of people at an inspection and you're not able to do a sewer line inspection or a sewer line scope. That's okay. But in my opinion, you have to budget for that. The next one is the roof, we're actually talking obviously, high for low five figure investments on updating roofs. Definitely something that's going to cost you a pretty penny. So as long as you know it upfront, that's no problem you can budget and you know and put it into rehab budget accordingly. Definitely jumping down into Windows, you're going to want to replace those windows, really, unless they're within five to eight years old. 

They need to be double pane windows, there can't be cracking within the windows, there can't be seals that are broken. You're also going to want to really consider the H HVAC systems. So that's your furnace, your boiler, your air conditioner. If those are more than again, five to eight years old, you're going to want to replace those because typically when you're putting out a finished product, you're gonna get beat up in inspection. So again, that's all kind of coming into that 60% budget. The other main area or two areas, I should say, actually are electrical and plumbing. So maybe kind of give it context, what we're not talking about is keeping a kitchen in its existing format, not really moving things around just taking old outlets out, putting new outlets in, you know, old faucet out, new kitchen sink faucet in, that's not going to break your bank. And we'll teach you how to budget that accordingly in our fixture and finished package. But what I'm talking about is when you're moving things around, when you're adding bathrooms, when you're finishing out a basement and you're needing to rewire, you know, the basement, when you are moving things around, you're adding a master suite. 

Those are definitely things that are going to, you know, obviously not break the bank per se, but definitely have you spending a lot more money on renovations. And the last thing is asbestos. In Colorado, you're looking at asbestos in 1940s properties through 1980s properties, and it can be at various parts of the home. So definitely can be in the old school, you know, 1950s looking linoleum tile, if it's nine inches by nine inches, there's a good chance there's going to be asbestos in there, it can actually be in the drywall compound. And it can also be on the ductwork. So if you're inspecting a property from the 60s, that ductwork is very old, and it looks like there's that old school white athletic tape on there, you've probably got some asbestos. So again, if you take those six pieces into consideration, and Tally those up, those have a good chance to either constitute 60% of your budget or unfortunately blow the overall numbers. And really what that means is either A, you should walk away, if that person or seller or agent or listing is firm on the price. Or B you can say hey, I still really liked the property, I obviously needed to invest a significant amount of money into this property, I just need it for a lower price. So just helps you from a negotiation standpoint. So those are key when doing rehab, budgeting and figuring out okay, how much is this thing going to cost? We definitely want to dive into kind of breaking out cosmetic versus a full flip, whether it's a townhome, whether it's a single family property or whether it's a really big condo. So for us, we really don't get lucky, in my opinion to do too many cosmetic flips. And by cosmetic that typically means you are only changing out carpet and flooring, paint, maybe updating some fixtures and finishes. 

But in general, you know the kitchen is in good shape, you're not doing cabinets, countertops, you know flooring, you're keeping the hardwood floors, you're again, keeping the home for the most part in roughly the same condition, but you're just doing kind of some minor updates. We love those when we get them. But we just normally don't find that good of a deal on those. There's definitely some people that try to flip that volume. And so for them to make maybe 10 or $15,000 on a project and be in and out in a month is a good deal. We always say Be leery and be careful on that. Because either a if we didn't budget properly, your whole profit is probably gone. Or be if you've got carrying costs, and you're borrowing from private lenders or hard money lenders, one month of having that home for one extra month on your books that can kind of evaporate your profits. So just be careful on the cosmetics.

But when you get them they're great opportunities, diving into a full flip. So again, that is way way down the line from the cosmetic that we just described. And that is where you're updating two or three major systems. You're finishing out basements, as we discussed earlier, you're spending 60 to $65 per square foot. So you want to really just put yourself in the right mindset when I'm budgeting am i doing a cosmetic or am I doing a full flip. And also you can really dive into smaller multifamily properties. So typically properties that are four units. And last, you can still use a lot of this same fundamentals and philosophies to help you budget properly. The next episode actually coming up, we're going to dive into our fixture and finish package. And that's how are you fixing it up? And what are you making it look like? Because that will also dictate your budget as well. But stay with us for the next episode, because we're gonna dive in a little bit deeper. Another question that we always get asked is when to do permits. So the way that we look at it in Colorado is if you're doing what they call like, for like, and it's just standard swap outs, you actually typically don't need to pull permits. 

