387: The Step-by-Step Guide to Flipping Houses and High-ROI Home Renovations w/James Dainard

This is Real estate rookie episode 387.

So you want to tackle your first flip, but you're not sure if you're doing it right. Stay tuned. I'm Tony J. Robinson, your host for today's episode. And welcome to the Real Estate Rookie podcast, where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Now, look, we've had so many rookies who've had their first flip completely fail or at best, break even, which is why today we are speaking with none other than James Dainard. James has done over 3,000. Yes, 3,000 flips. And we'll be sharing with us today how to plan your first flip for success. So, Jimmy D. Welcome to the Real Estate Rookie show, brother. Excited to have you on, man.

Oh, I'm excited to be on. This is my favorite topic.

And obviously you're the king of doing this the right way. You learn a lot of lessons along the way. And what we're. I think the goal of today's episode, James, is to talk about the ROI on, on the renovations, right? Because there's a time and place where maybe certain things make sense and certain things don't make sense. So I think our, our big question is what is it like when you don't have a plan going into a renovation? And I'm sure you have some stories like that and how did that turn out for you?

Yeah, it, the planning is essential for flipping. I always look at this a couple different ways, right. Like when you get into flipping, you're starting a new business, and it's no different than any other business that you're setting up. You know, like if I was going to go to go buy manufacturing, sell something on Amazon, I need to understand the cost and the plan for how to actually sell and make money on that. And so for flipping, you got to be prepared. And because it can have huge, I mean, so when you're flipping houses, there's a high reward in there. There's, there's a very high return, but with high rewards and high returns, there's high risk. And the better your plan is, the less risk you have in the deal. And so by setting up the right processes, you can substantially drop the risk.

And I want to get into how you're coming up with these plans, but give us a horror story first, Jimmy, like what's maybe a flip that you jumped into where you didn't build that plan out first. That really gave you this kind of come to Jesus moment. Of, okay, we're only doing this with, with a solid plan in place, moving forward.

And we, and we all have those, you know, I hear a lot. They're like, oh, well, James, you've been doing this a long time.

It's like, people make mistakes and they're like, they don't want to even talk about it because they're like, well, I made this mistake. I'm like, I make mistakes. Every project, and that's what everyone needs to realize is on every project you learn something new and you go, okay, I need to not do this next time. I'm having an issue right now in Newport beach on a renovation. This, that's getting a little out of control because I didn't plan it out correctly. But now I'm pulling it back in. But it can have massive downside if you don't plan it out. When I was new, a new investor, I was a wholesaler. I was selling a lot of off market deals. I started transitioning to flipping. I went from, you know, wholesaling to flipping condos. And that was simple. I didn't have as big of a plan that was needed. The margins were smaller. I needed to do some flooring, some paint, some countertops, appliances, and I could flip the house. And when you have a smaller scope of work, you can get away with that a lot more because there's a lot less variables in the deal. And then I made that detrimental step where I got a little bit cocky. I thought I was making a lot of money and I was really good at it. And I went from flipping a condo to flipping basically almost a borderline teardown. And because I saw stars in my eyes, like the profit's bigger. I'm going to go do this. So I tied up a deal off market. I wasn't happy with what I was going to make on my assignment fee. I opted to buy it. And I was like, I'm going to flip this myself. I made the normal mistakes. We all make those key bad decisions, which I hired a friend to do the construction work. We walked through the property, me and him kind of guessed our way through our scope of work. Like we needed to do cabinets and flooring and just update the basics. And I hired him on time and materials. And again, a great friend of mine, I wasn't worried about his integrity, but. But he also had never flipped a house and ran construction that way as well. And so fast forward what had happened is a project that should have took six months and $90,000 if I had actually planned it, budgeted it, hired a general, went 12 months, and it turned into $200,000 because there was no management and plan behind the cost. And in addition to during that time being exposed to a deal that long, the market blew up during that time and subprime mortgages went away. 2008, and I went from selling this property and I had bought an amazing deal. I paid 275 for it. I was gonna put in the 90, sell it for 500. That's a hit. But I went from making money to then losing all of my money because my costs went out of control. My timetables went through the way, extended, it took too long, market adjusted on me, and it went from gonna make a huge return to getting wiped out. I lost all of my down payment, all of my carry costs. Any doll put into that property was not returned back to me. And I sold it for barely the debt just to get out of it. And if I would have planned it better and walked into it with a solid plan, we could have executed a lot quicker. We actually would have hit the ramp up before the market burst and I probably would have made double what I thought. And so if I. And that was when I really had that going. Okay, I need to do this different because I know I can make money doing this, but what I just did was a complete fail.

I'm laughing, James, because we had a. Well, first, I appreciate you for sharing the failures because I think you're right, A lot of people don't share those enough. But I think Ash and I have both on this podcast try to be vulnerable about when we make mistakes in our business. And I'm laughing as you're sharing the story because I had a very similar experience myself last summer, summer 2023, where we had been flipping a lot of turnkey short term rentals in the Joshua. Joshua Tree, California market. And it had just been going bonkers since COVID So we did pretty well in that market for a. But the last flip we did out there, very similar to what you said, right? We had taken this property down, had a really good spread on it to begin with. Our usual contracting team was tied up. I think we had like, you know, small peanuts to you, but I think we had like four flips going on at the time. So that was all our crew could take. So we were just sitting on this project for, I don't know, like three or four months while they tied up these other deals. Now by the time they had finished that, the market has started shifting, shifting, shifting, shifting. And then we went over budget on this slip as well. So we ended up having to write a check and we didn't even try and sell it. We couldn't even sell it because the market has shifted so much. We wrote like, dude, I don't know, I think it was like a $200,000 check we had to write to refinance this thing just to keep it. So we, you know, we, we definitely learned the right and wrong way to, to go into a project with a business plan. And now I feel that we're better investors because of it, man. So now I want to go back to actually building out what this plan looks like because it's easy to say have a plan before you start a rehab. But I want our rookies, James, to maybe walk away with some tactical steps of hey, how do I actually build this plan out? So if you can kind of take us from the beginning, I want to know what it looks like as you build this plan. But we're going to take a quick break to hear a word from our show sponsors and we'll get to that after the break.

