Permits, Building a Scope of Work, & Managing Renovations

Dave:
You have questions and we have answers. We found three real estate investing topics burning up the BiggerPockets forums and creating so much hot debate that we had to weigh in. Whether you’re just starting out or already have a mature portfolio, stay tuned to learn from the experts. Hey friends, Dave Meyer here today on the show. We are answering your questions. Ashley Kehr is here with me and we dug into the BiggerPockets forms and found a few trending topics we wanted to weigh in on. We’ll talk about whether it’s ever a good idea to buy a property that’s not properly permitted, how to analyze a house hack deal, so you buy your first property, right? We’ll also talk about estimating a scope of work for your first rehab and how to manage a renovation project if you’re investing long distance. Ashley, I know these topics are right in your wheelhouse. Are you ready?

Ashley:
Yeah, I am. This is like I’m taking a quiz here, getting grilled on my rookie knowledge.

Dave:
Yeah, well, we are going to be grading you at the end, so all right, let’s get into our first question, which actually is doubly up your alley because it comes from someone on the forums who is in upstate New York. I know you’re technically in western New York. I want to properly recognize, but this question comes from Roman who’s operating again in upstate New York. Roman says, I found a good multifamily home in upstate. It’s a legal two unit that can cashflow $900 a month in an economically growing area. However, the house has had a new kitchen and bathroom put in without permits. This was done two owners ago and the current owner has been renting the property without issue for seven years. If I brought the property, I’d want to retroactively permit the work and get the house up to code House is selling for three 80. Even if getting the permits cost 30 k, it’s still a buy. Does anyone have any experience with something like this? How much could it cost and is it a good idea? Ashley, what do you think about this one?

Ashley:
Yeah, so going backwards into getting permits is never a fun thing to do. So luckily I haven’t had to do it, but I definitely have talked to other investors who have had to rip out walls and let the inspector look inside the wall to see what the work was done. But the first thing I would start with is talking to the code enforcement person in that area. So who is actually in charge of giving out permits? Who actually goes out and does the inspection on these properties? And I would start having a conversation with them about that because you don’t own the property yet, so you want to see what would they expect to make this property permitted. Then you can kind of build your budget from there. So if the inspector says that yes, I would come in and I would need to open up the walls to see that the plumbing was done correctly, the electric done correctly, this would be the process.
So they can give you an idea of that. The next thing is to get the scope of work from the person that you’re buying the house from if they have an idea of what was actually done. So when it says it was remodeled, was it just new cabinets put in and no walls were ripped apart? No electric was redone except for maybe new outlets, things like that. Having an understanding of what the work was done can be really beneficial too when you go to the inspector and ask what would be the process to get this properly permitted? So some of the reasons you’d want to do this, even though the previous owner had no issues is first liability. Especially in New York, a tenant can sue you for anything and if there was a fire and then you find out the electric wasn’t permitted, you could end up being liable in this case. So for liability reasons, it would be good to have the work that was done permitted on the property or in the future if you ever want to go and get a permit for something else and the inspector comes in and says, oh, I don’t have this new electric panel in the kitchen. There was never a permit for this. This one says it should be from 1980. So going forward, getting the work corrected before you actually do any more projects in the property too.

Dave:
Totally agree. Commending Roman here for doing the right thing and getting the work permitted because I don’t know about you, I couldn’t sleep if I knew there was something even slightly illegal or off kilter in my property. I know it happens, but I have personally gotten out of contracts for finding out things like this. To your point, Ashley, if the scope of work’s not going to be huge and it’s not going to be super difficult, there’s still reason to go ahead, but if it’s a big thing, if it’s structural, I’ve gone to situations where I thought it was a legal duplex and they actually just added a unit illegally. That stuff scares me away personally.

Ashley:
Yeah.

Dave:
Is there anything that would make you say no, that’s too much? If you had to vacate it or you couldn’t have tenants in it for a while, or what are some of the red flags that you think Roman or other people who find themselves in this situation should look out for?