So think of I'm updating a kitchen, I'm taking all the old stuff out, I'm putting in new stuff, but I'm not moving sync from location A to location B or I'm not rewiring the kitchen, or I'm not adding new H vac or I'm not finishing a basement, putting an egress windows we need again, you're just kind of taking old stuff out, put new stuff in in the exact same location, you typically don't need to pull permits. You know, kind of one caveat to that. And we'll do this a lot of times is you can do an interior remodel. And it can be again kind of out like for like simple swap out. 

But let's say the roof shot will definitely pull a permit on the roof and that's a really smart thing to do. It's good for resale. gives your buyer peace of mind helps with warranties. So you can do individual line items, when you're looking at it from a permit perspective, when you dive into Should I pull a permit on the entire project, that is, when you are moving things around, you're moving the kitchen, from the left side of the house to the right side of the house to help with the flow and the layout, you are finishing a basement. And it's got maybe those little old school basement windows that we all grew up with. For people that were in this, you know, 60s 70s and 80s. Now they need to be nine square feet, you need to cut them all the way down and make it so that you can crank that window open, and somebody can get out in case of a fire. And actually, more importantly, the window well needs to be deep enough so that a firefighter could get in with an oxygen tank on their back. 

So those are things that you definitely want to start pulling permits for, you're going to want to factor in typically a couple of extra weeks of renovation timeline. The good news, as from the budgeting perspective, you're only talking about a couple $100, typically $1,000 or less to pull those permits. So it's normally not a cost that makes it prohibitive. You need to be really careful from the timeline perspective. If you think about it, on average, if somebody is there holding costs is $5,000 a month, and you're adding an extra month of project, you just need to factor that in upfront. So on average, we normally pull permits right now currently in 2023. And if I look back over the last couple years, probably about 50% of the time, because again, we're doing a lot of like for like swap outs. And then if we are going down that road, we're going to want to pull permits. 

Each city and county within metropolitan Denver is also a bit different. The city and county of Denver in particular is, in my opinion, unfortunately, understaffed. And so it takes longer to pull permits. Working in cities like Arvada Englewood centennial, Adams County, those folks definitely have, in my opinion, a little bit more properly staffed departments. And so they can get you through permits a little quicker, kind of just something to put a pin in. Again, we're doing what we call property redevelopment. And so that is taking properties and fixing them up, we're not usually adding on an addition on the back, we're not popping the top, which means taking the roof off and adding a second story. We're definitely not doing new builds, and we're not doing scrapes so can be very lucrative, but it's not our sweet spot. So just kind of keep that contextually in the back of your mind that when you're thinking of these numbers gets for kind of as in place, fix and flips.

Hey, investors, thank you so much for listening to today's episode of raising the flipping bar. I'm Derrick Marlin, your host and today's sponsor is the elevation academy. The academy is an intensive one day training session where we teach you every single step of our system to increase your profits, find great properties save you time, avoid costly mistakes. Essentially, it is your roadmap. And it's 105 step system to your fix and flip success blueprint. So sign up today, we've got an academy coming up in a couple of weeks, we only are taking 20 guests, and we've actually got a money back guarantee. So if you try our system, you put in the old college try and you don't find it straight benefit, we'll refund every penny of your money, but we'd love to have you join us for the elevation Academy. We've got info on our show notes, and we'd love to have you join us. Let me give you another thing to really think about I know we've mentioned it, it's a common theme do not over improve for the back end resale price of your property, or ARV, which stands for after repair value. 

And I'm gonna give you a perfect example is we just finished a condo in the cap Hill neighborhood, which is by the capital capital, obviously. And it is we were listing it for $375,000. So fixed up there were not of a lot of other comps in that area that were one just fixed up in general, and to barely look like they were a true beautifully done, fix and flip. And so instead of using our kitchen cabinet designer, and doing custom cabinets, we bought the cabinets from Home Depot. And the quality is still really really good, especially for that price point. But you don't need to pay that extra money to have the kitchen cabinet designer come in. You don't need to have custom kitchen cabinets, you don't need to have some of the bells and whistles on that. And that actually saved us about $3,000 in material costs. And we bought them that they were readily available. And so actually you could get the project done faster. 