My assistant's great. He's also terrible because he's me. Turns out multitasking isn't a great business model. Belay knows real estate investors grow faster when they spend time closing deals not.

Buried in admin work.

That's why they built the Executive Assistant Task Calculator, a free tool that reveals how much valuable time and money you're losing every week. Once you know your number, Belay can match you with a US based executive assistant to take those tasks off your plate so you can get back to building wealth. You're just one assistant away from doubling your deal flow. Text Bigger Pockets no space to 55123 to download the free calculator today. Landlords, here's a quick tip. A standardized checklist for property inspections can save you time, money and headaches. Preventative maintenance means fewer expensive surprises later. Want to save even more? Rent ready helps you stay on top of rent collection, lease management and maintenance requests all in one easy to use platform. And right now, you can get six months of rent ready for just $1. With promo code BP2025, visit rentready.com that's R E N T R E D I.com and use code BP2025 to get started.

Want to invest in real estate but don't have the time or know the best local markets? Rent to retirement has got you covered. Here's the deal. They've helped thousands of investors just like you Find turnkey homes across the best US Markets. And best of all, they do all the heavy lifting for you. With over 255 star ratings on bigger pockets, Rent to Retirement experts help you build strategies to retire early through real estate. And right now, Rent to Retirement offers some amazing incentives on turnkey new construction properties. Just for example, you can get up to 30% off new build prices, or you can get 0% down loan options or interest rates available as low as 3.99%. So don't miss out. These deals will not last. Text REI to 33777 or visit biggerpockets.com retirement to start investing in top cash flow markets today.

All right, so we're back with James Danard. And, you know, we just talked about some massive failures he and I both had when it came to rehabbing properties. But we want to talk about the actual business plan and how you put it together. So, James, again, say you're starting from zero. Clean slate. How do you actually go about building the business plan for a rehab project?

Yeah, so as flippers and investors, one thing I don't want to do is speculate and throw mud at the wall and gas. And so when you're, when you're flipping a house, you know, it's, it's funny because people look at a flip, they're, you're buying a house, you're doing a full renovation, you're going to make it beautiful and then sell it for all this money. And that does happen sometimes, but it also, you can also flip a house numerous different ways. Sometimes we're just cleaning the carpets, throwing a fresh coat of paint on and flipping the house that way. And that comes down to data. Looking at a project and then making a tangible plan and going, okay, what do we need to do to make profit? How do we revanize this?

Yeah, I just want to say because you're, you're hitting on something super important. I want to make sure we really drill this home for every single person that's listening. How much of a factor does emotion play when you're building out your business plan versus data?

Almost every decision I make in investing is all based on data. It is, we look at data, and then we build the plan behind the data. And where we make our profit is putting the right plan on the deal, not buying the best deal. Because we, that's where we have a lot. What we like to say is we invent the returns because everything is a mathematical equation in this business. And then putting together the right plan and a lot of many of the deals that we buy, and we buy a lot of property in Washington are deals that anybody could look at. They're listed on the market, they're for sale. People walk into them and they're looking at the data points. They can't quite figure out the plan and they pass. And then we buy the property and we make $100,000 on it. And it's because we're, we're surgically looking through these things and it comes down to just some very simple core steps. Like you can't look at every deal the same, not every deal supposed to be done the same. And you know, as is, we're trying to find that next opportunity or we're committing to buy a property. You know, we follow the same process every time. And we train our team this way, from our acquisition brokers to our project managers to our listing brokers. And you know, for every property that we look at, we pull the comparable data and we actually pull two different sets. We look at what the highest price set is like what is the highest possible value for this property based on square footage, bedroom, bathroom count and finishes. Then we pull our middle comps too. What are stalling for a little bit less. And we actually pull those as well. What are the bedroom count, bathroom count, and what are the upgrades at that point? So we do this before we even go walk our potential investment. Because one mistake that investors make a lot of time is they get some off market deal, it hits market and they just race out to the project and they go, I want to look at this because I think it's a good deal. Whereas we like to pull the information first and go visit the site with our printed out comparables. We then make two different written scopes of work. When we're walking through that project, we're not guessing our way through. We're going, okay, to meet this value, we need to match the same amenities, bedroom, bathroom count and upgrades. And we fill out our checklist going, okay, what do we need? Well, this house had new vinyl windows. We need 12 windows. This house has hardwood floors, it's got new cabinets, it's got new countertops. And we document that all out. Then we also do it for our middle of the road flip, which maybe it doesn't have new windows, it doesn't have new garage doors, but it has new cabinets, cheaper upgraded flooring, and painted millwork all the way around. And so we list out the two different scopes of work. We then go back to our office and then we put them into a Construction calculator going, how much is this going to cost to improve it this way? How much is it going to cost to improve it this way? And then we put it into a Performa and we select the project based on the return, not what the highest possible price is. Because that is one mistake is people chase the highest possible price, but you can also way overspend to get to that. It's that it's not identifying the right scope of work for the exit. That's where investors getting themselves in trouble all the time. And the data's all there in front of you on your comparables. It's about printing that stuff out and taking your time, listing it out.

Jimmy, so much good information there. And I want to go back and circle through a few things. First, I just want to. I want to really tie down on the fact that you said all of your decisions are based on the data. And I think a mistake we see from a lot of rookie investors is that they get way too emotional in the. The deals that they're looking at, especially when it comes to flipping. They. Everyone thinks like hgtv, right? And they're like, man, this house is so cute. And you know, I could see this and I could see that. And they let emotion start to drive their decision versus the data that they're looking at. But I just want to, I want to recap what you're saying here. You're saying that before you even go walk the property, you've already looked at the comps, identified what those comps have, and then you're using that to build out your scope of work. And while I'm saying these things out loud, James, if you can maybe just define for us quickly what exactly is a comp and what is scope of work for Rickies maybe aren't familiar with those phrases.