Ashley:
The biggest thing for me is if is an unpermitted unit. So I actually walked a property before where it was three units and that’s what they had it listed at. But when I walked to the property, the agent for the seller said, okay, this is the deal with this, and you always know there’s some kind of catch to this, and it was that it was permitted as a duplex. So every year when they did their rental license, the upstairs tenant and the downstairs back tenant would say that they worked together and they used both spaces and that they were on the lease together. So if you buy this property, you have to depend on whoever’s renting those two units to lie on your behalf to the building inspector or go through the whole process of getting it permitted and it didn’t even have a full kitchen.
There was a lot of things that would take a lot of work to actually get that permitted as a third unit. So we didn’t end up that property, but that was the biggest thing. If it’s just a whole unit that is not permitted, the next thing is really finding out how deep the inspector is going to have to dig. So if there are other issues that could be uncovered, like say they did remodel the kitchen and they did the electric, they did the plumbing, they did everything brand new, that’s where I would be concerned as to what are the chances of it done correctly, what are the chances of it not done correctly, and also how much am I going to have to rip out and redo? Because

Dave:
Again,

Ashley:
If you’re inheriting tenants, so tenants are coming with it, the building inspector says they can’t live in this. It’s not permitted. They need to move out while you rip out the walls. You’re going to be putting them up into a hotel unless they agree to actually go and move somewhere else and end their lease agreement.

Dave:
I’ve never done this, but I’m curious what you think of this. Some advice I would potentially give to Roman is could you lock up this property under contract and get a contingency that you would permit it? And just as a reminder in the post, the question that we are responding to, Roman said that even if he had to pay 30 grand for permit costs, he’d be willing to do that. So I’m wondering if Roman writes the contract in a way and says, Hey, I’m going to try and get this permitted. Honestly, it’s a kitchen and a bathroom. My estimation is that’s probably going to be fine. It’ll probably take a couple of weeks. You say, Hey, we’re going to stretch out the closing and I will close on this in 90 days. Contingent on that, I can get permits for under $20,000 and if not, I can back out of this contract. Depends on how competitive this deal is and how many other offers the seller might have, but for me that would be a way that you can potentially get a great deal, ease your conscious and make sure everything is legal and above board, but still protect yourself against the worst case scenario.

Ashley:
And day of a couple years ago, nobody wanted to do inspections or contingencies. What’s your opinion on the market now? Are you still competitive if you put in a contingency like that in your offer?

Dave:
It depends on the offer. I’ve done it this year already and people have been willing to do it. I think the other thing about this is now that it’s sort of legally being disclosed, the seller’s going to have to disclose that this work was done unpermitted right to everyone, and so this issue’s going to keep coming up. So if you sort of present yourself as the reasonable person who’s going to do the work to get it permitted because the seller’s probably now wondering if they’re going to have to go do this so you can basically solve that problem for them. If I were Roman, I’d probably try and not pay 30 grand for it right away, but if you also express willingness to pay some amount of money to get this closed, you might be the best option for the seller. That’s just general, but it obviously is going to depend on the individual market, individual property.

Ashley:
Yeah, I think it’s worth risking losing the deal then finding out that it’s going to cost way more than 30 grand and be way more than a hassle, and I think that was a couple of years ago is people got caught up, especially rookie investors, new investors just wanting to get the deal and taking out that inspection, but not knowing enough about construction and about the property and then finding out problems later on. So I definitely think it’s worth it, especially in this case, even if the deal doesn’t work out, you’re going to end up saving yourself money in the long run, most likely if there are issues that you didn’t find out

Dave:
For sure. Have you ever bought a deal without an inspection?

Ashley:
A ton of them.

Dave:
Really,

Ashley:
But that’s because I’m buying them so dilapidated.

Dave:
Yeah, it doesn’t matter that

Ashley:
It’s like the inspector would go in there, literally just mark everything,

Dave:
Be like, what are you doing?

