Get YOUR Flipping Refurb Right!
The property market is changing and without question we NEED to change with it! More and more investors are moving towards ‘flipping’ properties for profit BUT the question is, how do we ensure things don’t go horribly wrong before it’s too late? In one of the most important articles this year, we talk to independent consultant Martin Rapley who for the past three years has worked with investors, offering help ranging from ad-hoc telephone support with refurbishments through to joint ventures (JVs) on major developments.
With over 30 years’ experience in the construction industry, Martin started his career as a quantity surveyor but later turned to project management. After running his own construction company, almost by accident he realised there was a niche for his skillset because time and time again he encountered investors with unrealistic budget expectations and who were unclear as to what the construction process entailed.
In this interview, we pick Martin’s brains and delve deep to answer questions you didn’t even know you needed to ask! He reveals (amongst other things) common mistakes people make when they first look at a project and discuss budget control. And for those just starting out with flips and refurbs, he explains exactly what is involved.
YPN: First of all, are you are witnessing more and more ‘flipping’ these days?
Martin: I think it’s the big ‘glory thing’ that everyone wants to do now. Once investors have two or three properties under their belt, many turn to development but the value of projects varies considerably. It could be a £multi-million project involving land purchase and building four or five houses, or simply converting a garage to turn a three-bedroom house into a four-bedroomed property. Whilst there is a lot of excitement around this, unfortunately there is also uncertainty; many investors don’t understand the process and often come to me when already knee-deep into a project.
YPN: This isn’t just a job for you though, is it, but a passion because you like helping people? Tell us how you got to this point.
Martin: I started working as a quantity surveyor looking after the finances of building contractors mostly appointing smaller trade companies to carry out the work. This gave me fantastic experience of working with smaller tradespeople, which has proved invaluable in what I do today. I worked on some great properties around London and the South East, but left the company because I was bored – there was nothing driving me forward. However, I didn’t know anything different so set up my own company doing exactly the same thing … and gradually got bored again.
Eventually, someone at a networking event asked a question that started me off in a new direction: why didn’t I go to a property networking event because surely people there would need builders? I came across what was then the Kent Property Club and attended to do my 20-second business pitch. That led to investors asking me to quote for work on properties they had purchased. After receiving the quote though, many would get frustrated and complain they didn’t have enough money to do the work, or how could it possibly cost that much, or they didn’t realise they would need planning permission.
And so my eureka moment dawned! What if I could provide more support for aspiring developers? Consequently, I decided to wind up the building business and concentrate on working directly with investors.
One of the first things I did was to attend some training courses to understand what investors were being taught about refurbishments and conversions, and what I discovered was … little if anything. Only by signing up to a specialist course could you learn ‘some’ of these additional skills. I also discovered that these specialist courses focused on large scale developments, so realised there was a niche for working with investors on small scale projects. I’ve been doing that for the past three years, working on the type of refurbishments that new developers tend to do in their first two-three deals.
YPN: Though we talk about these deals as small, that can still mean a huge sum of money, particularly for someone on a first deal or with little capital – things going over budget could be the difference between make and break.
Martin: Exactly. Larger developments may have tens of thousands of pounds of potential profit whilst these smaller deals only have £10,000-£15,000, but if something goes wrong or the scope of work has been totally misunderstood, that £10,000-£15,000 suddenly becomes £5,000. That’s still good – but don’t forget it can also go the other way and become minus £5,000 because the costings are tighter. This can have a knock-on effect for investors with JV partners financing the project, who were given a budget of £20,000, but the cost is £30,000. Instantly they lose credibility and the relationship has soured before it’s even begun.
YPN: Investors with a background in building and construction have an advantage with development projects because they know exactly what needs doing and how much it’s going to realistically cost.
Martin: I met Simon Zutshi late in 2012 and he told me I was already well on the way to becoming a property investor because I knew how to do the refurbishments. At that point I had no intention or desire to become an investor – I had no idea what an asset my skills were and it took some time to realise that. Now I walk around properties with clients discussing the repairs needed and how they can be done within a sensible budget. I regularly have responses along the lines of “I didn’t even know that was possible” and “I didn’t realise that was a problem” because people aren’t aware of what’s required.
Clients often want to build a partition to create another bedroom in HMOs. They need to be aware of the consequences of that, such as the radiator that might be in the way of the partition, the position of the light switch and so on. The ‘little’ job of putting up a partition that should cost significantly less than £1,000 suddenly becomes much bigger after adding the cost of a heating engineer to move the radiator and an electrician to reconfigure the lighting.
It’s with the little things like that (or not so little in reality) where I can help investors, utilising my experience as a quantity surveyor to make them aware of the knock-on effects of a ‘little’ job. Sometimes it can be just a simple job, but all too often it’s not! In another common situation…
An investor wants to cut a door through a wall. I can almost guarantee there will be a plug socket or radiator on the other side of the proposed opening, so that simple job becomes yet another trail of additional ‘little’ jobs that all cost money.
YPN: Would you say that it’s a common error for people to make incorrect budget calculations after hearing about others’ conversions and assuming their project will cost the same?
Martin: Yes. The single most important thing people forget is, every property is different. It’s almost impossible to assume the cost because each property is in a completely different condition and requires specific work.