So a comp is a comparable. So a product that's within a certain radius of your property. And things that you want to look at homes that are selling in your immediate area, that could be a quarter mile, it could be half mile, it could be a mile out, depending on your geography, geographical location. We are looking for properties of similar architecture. You know, if it's a Rambler, we're looking for homes that have sold recently, in the past six months that are a Rambler, that are like, for like, you know, we're, we're. They're homes that would. So that are selling that have the same bedroom bath count, or they can have the same bedroom bath count. They're within the same square footage within usually about 10% is what we target. They're the same style of home. And then that gives you the data point to say, hey, if I put these fixtures in, put these upgrades in, the market is willing to pay this value for the property. So it's recent sales, solds, pendings and actives of similar homes that indicate what the value will be done. When you're done with your scope of.

Work, do you put more value between the sold pending and active? Does one hold more weight with you when you're looking at the comparables they do?

You know, it depends that the market that you're in. So when the interest rate started skyrocketing about 18 months ago, we put all of our weight on pendings solds from. Cause as the rate was going up quick, you know, you can't keep up with that. The market's different. If you have a comp from three to four months ago with a lower interest rate, that's a different environment. So you can't really use those data points. So when, when the rates are skyrocketing, we only used pendings in today's market, it's stabilized out a lot more. So now we're looking at pendings cause we want to see is there any growth potential and any pending property. We talk to the brokers, find out how many offers they, how many buyers came through. That tells us whether we think we can kind of raise the value a little bit. What is the market activity in addition to right now there's a lack of sales. Like, sales are down 30, 40% nationwide, so the data points can be hard to find. And so we do spend a lot of emphasis on sales that were actually 12 months ago because we feel in our market, the market was actually worse 12 months ago. And the reason we like using those data points as our value indicators is because it gives us a lot more conservative underwriting. And so I would say it's. It depends, you know, depends on the market that you're in. In a flatter market, we use pendings and sales up to six months. If we're in a high, if we're in a volatile market, appreciating or depreciating, we're going to focus more on the actives and the pendings because that's telling you what's going on in the now.

I do think, and I'm so glad that you, you, you touched on that piece, James, because I even for me, like, I see sometimes new investors using comptrum like a year ago, and it's like, guys the market has shifted so much in 12 months. You can't use that as a. As a good data point. So I want to get a little bit of insight. Right. So the first step here is building out your comp set, using those comps to help you lay the foundation for the best business plan for this specific property. And again, you made an incredibly insightful statement, James, when you said it's sometimes the higher sales price doesn't always give you the best return or give you the most profit. So I love using that approach. Now, once you've actually solidified what your specific scope of work is like, what the actual changes are that you'll be making to this property, when you're starting a project, how do you actually stick on budget? Because I think that's where a lot of people mess up. They say, hey, I'm going to spend 50 grand on this rehab. And you know, it's going to take six months. And they end up spending 100 grand and it takes a year. So what are you doing to kind of keep your budget on track?

Yeah, that's a great question. That's been a painful thing the last 24 months. Construction, it's been tough even for someone who's renovated a lot of homes because there's, you know, the pandemic hit. There's a lack of resources. And, you know, with lack of resources means it's hard to find guys. It's harder to. The harder to find, the more you have to pay. And so things that we do to stay in budget, right? So as we go through a project, we pull our comparables. We make our scope of work. We make two different scopes of work. We put it into our construction calculator, and that helps us keep our budgets tighter. How we've came up with how we compute our construction costs, because this is a question I get all the time. They're like, james, send me your construction calculator or tell me my rehab costs. But you're in a different market with different labor, different materials, and different expectations from the end buyer to buy. And so this is going to vary for every investor nationwide. But what doesn't vary is a cost to install an item and a. An allowance cost of the finish that you want to put in your. Your project. And so we spend a lot of times, every 30 to 60 days, we interview our contractors and talk to them. You know, I'll call up my furnace guy and say, hey, what's the going rate on a furnace right now? I've seen my bids starting to elevate up. And he's going to educate me on different types of things. Like, hey, maybe the coils are in high demand, or there's a. There's a material that's in. Or that's in low. High demand and low frequency and is causing price to. To explode up. So we talk to our trades all the time, and we update our pricing. Our construction sheet is based on what they tell us. So if I'm talking to my furnace guy, he's going to say, hey, the cost of the furnace now is now $2,500, and I charge $900 to install it. That's how our calculator is broken out. We need to install one furnace. We have the trade that gave us the install price and what the material cost was, and that calculates our cost. So the more granular we get, the tighter our budgets are. So how we've broken down our budgets, it's broken down by install and materials. How you can control your cost is by having that broken out at any given time. I can swap out my materials. If I'm going over. If my furnace guy is now charging me $200 more, well, maybe I need to go source a furnace that's $200 cheaper. And so that's how we stay in budget. It's broken down into the labor and the estimated cost of the material. And it gives us, as the investor, rights to control things that we can't control, which is maybe labor.

So are you building out then, James, the entire budget from top to bottom before you close on the property, or are you typically closing first and then kind of tighten up the budget from there?

So we tighten our budget up before we close. We do it inside of our feasibility. And the great thing about, you know, the industry that we're in, you know, there's a lot of resources out there that you can go in and fill out a construction calculator. Fairly simple. Like our project, it's. It's fairly simple to do. We have our scope of work checklist, which calls out windows, how many windows we have, how much square footage it is. And it's basically an input checklist for my team. They can go right over to my construction budget sheet and just fill it out, and it automatically calculates those costs. The time spent is more the interviewing and updating the sheet every month, because as long as we're staying on top of the cost, it's very easy for us to input it all in. And we know that these costs are all based on historical and what our trades are Quoting for us. And I know it sounds very overwhelming sometimes. It's like, wait, you got to interview all these people? But you don't need to interview everybody. It's more just your core cost items. It's. I just need to know what my electrician's charging, what my plumber's charging. I know my appliance company can give me a quote for appliances. My cabinet company will tell me how much a set of kitchen cabinets cost. It's not that hard. You just have to ask the question. And so by. By having it in the right format, you can go through, input all these. These items from your checklist, and we can create a budget in 10 minutes in our office that's going to be about 95 to 98% accurate.