Ashley:
One thing you can do is if you’ve ever gotten an inspection done before or somebody that’s done an inspection, look at the report that they actually fill out because it’s very detailed as to every single line item, what the inspector’s actually looking

Dave:
At.

Ashley:
So if you feel you don’t want to do an inspection because your offer is going to be competitive, get a copy of an inspection when you walk the property, go through everything that an inspector would actually look at. You’re obviously not going to have the tools that they do, like checking each outlet to make sure they work unless you want to go and buy all that stuff. But checking if there’s insulation in the wall. So inspectors are well worth their money, but mine just would’ve been red, red, red, red, red inspection report.

Dave:
Alright, well great question from Roman and great advice from you, Ashley. We do have to take a quick break, but we’ll be back with more community questions right after this before we move on. Today’s podcast is brought to you by simply the all-in-one CRM built for real estate investors. Automate your marketing skip Trace for free, send direct mail and connect with your leads all in one place. Head over to reim.com/biggerpockets now to start your free trial and get 50% off your first month. Welcome back to the BiggerPockets podcast. I’m here with Ashley Care answering user questions. We just talked about whether or not we would buy a property that has unpermitted work. Next we are moving on to a question from a first time investor from San Antonio named Tanner. Tanner asks, any advice for someone trying to buy their first duplex and house hack?
I currently have a pre-approval and I’m shopping for properties in the two 50 to three $50,000 range. My plan is to do a small value add upgrades while I’m living in the property, but I’m stuck on the deal analysis. I want to be able to pull the trigger when a good deal comes along and be confident in my investment. What are the best ways to analyze a duplex house hack deal lot there? Where would you start with this? There’s a couple questions here. It’s like how do you get over analysis paralysis? How do you analyze deals? How do you consider a house hack versus a traditional investment? What’s the first thing you would think about here, Ashley?

Ashley:
Well, how do you get good at anything?

Dave:
Practice?

Ashley:
Yes. So that’s the first thing. Use the BiggerPockets calculators. There’s already the built-in worksheet going line by line, literally telling you every number you need to find and where to find it. There’s the little question marks, you can hover over it and you plug in the numbers. The hardest part of that is I think things you have to estimate such as insurance, not knowing exactly what your insurance would be, but you can call an agent, you can call a broker, you can get an estimate just quickly over the phone. I don’t think they’re going to answer your call if you call for every single deal you’re analyzing and don’t actually buy any of them and not finding any

Dave:
Policies. Yes,

Ashley:
But there’s also so many websites too that you can go on now and just plug in the information and

Dave:
Totally

Ashley:
Get a quote

Dave:
And a lot of them are within five or 10%, right? Yeah. If you’re getting a duplex in the same zip code, it’s not going to be that different. You’re going to be within a hundred bucks per year probably, and that hopefully won’t be making or breaking your analysis

Ashley:
Or posting in the BiggerPockets forums and just say, Hey, I’m looking at duplexes in this area. Does anybody have any there? What is your insurance? You’ll get responses from, especially in a big city like San Antonio, you can get a good response rate as to far as people can give you an idea, but there’s so many tools out there for how much can you receive in rent looking at market rent for properties. So every day I would pick a property on the MLS, even if you can eyeball it and say, there’s no way that deal would work or it’s not in your budget, just practice, practice, practice. So that would be my first thing. Second thing is in the BiggerPockets forums you can post your calculator reports. So after you actually enter your information into there, you can save the report, post it to the forums and say, Hey, what do you guys think of this? People love to give their advice, they love to criticize, they love to give their feedback, which is going to be great. It’s all constructive criticism.

Dave:
Wouldn’t you rather get criticized now than realize you bought a bad deal? And people are nice. It’s not like people are being mean about it. They’re just going to point out things that maybe you haven’t thought of as a first time

Ashley:
Investor and then networking with other investors in the area to really dial down your cost.

Dave:
Yes.