The lead time on those types of cabinets when we use our designers is normally between two and three weeks for stuff that's relatively standard and essentially in stock. So it also helps speed up our project because we were able to be in and out of this property in about five and a half weeks, you know, and actually we're under contract for over asking price. So it wasn't something that suffered on the quality end. So it's definitely something to keep in mind do not over improve for that ARV. So that's kind of that summation of how do you budget from a rehab perspective and again, going back to we're able to do it for ourselves and help teach our clients to walk a property in under an hour be 95% on the money as far as the rehab budget is concerned. 

And then you have a contingency. And that's what catches that extra 10%. So when you're doing your contingency on every property, we have a 10% contingency of your budget. So if you're budgeting 100 grand, obviously, your contingency is going to be an extra 10,000 bucks, if you're doing larger properties properties that are 2500 square feet or greater. More importantly, in my opinion, if you're doing older properties, we've done a couple from the late 1800s, I think the oldest property that we've done is 1896. And you're just going to find crazy stuff that goes on with those properties. So older properties, always, in my opinion, regardless of the size, budget 15%, for your contingency. So those two things kind of married together, get you essentially, hopefully 100% on the money from a budgeting perspective, let's jump into the second part of our big four of project management, which is called the statement of work. 

Okay, so for the Statement of Work, again, this is part two of a four part series, if you will, on project management, we're going to use the acronym so w obviously stands for statement of work. And what that is, is it's a detailed description of exactly what is going on and going in every single aspect of the property. So at elevation, we do two different ways to create your statement of work. The first one is a single page format, obviously, just one sheet of paper or one spreadsheet. And the second one is a room by room format. So on the single page, what we do is we use that as a starting point for every single project, whether it's a simple condo or townhome, whether it's a huge 5000 square foot fix and flip, we use that single page as the starting point. 

Typically, the single page for us is about 35 rows, we do it in Excel, and it's broken up into four different sections. The first section is for labor and materials. And that's essentially who's paying for labor and who's paying for materials. When we run our flips, we're typically going using general contractors. And it's definitely a little more expensive. But a lot of those budget line items are falling under the general contractor. When you're using kind of a traditional contractors, they're doing about 60% of the work. 

They're subbing out the other major systems, actually, there's certain things that you're going to be paying for, and there's certain things that the contractors are going to be paying for. So you want those areas detailed and line items out. The next one is the actual budget amount for each individual line item. So whether it's $1,000, for plumbing $2,000 for H fac $3,000. For cabinets, it just gives you a line by line break out of how much are you spending in each individual area. And then you go to the notes section, in my opinion, the notes are actually the most important. And here's the big reason is when we go to bid out and select a contractor for a specific project, we're going to give them the one page statement of work. And it helps really achieve two things. One is it helps give you the ability to have an apples to apples comparison on how much you want their bid to come in for, you're going to ideally give them a range, you're gonna say, Hey, here's 35 line items, here's a detailed description on the notes of exactly what we want done, so that there's no miscommunication. 

And we try to say within about 5000 bucks, you want to tell them for example, Hey, my budget is between 55 and $60,000. It shows that you a know what you're doing. B It helps save them time. And C it makes it so that again, you can kind of have a comparative analysis between two or three different contractors and getting in the right bids. So in those detailed notes, it also helps them transcribe that to building out a bigger statement of work, and it gets them. Another thing is they will get their bids back to a lot faster. If somebody's having to do something from scratch, it's going to take them time. 

And so if you show a property to a contractor on a Monday, you might not get a bid back until Friday, you've obviously burned a week, on average, with current holding costs, you know, you're spending between four and 600 bucks a week and interest if you're doing private or hard money. So truly Time is money. So it'll help you and give you the ability to get an apples apples bid back. It'll speed up the process. And it'll really show the contractors that you know exactly what you're doing. The last aspect that's important for the single page statement of work is it becomes an addendum to the contract that we signed. 