And I actually sold that process from you because you shared that with me a while ago. And now when we're talking to our crews, I'll say, like, hey, you know, sit me down and let's talk through what your different prices are for these different things we might need. And it definitely has helped with projecting out the budgets for these different projects. Now, let me. Let me ask one last question, Jimmy, because I think for a lot of our rookies that are listening to this now, they understand, okay, how do I put that budget together? But the other big challenge is how do I actually find the tradespeople to do this work? And, you know, obviously, you've got a really strong network in the Pacific Northwest, but say I picked up James Danard and I dropped you in Columbus, Ohio, right. And you're starting from scratch. What are you going to do to start sourcing these different tradespeople to start getting these numbers?

Yeah. And part of setting up your plan, right, is sourcing your vendors and your general contractors before you create your budget sheet. Because if you don't know what the pricing is, you can't really create the budget. And another very simple way to doing that is as a new investor. I can call three general contractors, have them come, bid two to three projects for me. As practice, I can break it down, price per square foot on scope of work, and go, okay, roughly, this is about where this guy's going to charge. And so there is simpler ways of doing that as well. But the key is finding the right people. Because if you hire, there's. There's general contractors out there that work retail, Right? They do custom work. They're going to charge a lot more. They give a much more. White glove service is a different experience. There's general contractors that are going to Be set up for like insurance restoration. They're very expensive and you have to find the guys that work inside of your business. Right. And there's a mass group of contractors that work for flippers and investors. And the reason they like it, they get volume, they get paid fast. There's not a lot of personal opinion. They just have to do their scope of work. The homeowner's not changing everything or saying I want this my way now they don't want that custom features and so you have to source them out. The best ways to do that is networking with investors. Who are they using, who have they had great experiences with. The second thing you to do is drive for dollars. People talk about driving for dollars is to go find an off market deal. And it's, it's to save money, it's to create more, to create more profit that's going and finding a deal, but it's also finding the right resources. So a lot of like what we like to do is look at any potential flip property that was sold. Like we can see any fixer it was sold on market. We turn it into a drive list and we drive those and see who's working there and talk to them. And that gets you general contractors that are working for investor on a flip and they understand your business. So get out there, pound the road, see who's working, who are they working for and then start building that database.

So James, dude, I love talking to you every single time because I feel like I selfishly learn so much about the, the rehab process. So I, I want to get into how you're actually building, putting the team around these slopes because I know you've got a really unique process for bringing the real estate agents into your rehab process to make sure you're actually getting and making those right decisions. But before we jump into that, we're going to take a quick break to hear a word from our show sponsors.

You know you're in trouble when your assistant is also you imagine getting hours back each week so you can focus on growing your portfolio, not managing busy work. That's the reality with Belay. They match real estate investors like you with remote staffing solutions that save time and help you scale faster. Because the truth is you're just one assistant away from spending your time where it matters. Finding deals, funding opportunities and closing contracts. Belay even created a free tool that shows you how much time and money you're leaving on the table by not delegating. Want to see your number? Text biggerpockets. No space to 55123 to get Belay's free executive assistant task calculator inspecting your rentals again. Here's a pro tip. A simple checklist makes sure nothing gets overlooked. It saves you time and costly repairs down the road. And when it comes to managing your rentals, Rent Ready makes everything easier. Rent gets paid on time, leases get signed online, and maintenance requests don't get lost in your inbox. And if you're a BiggerPockets Pro member, I've got great news for you. Rent Ready is already included in your membership for free. Don't leave it sitting on the table. Log in to your BiggerPockets Pro account and start using Rent Ready today.

Do you want to invest in cash flowing rentals but don't have the time to manage the properties? Is your local market too competitive or expensive to invest in? Rent to Retirement offers new construction turnkey investment properties that you can buy with as little as 5% down and rates as low as 3.99%. Their team handles everything from financing, management, insurance and more so you can live where you want and invest in the markets that offer the best returns. Rent to Retirement has the best reputation in the industry with more five star reviews than any other company on the BiggerPockets website. To learn more, visit biggerpockets.com retirement or just text REI 233777 to start investing in the best markets today.

It's 3am on the 6th and you're wondering if you should text your tenant about rent. Here's a better idea. Don't with avail. Rent collection runs on autopilot. Automatic reminders go out payments land directly in your account. Late fees trigger when needed. Tenants can enable autopay and with fast pay you can get paid as soon as the next day. Sign up for free at Avail co biggerpockets. That's a V A I L co Biggerpockets Avail handles rent collection so you can actually get some sleep.

They say the best offense is a good defense. In sports that's true. In life, it's called having life insurance. If you're new to life insurance, you're not alone. A lot of people put it off, assuming it's something for future them to figure out. That's where Select Quote comes in. They make the process ridiculously simple. For over 40 years, Select Quote has helped more than 2 million Americans understand their options and and get the coverage they need. Over 700 billion in coverage and counting their license agents compare plans from trusted top rated companies to find the right policy for Your health, your lifestyle and your budget. And they do it for free. You can even get same day coverage up to $2 million with no medical exam required. And if you've got a pre existing condition like high blood pressure or diabetes, they've got options for that too. Life insurance is never cheaper than it is today. Get the right life insurance for you for less and Save more than 50% at select'.com BP Rookie Save more than 50% on term life insurance at select quotes.com BP Rookie today to get started. That's select quote.com BP Rookie I guess.