Ashley:
One idea I had when you were reading that question was if you feel like the numbers aren’t working is what about the unit that you’re living in? Do you have the option of renting out those bedrooms also so you can bring in more income? So now you have a little less risk because there’s more income. Your mortgage payment is still the same, your expenses are still the same. So if you have the option of renting out one side of the duplex and then also renting out your bedrooms, you can increase the rental income and then you have more leeway if your numbers aren’t exactly correct because you’re bringing in more income on the deal.

Dave:
Those are things that you can mess around with to try and get your analysis really crisp and sort of to maximize your return. So this is great advice. I also just want to take the high level philosophical part of this question just for a minute because I think when you’re talking about buying your first deal, a lot of it, yes, you should absolutely get really good at deal analysis. There’s no substitute for that. You can’t get around doing that. But just remember that if you are house hacking and it is your first deal, this doesn’t need to be some grand slam deal where you’re making amazing cashflow and everything is perfect when you’re house hacking. If you can just reduce your living expenses by any considerable margin, that’s a win, right? If you were spending 1500 bucks a month on rent and now you’re still paying 500 bucks a month in living expenses, it’s a thousand dollars a month that you’re saving.
That’s essentially generating a thousand dollars a month in cashflow. I actually collaborated with Scott Trench. We built a calculator that’s like buy rent, house hack, and so that’s free. You can go to biggerpockets.com/resources and get that for free. But I recommend just thinking about it in those terms, what is going to be the best outcome for you financially over the next couple of years? For most people in most markets it’s going to be house hacking. That’s not true in every market. But in a market like San Antonio that’s relatively cheap, I’m almost sure that buying in this two 50 to three 50 price point is going to do better for you than either buying a primary residence or renting. So I think just making sure your expectations are appropriate are really important, especially for this deal and for house hacking. I also just want to underscore what Ashley was saying about practicing because I think a lot of people kind of scoff at that and they don’t want to go do this, but when you were saying that I was doing this yesterday, I was practicing deal analysis, I wrote a book about deal analysis.
So experience investors do this stuff too. Whether you call it practice or just looking at deals, it’s the same thing. Just look at as many deals as you possibly can and you’ll get good at it.

Ashley:
Agree with that so much. I can’t even tell you how many BiggerPockets calculator reports I have saved in my portfolio from the last 10 years,

Dave:
So many.

Ashley:
But now it’s gotten to the point where in a very, very specific market, in a very specific duplex, I can eyeball that and I can analyze it like this. I can run those numbers in my head because I’ve done so many, and that gives you such a competitive advantage that you can make decisions quickly when a deal comes up as to yes or no. And obviously there’s more that goes into it than just eyeballing it, but you can move faster and you can move quicker when those deals come across. And I think that building out your buy box so you’re not wasting time analyzing deals that you don’t even know how to operate or manage, but they look cool. You heard a podcast about them, but really building your buy box and then just exercising that muscle of analyzing deals in that market of what you want to buy and you’ll be able to move quicker and faster.

Dave:
And luckily, it’s not even that hard. You do need to get a feel for it over time and you do get better at it, but even the first one shouldn’t be too hard. And over time you’ll be doing this in five minutes. It’s really just not that difficult. So great question, Tanner. You should know that this is a commonplace that almost every real estate investor finds themself at some point in the beginning of their investing career and it just takes that commitment and practice and diligence and you’ll get there. Ashley and I are no different than anyone else. We were in the exact same spot, so just stick with it. Alright, that was our second question. Today we do have to take a quick break, but when we come back, we’ll talk about a first rehab, how to set the scope of work, how to manage your contractor, and how to even do it long distance. We’ll be right back.
Welcome back to the BiggerPockets podcast. I am here with Ashley Care answering user questions, and this third one is one I’m particularly interested because I’m actually dealing with some of these questions myself. All right, let’s move on to our next question, which comes from Sophia who is investing in El Paso, Texas. My husband and I are looking to do our first rehab and we are wondering how to write a scope of work and determine what material to buy. Does this all come from the general contractor? How does one define design choices? And if we don’t live in the city, who is a good person to check in on the construction so we don’t have to go every week? Is it our property manager or is it the general contractor to keep us posted? I’m very curious to hear your thoughts on this, Ashley, because I am going through this a little bit myself right now and learning some of the bigger scope of work renovation myself. So you’ve been doing this for a couple years now. How would you approach this question?