So a couple episodes from now we'll dive into all the different contracts and due diligence and documentation that we use, you know, when we do our property redevelopment process, but it helps it so that it's very clear for both sides. And it's fair for the contractor in my opinion as well. And it enables you to minimize the disputes, minimize the gray area. So a good example of what we say when we're doing our single page statement of work is when you're putting in new baseboards, there's different widths and thicknesses of those baseboards. So maybe they work with another investor and they only put in three inch baseboards because they're less expensive. But in our fixture unfinished package, we typically recommend five and a half inch baseboards so those big tall nice view Before baseboards make the property look quite a bit more high end, in my opinion. And there's a little bit different costs associated with that material. So if you don't have that in your Statement of Work, they might just a put in three inch baseboards, or you're going to have kind of an issue when it comes to, you know, timing, from a budget perspective of, Okay, I gotta pay this first draw, and they thought it was three versus five, you know, that's a big discrepancy. So again, just kind of a little example of why am I doing this single page statement of work, we actually use the single page statement of work on condos and townhomes. And we use that for the duration of the project. And the reason is, is a lot of times one area of the of the property or the project flows into the next area.

So for example, the living room, the dining room, and the kitchen of a condo, or a townhome, are all very similar, you're going to have the same paint colors on the walls, you're going to have the same baseboards, you're gonna have similar hardware, so you don't need in my opinion, to break out every individual room. Versus the next section we're gonna get into, which is the room by room description. So if we're going down, and we're thinking about a larger project, we actually have a spreadsheet that every single tab is a different room within the home, because a lot of times you are going to be doing different things and different ways to finish out a specific property. So what we do is that is again, a way to really kind of help protect yourself, help cut down on communication errors with the contractor. And so what you might have in a primary suite, typically, which would mean nicer fixtures and finishes in the bathrooms, different styles of tile a little bit nicer faucets, nicer mirrors, for example, you might be finishing hardwood on one floor, and you might be carpeting on the next floor. So each individual room needs to have all the different details. 

And there's typically a couple of different ways that we do this. And if you think about it, again, we have categories for labor materials, who's paying for labor, who's paying for materials, and then we've got a note section that's very, very detailed of exactly what's going on in each area. And we actually go as far as putting photos in the spreadsheet. So I'll give you kind of an example of you know, kind of the old school telephone game, when you know, you were probably little growing up. And that is if you're sitting in a circle and you tell one person one thing and money or and it goes all the way around the circle, you're gonna get a crazy different answer at the end. So if you think about this example of laying tile, in a bathroom, you're telling the general contractor, the general contractor is telling their right hand man or woman or their foreman, the foreman is telling the person that owns the tile company, and then that person is telling the actual person that laid the tile, that's four or five different individuals that things might get completely lost in translation. 

So with that, you're able to tell them, this is the exact type of tile that's going in the bathroom, this is the direction that you want the tile laid, whether it's horizontal or vertical, there's also the thickness of the grout lines and the color of the grout. So again, there are an exponential kind of number of ways that things can kind of go sideways. And so even if something is wrong, and you have the contract to eat that cost, you've obviously lost a bunch of time. And as we always say, time is money, or you have a pissed off contractor that says well, you didn't tell me how to lay the tile out. And that's true. And so there's probably going to be a change order. So you're going to be paying extra money. So that room by room statement of work is really, really important. The way that I always say it is I kind of budget and allocate between two and three hours per project, just to sit in the property seems kind of cheesy, but I just bring a camping chair, bring the laptop, we're lucky we're at a point where we've got a phenomenal project manager and he handles that for us. 

But when I was doing this myself, but on some music and just go room by room, sit in that room and look at all the different aspects of the property and detail and dial in exactly what you want. Another kind of you know, pro tip or flip tip, as we call it, is pick the way that your brain works the best. And I actually go from the top of a room and scan down to the bottom. Or if your brain works a little differently work at the bottom of the room and kind of scan up, you'll be super surprised and shocked at the amount of details that you'll either catch or miss. If you don't think about it that way. If you just kind of come into a bedroom and say, Okay, well, what am I going to do, you might just miss some of those details. So again, kind of go top to bottom, or bottom and top whatever you like better. And I think it really helps you from a budgeting standpoint, and building out that statement of work. So again, kind of think about a two to three hour timeframe, you will save yourself so much heartache, brain damage and money in the future by just spending those two or three hours up front. The other thing that we do at elevation is we actually we just order them off of Amazon, but we've got rainbow colored so they're stupidly bright. 