We'Re back with James and he just gave a masterclass on how to budget and create your budget for your flip and how to find the people to actually do that work for you. But the other piece I want to talk about is that I think you've done a phenomenal job change of building a team around your entire flip process. And I know you've got a really good process for integrating real estate agents or brokers into your deals as well. So maybe just walk us through what that relationship looks like between your rehab project and the brokers that you're working with as well.

Yeah, there's kind of two different ways investors like to hire brokers. They either want to be cheap and find that broker that wants volume and do it for a discounted listing and they see that as a way to generate profit into their deal. And there's nothing wrong with that. I think that's reasonable. Hey broker, I'm going to give you volume. You're going to list these when I'm ready to sell. We want you to take care of that and give me a deal. That seems fine. But for us as investors, what we have seen is the more experienced our broker is, the more they understand our business, the more value that they create. And they're going to 3x that commission profit back to us. And so what we've done is any broker that works with us on one of our projects, it could be in our internal team. But a lot of brokers bring me deals too that we buy that are outside of our office. Now anytime that broker brings me a deal, we will give them the list back. But we give them a set of expectations that we expect so we can have our project running smooth. And so we pay our brokers a full 3% when we sell, but they're working with us from when we purchase the property all the way to the end, not just when we're ready to list. If a broker just wants to list it when I'm all done and they didn't have the input. Then we're going to work out a different type of commission split at that point. And so what we do is we have a checklist of our brokers, what they have to do. So our real estate brokers, they meet us on site with our general contractors in the very beginning. They review what our scope of work is, what our comparables are, what our allowances are, and then they participate in the design with our comparables, you know, and so we're giving them the comparable mock up that's showing the new cabinets, the new flooring, the, the new paint color schemes. And then they look at that and they make their adjustments. Maybe they like a different paint color, maybe they like a different cabinet color and they're working inside of that set comparable, inside the pricing, but they give some design input. Because I have learned that brokers know selling properties a lot better than investors. Half the time they understand because they get more feedback. People are telling them what they like, what they don't like. They've, they've had enough negative and positive feedback on homes to where they can add some little extra bit of profit dust onto the deal by giving good advice on their personal experience. So the brokers have input into the design of the property and we also like that because it ties them to the deal. They get emotionally attached that that's their work that they're working on. And so our brokers get our allowance sheet and then they select the specs inside of our allowance sheet and give us a design every time. Our floors, our cabinets, our countertops, our appliances. But by setting that allowance inside of my budget, that tells them what they have to be under. They're not allowed to go above unless it's approved by me. So I'm saying, hey, if, if we have $3 foot floors going in, they have to find something that's $3 or less and so it allows them to design it. They're emotionally tied. In addition to, they have to walk that site every one to two weeks no matter what. And they come out outside of even our contractor and project manager and they take photos because they again see things that other people don't going, hey, this space feels weird. We make them walk all the spaces. Is it sellable? Is it livable? Do they think it's being maximized? A lot of times our brokers will say, hey, I think we should add one window in here. It's going to add a lot more natural light in that we might have all over overlooked and it makes a big impact. And then those brokers, at the same time as they're walking it, they have to put us on auto CMAs every month. They are responsible to pull me a fresh new CMA for that property every month and send me the photos. If there is an increase in value or a change in value, they go out and drive that property, walk through it and then they list what that property has or doesn't have that we're going to have inside of our scope of work. So it keeps me and then now for values. Because one thing that investors make is they make this perform in the very beginning and they go, this is what I'm doing. But the market changes and if the market's going up rapidly and you miss that opportunity to upgrade your house inside your renovation, you could be leaving thousands of dollars on the table. If the market starts going down like when rates spiked and that you're not paying attention to the values, you might need to make some adjustments at that time. So they pull the CMAs, they walk it and then give us a report back of what those homes have and then we can change our plan and look at the numbers if we should change our plan to try to either maximize or mitigate the loss on a deal.

And I just want to. Again, great information. James and I just want to define a term for our rookie audience. So James mentioned cma, that's a comparative market or market analysis report, which is basically almost like, hey, here are the things that have been selling or that are active currently in this market so you get an idea of what that property might sell for. And the practice of reviewing that CMA during the rehab process is literally something I've never heard before from anyone else. But I think it's a really important thing for rookies to pick up on to make sure you're maximizing that, that ARV on the back end. Now, one question I want to follow up with Jimmy because I just, you know, obviously you're a big volume client for a lot of these real estate agents. So they, they may be willing to, you know, do all the things you just laid out. Do you think that someone who's brand new first time flipper could ask the same thing of a broker and get them to say yes?

Oh, of course. They just got to ask the question. Brokers want business. And it's especially in today's US brokers are fighting over transactions. There's not a whole lot going on. And what you're doing in the, the thing that you want to explain to them. When we. We create, I don't just hire brokers. I create partners. It's. I want that broker to understand my business because now they're inside of my business, and they are a partner with me for years. Like my listing broker, Megan, that works with me on all of my. My projects. She gives me valuable insight, and she is emotionally attached to each project, and she treats it like it's her own because this gives her a huge book of business. Like, Megan at her Office has over four $45 million in listings with her banked for the next 18 months. That's a great business for her. And so there's. You can always ask, because as an investor, those would be the two things I'd always ask for, is do I get a discount or am I getting service because you're giving them volume? And that it's a fine thing to ask for. It's a reasonable thing to ask for. And not only that, you're giving them business for a lifetime, not just one transaction.

Yeah, and I love the way you phrase that. You said, I'm not just looking to bring them in as a broker, but I'm looking to build a partnership. And I think that's the right context to have that conversation. Now, James, maybe you can give us some examples, like, what are some specific things that you've seen these agents call out as they're looking over your scope of work? Or as they're looking at, you know, maybe they're physically walking the property, say, hey, maybe we should change this, or, hey, this looks a little off. We should do it differently. What are some things that you've heard them or seen them say?