Ashley:
The first thing is I always walk the property first. I want to know what’s going on in there and if you can’t physically walk it, have somebody video, do a video the whole way through, and then pictures. So you’re going to take pictures, they’re walking through the property, here’s the door, I’m walking in. Then here’s this side, this side, this side. Go through the whole house almost like you’re walking through a picture to picture just because pictures are easier to zoom in than on video. I do pencil and paper. I stand there and I stand in the doorway of the mud room and I’m like, this needs to be fixed. This needs to be fixed. And even if you know nothing about construction, you can still eyeball. Something is wrong, the trim is falling off. There’s a hole in the drywall. The closet doesn’t have a rack, so you can go through and just write down the things that you see.
I also notate what I want to get rid of. So if kitchen cabinets are getting ripped out, I don’t want them to demo that. And then I also notate what is staying. So maybe there’s unique wood feature of some cabinet or something that’s built in. I would mark that that is staying not getting demoed. So I do that and I walk room for room and it does take a while. Then I go and I sit on my computer and I type it all up into a nice thing. Then I take that scope of work and I send it to my contractor. My contractor walks the property, so he takes my scope of work and he basically gives his feedback and makes changes to it or makes suggestions. So the one flip I just did when my contractor walked the property, he called me on the phone and we went room by room and he’s like, okay, I see here. I think that instead of putting a regular bathroom door on, you should actually do a pocket door. He’s like, there’s not a lot of room anyways. We can make it a really nice door. So it’s like a feature stuff.

Dave:
Everyone loves a pocket door.

Ashley:
So he gives lots of good feedback and then from there I changed the scope of work based on his recommendations that we agree on.

Dave:
How would you go about thinking through the scope of work to make sure that you’re providing safe, good, comfortable home that’s going to generate rents, but you’re not overdeveloping over improving a property that’s going to be rented out?

Ashley:
So I learned this from good old James Dayner from On Market podcast. Of course we all have look at the comparables. So the property I did, it was 1100 square feet. It was three beds, two bathrooms, and one bathroom was in the basement. So it wasn’t even that great of a selling point, but we went through and looked at other properties that had sold in that area as far as what was the expectation, what properties got a little bit more than other ones and why was that? And for this situation, it was because the kitchens were updated. So we ripped the whole kitchen out, did everything brand new in the kitchen, and that was a huge selling point of it. So looking at comparables, what have other properties sold for? The really hard part I think is matching my design with what the contractor wanted to do or what was easy. So the tile, I wanted the tile done a certain way in the bathroom and the contractor said, no, this is going to take me so long to actually do because of the way it’s laid out, the tile that you picked out. And we went and had to revise that. So that’s where you have to have the understanding with your contractor too is some of these details and finishes that I want. What’s the actual labor to

Dave:
Complete

Ashley:
Them to? When you are picking out finishes, you have to not only compare to what other properties are doing, but also think of the labor cost for some of those finishes that you’re picking out to.

Dave:
And would you say the same thing if you were trying to figure out what something we’ll rent for?

Ashley:
Yeah, so what I used to do for a long time was I started an Excel spreadsheet and every day I would pull up the market I was in and look at what properties were listed for rent. I would enter them into my Excel spreadsheet. This was very tedious, but I was very motivated. If you really want that deal, you will do this.
And every day I would check, and if a property disappeared and was no longer listed, I would mark it as rented. So if it rented within a week, two weeks, most likely it rented for what they were asking. Right now in my market, there’s no negotiation. Properties are renting like this as soon as they’re listed for what they’re asking. So yeah, that’s tracking what things rent for, but then also calling property management companies or apartment complexes in the area. A lot of websites like apartments.com, a lot of the complexes will keep listings up. Even if there’s not anything available, we’ll still say what they rent for. If you’re like me and you feel uncomfortable calling people, you can just call and say like, oh, I’m looking for an apartment. What do your two bedrooms go for? Even if they don’t have any available, they’ll still give you the information. I did have an investor call me before and say, Hey, I got this property I’m going to be renting out. It’s right across the street from you. Just wondering what you got, what you’re getting for rat and things. And he was completely honest as to I’m your competition now across the street. What are you renting for?