You can't miss them, but we have hanging folders at the project. And so in those hanging folders, we'll dive into all the different aspects of what we put in there. But essentially, we take that statement of work and we put it on site at the project in a hanging folder. So that again you're trying to cut out communication areas or Time errors of what the person laying the tile or the person that is setting out the kitchen cabinet design. So you have everything on site, so they don't have to then call their boss and then that boss has to call the general contractor and then that person has to call me and maybe I'm on vacation. And things should work far more seamlessly. So again, have everything on site, have it in the folder, and it helps you really keep things dialed from a Statement of Work perspective. And, you know, really let you know exactly what's going on. We kind of talked about it. But what we do is we actually do that as a kickoff to the meeting. So a lot of times we'll have our general contractor, the subcontractor, everybody involved and everything kind of reverts back and goes back to that folder. So the one thing you're going to want to do with a single page statement of work, when you have them in those hanging folders is you're going to want to take off the price. 

So really, it's just kind of helps protect the contractor because it's really none of their subcontractors business who's getting paid what, as long as you've predetermined what the budget is, you guys have agreed upon it, you've signed that contract, you're good to go. So you want all the detailed notes and descriptions in that single page statement of work. But you really do not want the pricing, the detailed room by room statement work that actually doesn't have any area for pricing in our, you know, software in our form. So not really to worry, but kind of the end takeaway messages, leave that on site. Inherently, sometimes things will get trashed, especially when you're doing drywall stuff will get taken off the walls, it won't get put back up properly, I would put that back up. If you need to fill out a new scope of work, put that back up. And it's a way to help just kind of keep the process going consistently. 

Again, same saves confusion, saves time, saves energy and hopefully saves you money. So couple final thoughts as we wrap up this first episode in the Big Four of project management, at least as we've said, on rehab, budgeting and scope of work. In my opinion, they're really key to running things successfully. So that you can do it at scale. And I want to really help our audience out that was going to be with us from where I started have kind of a one person company to a small couple person company we're at now or if you are farther ahead than we are, and running scale and doing flips in multiple markets, having in house crews having multiple project managers. In my opinion, one project manager can run six to seven projects at once, and run them really efficiently. But you've got to do it by having the rehab budget dialed and the really detailed scope of work on every single project. The other thing is don't get lazy. 

I know it's tough, we've got an amazing contractor that we work with, I think we're on like our 23rd project with him for either our company or our clients flips. Don't get spoiled, don't get lazy redo this every single time. And the great thing is, is when you get a crew that has familiarity with you don't actually know and maybe catch mistakes where you screw up. And they'll save you time and energy. Another perfect example is one time we went and we get our paint from Sherwin Williams. And they transpose the four digit code that corresponded to the specific paint, and they got paint and it was purple. And they knew before they even put it on the walls, obviously elevation doesn't paint their bedrooms purple. So something got screwed up at the paint store. So they can catch things if you have that rinse and repeat type system. So having that dialed in, is really, really important. The way that we always kind of joke is people say, Well, why aren't you guys doing something on HGTV? To me, it's because we are organized. And we don't have a lot of drama. 

I mean, there's definitely disagreements. But there's not times where we're pissed off and screaming at contractors and they're screaming at us if you have an organized and a well oiled machine, and a system that's going to help with, you know, brain damage, organizational issues, communication issues down the line, and it's going to help again save you time, which is also money. And then again, don't be the investor from a rehab budget perspective that just wanders around the house kind of stares at things and just blurts out a random number. Those are the people that got bailed out, in my opinion over the last two years. And because everything went over asking great they made a bunch of money, but that is not the case. Also, if you are bidding against other investors at a wholesale property, there's five or six people walking around, if you can have your numbers dialed in, theoretically, you could maybe pay a little more for the property and properly outbid, or conversely realize, Oh crap, this is gonna cost me a bunch more money. 

This is my highest and best offer and take it or leave it you just got to move on. So definitely really, really important things as we dive deep into project management. Stay with us on our next episode as we're going to dive into fixtures and finishes and the timeline. But I really appreciate you joining us and we'll catch you guys on the flip side. Thank you so much for listening to raising the flipping bar. My goal is to help you successfully and profitably redevelop properties in competitive markets. And I encourage you to listen to some other episodes on this podcast. If you're a new investor, make sure you subscribe or follow raising a flipping bar on your favorite podcast platform. And make sure to share this episode with someone you know would enjoy it had to fix and flip dot show to stay up to date with future episodes of raising the flipping bar My name is Derrick Marlon and I'll catch you on the flip side