So specific things. Well, we have a real life example right now. I was literally texting with somebody, my broker and my contractor in group texts two days ago. And luckily for us, we're renovating a property in Seattle. And we had $175,000 budget, which was, you know, a normalized budget for what we were trying to accomplish there. We were doing all the mechanicals, doing all the upgrades, but our goal was to actually put out a little bit more of an affordable product in this neighborhood, which was going to be a target price of about 1.75 million at the time. Recently, Megan got a new comp popped up, and it came in at 2.2 million inside of our neighborhood. Same bed count, same bath count. And she pulled all the photos and went and walked our site, and she goes, okay, this property that just sold for 2.2, it is a custom renovation. So we're not going to be at that level, but I do think we can get close to 1.9 to 2 million if we do some extra upgrades. So that list that she came back with was one was ac. We did not plan AC into the house. It's not something that's normal in Seattle, but it helps us get a premium for that luxury buyer by adding that additional feature. We upgraded our fireplaces to. Instead of just cleaning up the fireplace log set burner, we're actually doing a nice insert now. So we're adding some extra finishes. We're going to expand our deck and put more money into our landscaping, too, because we have a nice big backyard. The comparable had the same thing, but they had paver patios and walkways to give it more of an experience. And so it was about breaking those things down, and we're spending $50,000 more. She gave me a list of the upgrades she thought we should do compared to the comparable, and now that's going to get us nearly $200,000 to $250,000 in value. And so it was those upgrades. But she went through the mechanicals and says, hey, look, this properties all have ac. We don't have that. We need to add that in. They have gas fireplaces. We don't. We need to add that in. So she does the same format we do when we're purchasing the property. But common ways to upgrade your house pricing that we do that are a little bit more simple ranges. I love the fake.

I call them the fake chef appliances, where they look like a wolf appliance. They got the knobs, the burners, but they cost.

A fifth of the cost. So it's my fake. So we'll upgrade our ranges. Going to like a more commercial range. We upgrade our light fixtures a lot of times where we'll spend a little bit of extra money on the dining room light, the exterior lights, because people's eyes go right there. Upgrading the flooring is a common upgrade for us, too, because we know buyers, they want to spend a little bit more. There's a big difference between walking on an LVP floor and walking on an engineered floor. And so that will be the big delta on the flooring. And then doors and trim are actually a big one for us as well, because do we go from hollow to solid? That gives the home a completely different feel and look. You get different styles, it gives a different quality. From the day you open that front door, they can feel the door better, and it's going to get you to that Next level. And so just look at those finishes. If you're ever questioning, just go where the buyer's eyes go. Light fixtures, tile, yard, and then the feel. And those are easy ways to upgrade and do them in very tangible ways. If I want to go from a three dollar foot forward, a four dollar foot, I know what my square footage is, I know what the cost is going to be. I can make a decision really quickly and justify the price.

We've talked a lot, James, about controlling the budget, understanding how to get the maximum value based on what you're putting into the property. But I know another kind of tripping point for a lot of rookies is the timeline itself. Right. So I guess what are some things to maybe keep in mind when it comes to not just staying on budget, but staying on time?

Yeah. And when you're starting a flipping business, and again, I call it a flipping business, this isn't a flipping hobby. It's not a flipping, it's you're starting a business. You have to, in, you have to invest in your infrastructure. Part of that infrastructure is buying a construction contract, investing with an attorney that is going to make a contract that keeps your job site put together. How we keep our job sites running smoothly and on time. And by no means does that happen on every job site. Again, doesn't matter how long you guys do this for. You're going to run, you know, I will always run into projects you're always, you're working with. You're always going to have difficult events on your project because you're working with third parties and third party businesses and you don't know how they run their businesses or control their books. And so, so there's a lot of risk in that. You know, if someone's not running their business correctly, they can take a long time that will affect your profitability. If they're not running their business correctly, they could have liens come in which could affect your property. And so by investing in a good construction contract that's going to help prevent those things. It's going to give you a template for how you expect the job site to be ran. It's going to tell you how you need to make your construction jobs. It's going to tell you your benchmarks for timeframe, what you expect to be done in a certain amount of time and then it's going to give some teeth in it to motivate to keep your job moving forward. Because on our construction contract we have a penalty clause. If you are late, you get charged 150 to 300 a day. That motivates the contractor to show up in addition to, they get the same bonus if they're early. And so by having this good contract, it's on paper, the contractor has clear expectations of when he's supposed to be there, when he's supposed to finish, what, what the repercussions are if he doesn't finish, in addition to what his rewards are if he finishes early. And you know, some of the best things that you can do to get your job sites moving forward is to bonus your contractor, offer them more money, give them a little equity in the deal, give them a daily rate charge. The more invested they are, the more you take care of them, they should take care of you better. And so throw out those bonuses, make sure they're clear, but then also make sure that you have a clear expectation of what happens if they don't show up. Because if they have repercussions for not showing up, it's also going to make them think more on their feet. Right. A lot of generals go, well, I'm late because my electrician didn't show up. Well, we didn't sign the contract with the electrician, we signed it with you. And your job is to make sure he shows up and you need to have a backup plan. If he doesn't show up, where's the next electrician? Why aren't they starting? And so by having this on a contract, it keeps your job site running smoothly with expectations and time frames. So buy that construction contract, it's worth every cent.

And I think the managing of the people part is what, what also makes a lot of folks scared of managing the rehab is, you know, they hear these horror stories of contractors doing this and running off in the middle of the night. Just one quick follow up question to that, James. Is this like a real estate attorney that's drafting this contract or what kind of attorney should someone be seeking out if they want to build this out?

Yeah, if you want to build a construction contract, use a real estate attorney or a construction contract lawyer. They're actually two different specialties and the more specialized your lawyer is, the more teeth you're going to have in your contract and more protected you're going to be. They're going to understand your laws. And so typically we use, my real estate attorney is also a construction contract dispute attorney. So he, he, he's been in lots of conflict and know how to resolve it.