Dave:
Well, I want to get to the second part of this question. This is something I’ve been thinking about personally and just as a reminder, Sophia had asked about doing their first rehab. I don’t know if it’s out of state, but it’s long distance. And basically Sophia asked, who’s a good person to check in on the construction so we don’t have to go every week? Is it the property manager? Is it the general contractor to keep us posted? I’m curious about this because I’ve done, I guess it would be a medium scope for long distance, but it wasn’t like a huge renovation. And I’ve sort of been hesitant to do a bigger renovation largely because of this question, because I trust my property manager. I trust probably the contractor, but in my opinion, everyone needs to be managed. And that’s not a knock on the contractor, but just whether it’s a contractor, property manager, anyone, I wouldn’t rely on someone to self-report their own competence and progress. There’s got to be a third party. And so how would you handle this situation? Would you just fly there yourself? Would you maybe pay the property manager? Not really the property manager’s job,
How would you go about this?

Ashley:
I would start with the real estate agent. So if you purchased this property using an agent, I would ask them if they would be your boots on the ground and you could pay them extra to go and actually walk the property, send you video, things like that. Where I maybe wouldn’t do that is if you got your contractor from the real estate agent.
So if they were the ones that referred them recommended, so they work with them on a lot of houses and things like that, then maybe I wouldn’t because you kind of want that checks. And so the property manager, I would ask if they would do that, whatever, what the fee the cost would be to add that on. Because even when we had a property management company, when they did turnovers, they still charged a project management fee on top of them doing the turnover. So they would probably maybe charge you a project management fee. You could also ask if there was anybody in their office that would want a side job of going to your property once a week doing an update, things like that. Being cautious of meeting people online, but posting online and asking if there’s anybody that lives in that area that’s maybe a college student, another investor, they want to get started investing, maybe they have a duplex themselves.
There is that level of not really knowing the person and you’re trusting them to go into this house and things like that. So that’s where I would start with real estate agent, then property manager. Then finding someone that you’re paying to be your boots on the ground. And I would definitely find someone that’s motivated and excited to be learning about real estate and they can see the whole rehab process. You can share with them when it’s costing. So they’re learning if they want to invest in that market. So those would be the three people that I would go through.

Dave:
But I agree with you. I think finding someone who wants to learn the industry, they’re going to be curious. If I had this job when I was in my twenties, I would’ve loved it. I loved going to houses. I would’ve just liked walking around and just talking to the contractor and just taking pictures because you’re just learning. And so there’s people like that in every city. So I’m sure whether through BiggerPockets, through a meetup, whatever, you could be able to find that. Alright, well those are our three questions for today. Ashley, thank you so much. Any last thoughts or advice here for our audience?

Ashley:
Well, first of all, a lot of the things that we actually talked about like building your scope of work, estimating rehab costs, there’s actually templates for rookie investors or really anyone that wants to use them in the BiggerPockets Resource hub. So you can go to biggerpockets.com/rookie resource to find that.

Dave:
Awesome. Definitely check that out. All these free resources on BiggerPockets, making your life easier as an investor, so don’t forget to check those out. Thank you all so much for listening, and just as a reminder, we found the questions that Ashley and I discussed here today in the BiggerPockets forums. They are another great resource for both rookie and advanced investors. You can ask pretty much anything you want. You can get great valuable advice, connect with other people in your market. So check that out as well at biggerpockets.com/forums. Thanks again for listening. We’ll see you next time.