So that's, that's the people side of things, I guess. How does the actual scope of work itself tie into trying to stay on time. Right. Because you gave the example earlier of the agent walking the property and saying, hey, this other property popped on the CMA, we think we can get, you know, 100, $200,000 more. Do you take into account how those changes may impact your timeline? And if so, like, how do you kind of determine whether or not it's actually worth going after?

Yeah, and that's a great question because we, we all can forget about like, okay, when you make a change, change creates delays and there's a domino effect on each one of your projects. You can make one change and it can affect your complete schedule, can affect your complete budget. And you always want to think of what is that domino effect. And so what we do is when we prepare a new scope of work for that contractor or an add on scope of work, we list out what we want, like a quote for AC like I was talking about, we want to upgrade the fireplaces, we want to upgrade the landscaping, we submit what we want done and then they give us a written bid back for that work so we can evaluate the profitability. In addition to, they have to reference what that's going to do to the timeline and go, if we are changing the scope of work, it's this price and it adds two, three, four weeks, whatever the time frame is. And that is all sent back on the quote on a construction contract. It references that any change order has to reference the date and what it will extend it by. Or if they don't, they have to stick to their original date. They get no leeway there. And so by knowing that time frame, we're going, okay, this is our upgrades, we know what the costs are, we can add in the time frames, then we go back to our Performa, we change our debt cost, we add in our budget, and then we can see did we make more money, are we making a higher return, is it worth doing?

And just, just so folks have maybe a sense of James, if you look at maybe the last hundred flips you've done, what percentage of those did you actually have to enforce that penalty because the contractor was late or delayed on the job?

Ooh, that's a tough one. Okay, so what I like to do, I really only enforce that damage clause if the, if the job's getting lost and they clearly did not show up or prioritize that job. I would say there's probably about 5 to 10% of those projects are probably in that realm. Sometimes when they're running late, what I prefer to do with my Late clause, because you can 2x this. This is actually a little flip tip for everybody. Contractors never want to take less money. They just don't, you know? And so let's say he's 10 days late at 200 bucks a day. That's $2,000 right there.

Instead of taking a $2,000 haircut, I might say, hey, look, okay, you're late. There's $2,000. You either need to take this off the invoice or how do you feel about building me a fence back here?

And they almost always elect for the work, and the fence will cost me $4,000, and I'll pay them in full on their contract. And now I got a fence instead of the 2000, and I can almost 2x it every time. So I don't. We use it more as, like, a negotiating tool going, okay, or if. If we had overages on the property, hey, we had these change orders. Okay, well, how about I only pay for material, you do the install for free, and we're going to wipe out your late fees. And so it's a way to kind of control your costs in different ways, too. I very rarely actually take it from their final bill. We try to work it out in different ways. I would say we pay our guys more often bonuses than take from them, because we're also very reasonable on their time frames. If a contractor tells me 10 weeks, I write the contract at 12, because I'm not trying to set up my job site for a bunch of conflict and issues. Again, contractors are your partners. I want these guys with me for longer than two projects. I want them with me for a couple years for. I mean, some of our generals have worked with us for over 10 years. We do that by being reasonable with them. We just want a job site to run smooth. We don't want to burn through our guys either.

So we talked a lot about the team. We talked a lot about the budget itself. I just wanted maybe some final advice from you, Jimmy, on the actual design process. Right. Because I do think there's a lot of different things from the design perspective that probably allow you to run this project smoother. Get a higher ARV in the back end, maximize your profitability. So what are. What are some of the things you're seeing from a design perspective that maybe new flippers should be considering?

You know, we take our design. I mean, I would think. I mean, I would love to design all my houses a little bit differently if I. If it was my own personal house. Right. I'm having fun renovating My house right now because it's looking different. It's a different budget.

But we stick to the core theme of what the comparable data is as far as finish level goes. Now, the design we do stay on top of on trending. Right. Like, we do know 12 months ago, if you had a white house with black windows, everybody wanted it. It was, and they were going to pay a lot of money for it. Now it's starting to lose its flavor because they all look like Oreo cookies throughout the whole neighborhood. It's.

But you know, it.

I'm like, I can't see one more house this way. But yet I probably just painted two houses. That color scheme, it's. But it's. It's that little things that can add bang for your buck are a soap niche. We like doing those in our showers. The reason being we're already tiling the whole bathroom. It doesn't cost that much more to add it in. We can add a little bit of accent inside that soap niche. We can go from like a subway tile, which is a cheap, affordable tile to keep our cost down, and then slap some penny tile in the soap niche, which is 10 bucks a foot. So you add like this little bit of flavor into a more affordable surround, and all of a sudden it looks custom and you didn't spend custom tile pricing. Other things that we like to upgrade, which are actually budget savers, but also people feel like they're upgrades is we take our uppers off our cabinets a lot and throw in shelves. Shelves cost a lot less than cabinets, but it gives it that architectural dimension that people are like, this is cool. This feels good. You can kind of switch up the tone of your house.

Other things that we also like upgrading are just our light fixtures. You can spend an extra $25 on a fixture and get a huge bang for your buck. But it comes down to making those upgrades when you have the data, not just because you want to, because the hundred dollar upgrade can kill your budget. I hear this all the time. Well, it was only a hundred dollars more. It was only $250 more. And let's say you do 200. Let's say you spend $250 more on some fixtures and you do it 10 times, that's 2,500 bucks. If your budget's 50 grand, that's 5% of your profitability you just threw out the window. Unless you're getting that back. And so I always like to train my team and train myself. Is the dollar spent? What's the percentage of profit? Because it sounds like a much bigger impact than just $250.

James, last question for you. And I think this is an important one that ties into what you were just talking about. But where should rookies be going to get the materials for their property? Like, you know, is Home Depot fine? Wayfair, like what, what are the places that you feel a rookie should be going to source? Flooring, fixtures, you know, trim work, all these different things that they might need.

You know, I think it depends on the market you're in. You know, like the more expensive markets, you have to give it a little bit more flavor, a little bit more customized so people don't feel like it's one of the masses to get you to, for them to pay you more. And so we don't do a lot of Home Depot for finish work. Now, do I use Home Depot for certain projects? Of course I do. It's, it's a, it's a good way for you to kind of wrap your brain. The beautiful thing about Home Depot is you can walk in and you can see the different pricing on materials right there in front of you. As a new investor, you're going, okay, LVP is $2 a foot. Laminate is 250, engineer hardwood is 5. And so it gives you that baseline for, for allowances inside of your scope of work. And then we use the Home Depot as our allowance a lot of times because we know we can almost beat the price. And so we, we, worst case scenario, we can go to Home Depot and buy it. Where I tell investors to shop is you need to shop what's on clearance and what's on sale. There's not one place that we go to. It's. We are going where the best possible deal is. If there's flooring at a certain shop that's on clearance, I'm going to look at that. That it's, if there is Home Depot's running a big sale. We're gonna, we're gonna look at that. But I would say Home Depot is going to give you that baseline, finish level. And if you're in a more affordable market, there's nothing wrong with it. You can get a vanity, a countertop, a mirror and a faucet for 300 sometimes at home Depot. That's a great value there. And so you want to kind of list out your different suppliers all the way through. But go to your clearance shops, go to Home Depot, make your material lists, and then talk to investors. Where are the investors shopping typically, like in Seattle most, most markets in general Your big metro cities are going to have a building supply area, right? Ours is in. It's in the Soto district of Seattle. And if we go on this street, there is cabinet suppliers everywhere for investors. There's countertop suppliers, there's discount flooring stores. They're wholesale shops. And that's where you want to shop because you can go to a cabinet. If I go to Home Depot and buy my cabinets, they're going to be more on site. They're not going to feel as special, but I can go to my wholesale shop and pay probably 30% less. And they're going to be all wood box cabinets that can be customized a little bit more. They have different, any color, every different style that you need, and they do it in volume, and they're looking on a small spread. So find your wholesale shops. And then also you guys, those areas, those wholesale districts are the best place for you to get subcontractors. One thing that we do is we have a project manager sit outside cabinet supply shops in our whole district. And I have an air card with him. He works all day on his laptop. And any general that goes in, he gets out of his car, he goes, talks to him, find out what he does, he interviews him, done lead in our system for a new general contractor. And he's shopping at the right places. And so it's a good indicator whether they'll hit your budget.

Dude, that is such a ninja trick to finish off this conversation. James, always a lot of value when we talk to brother or when we talk together Brother. We talked about creating cohesion in the property, right? Like the bathrooms matching the kitchen and how that leads to higher values. The huge impact of having a realtor start at the beginning of the process with you and how they can lead to hopefully, higher returns in the back end, you know, going where the buyer's eyes are going and how that can lead to higher returns. Understanding that this is a business, like you said, not just something that you're dabbling in. You've got to build that right infrastructure. And I think one of the biggest things that I want Ricky to take away from this episode, James, is you have to make all of your decisions based on data. And sometimes, you know, the cute house isn't always the best deal. Sometimes the higher ARV isn't always the the best deal. So it's all about looking at the data and truly understanding what that looks like. So, James, thank you, brother, for coming on. I just want to quickly highlight to you if you guys want to go back and learn More about James from the rookie podcast. He was on episode 165 which is all about estimating rehab costs. So if you really want to dig into that topic 165 and then episode 166, we brought him back and that was about finding contractors and more red flags about renovating. So, James, thank you for hopping on today, brother. As always, appreciate all the guidance you share me with with this.

Yeah. And Tony, I have one more tip for the new flippers out there. You know, because the construction is hard. It is a hard in the more projects you do, the more you learn and you can systemize it. One of the best things that you can do as a, as a new flipper is go out and interview contractors that have been in this space for a while and have them come in the deal with you. The more you build that team behind you, it's better to offer a little bit of equity and give, make them a partner in the deal than to mismanage and let the job site get ran up on change orders and time frames. And if they're connected in the deal with you, they're going to be a partner, they're going to look at it like you would and they're going to help protect your investment. It's a great way to mitigate gate loss and you get a learn even if you're giving away 50%, they're going to be teaching you a lot through it and your money's going to be protected. So look at those partners. We do a lot of partnerships too with general contractors in Seattle. It gives me time, it allows me to scale, but it also helps my job sites run smooth.

James, now you just opened up Pandora's box to have all of our rookies in your DM saying like, hey, let's partner on a deal together. So don't, don't be surprised if you get the, the, the, you know, on what the onslaught of people reaching out to you, brother. Well, James, as always, brother, like I said, appreciate you hopping on man. Guys, rookies, please, please, please go learn more about James. Listen to those other episodes. If you want to connect with him, check the show notes for today's episodes. We'll have his contact info down there below. If you guys want to connect with me on Instagram, you can find my contact info there as well. And James is also co host of the Bigger Pockets on the Market podcast. So go check that out. If you guys want to hear James talk more about real estate, the economy, things that are going on, and more about real estate. Investing. So that is it for today guys. Again, my name is Tony Robinson. I will see you guys on the next episode.

So.

Okay, we're going to shift gears for a minute to cover something important, especially for new landlords. The shows often talk about getting stuck doing everything ourselves and the cost of sweat equity. The key question is simple. Is my time better spent elsewhere? I use a tool that cuts down on a lot of landlord hassles, and the wild part is it's just $12 a month. It handles rental screenings, rent collection, maintenance requests, and accounting all in one platform via a mobile app or desktop. It saves me time in tenant communication and keeps me organized for tax season. It's called Rent Ready and you can sign up for a six month plan for just $1 with promo code BP2025. Pro users get it for free because we believe in it. Just sign in through your Pro account to get started. RentReady helps ensure on time rent with auto reminders, keeps communication professional, and lets you post listings to multiple sites. Check it out@rentready.com BiggerPockets that's rent R E D I.com BiggerPockets.