One common mistake is to allocate an exact budget of (say) £20,000 because you’ve been told that’s the cost of a refurbishment. The second mistake is that a deal only works if you limit the spend to £x and make that the allocated budget. Unfortunately, that’s completely back to front.
YPN: Your skill set is invaluable to an investor – presumably you can look at a property, estimate the refurbishment cost and then identify whether the project is viable?
Martin: I can generally walk around a property and count up the refurbishment cost in my head. I meet a lot of investors who are excited by what they think is a perfect refurbishment project only for me to be the bearer of bad news with the realisation that their budget is woefully adrift.
Another issue involves contingency budgets. Again I meet lots of people who put together budgets based on their own experience and add just 10% contingency. If the overall budget is £15,000-£20,000, that 10% can be swallowed up easily. I encourage less experienced investors to allocate a much bigger contingency to allow for the unexpected and cover any slip-ups in the pricing. I have worked with some who add an additional 30% contingency that they know will allow for any slip-ups.
At the end of the day, these investors are looking at a 15%-20% profit, which is a great attitude to have. Unfortunately, too many look for a deal in everything when the deal just isn’t there, then decide it can be a deal if they reduce their contingency to 10% – that is a very risky strategy.
YPN: Do you see people offering on properties due to eagerness in a competitive market when you know that there is no profit to be made?
Martin: There are now a lot of independent building businessesthat work solely for themselves and target smaller projects, buying a property and refurbishing it with no need to make a profit as such, because they just want enough money at the end of the project to cover what they want to earn over the duration, ie their wages, before moving on to the next. Therefore, they can often make a higher bid than investors as they don’t have financing costs and are not factoring in any profit beyond earnings.
I have lost numerous projects to these companies and now tend to shy away from the ones I believe they will be interested in, for example where planning permission is already in place. The only exception is when I believe I can add something different. I explain to a lot of my clients that the key thing is to look at a project from the perspective of an investor, eg how can I turn this house into an HMO?
YPN: Is there a middle ground, perhaps between the price range and scope of those ‘bread and butter’ flips where we see huge competition, and projects not quite big enough for the larger players in the market?
Martin: Absolutely. Let’s look at the conversion of a big residential property. Several developers might be interested in splitting it into flats, but if the size and layout doesn’t work for flats, they lose interest. However, the layout may be perfect for an HMO or serviced apartments so it would be a great opportunity for an investor to snap up.
YPN: What exactly needs to be done to make a house suitable for an HMO? Some think they can buy a property, put locks on the doors and that’s it, job done. Are they getting it wrong?
Martin: They might get by but are almost certainly not meeting licensing standards. What it really comes down to is: a) What the local authority’s standards are; and b) Whether or not you want to sleep at night?
Many local authorities, certainly in my area, decree that you need a license if there are more than three floors or over five people but this differs around the country.
When converting to an HMO, people might forget to consider whether the kitchen is large enough to cater for the number of tenants. A five-bedroom property needs at least five cupboards plus a general cupboard for crockery and bits and pieces, and possibly another for cleaning products. In the average residential property, the kitchen isn’t big enough to support this so you are then unable to supply the amenities the tenants need. If the property isn’t licensed and this isn’t being policed, tenant turnover is high because they are not happy with the services provided.
YPN: Larger properties of say six-eight bedrooms, most with en-suites, have a huge demand on services: if three or four of the tenants want a shower at the same time, that might not be possible. A new system could mean a huge amount of money.
Martin: Larger properties often have more en-suites and the average domestic water system isn’t designed to cope with this potential volume of usage. You will therefore likely need an upgraded boiler and cylinder more akin to a commercial installation. This in turn means you may have to use a specialised installer because your local plumber can’t do it.
An engineer looking at your property will base their calculations on an ideal scenario, for example four of the six en-suites plus the washing machine in use at the same time. You could assess the risk and take a view on that by asking whether a smaller capacity boiler would do the job if just three of the six en-suites were in use. That could save a few pounds.
I recently had a conversation with an HMO owner; his view was that people living in an HMO slip into a routine. For instance, if they get up at 7:00 am for a shower and there isn’t enough hot water, they will adapt and get up at 6:45 am or 7:15 am instead. His view was to slightly under-specify some of these services and shave a little bit off the budget. For HMOs I believe services are the biggest cause of slip-ups.
YPN: At what point do clients come to you? And is it ever too late?
Martin: Generally either very early on or far too late. Let me give you some examples. Whilst these are extreme cases, unfortunately this is the reality of what can and does happen.
One client came to me after converting a property into flats. These flats were on the market and one even had an offer. I was asked to find the missing paperwork relating to building regulation sign-off required by the solicitor as, due to a fall-out, the builder was no longer involved. I discovered the builder had been managed from over 150 miles away and probably told simply to get on with it, he hadn’t followed the drawings so the construction didn’t meet building regulations; there weren’t even any gas, water or electric connections so no-one could move into the property. Presumably the builder had been paid to do this but with no management on site, had simply got away with it.
Another client came to me because his builder had gone bust half way through building some new houses, and he wanted me to help him complete the project. After investigating work done and payments made, I discovered they had a 50/50 JV agreement with my client, a solicitor, as funding investor and the builder doing the works. It became clear that the builder had effectively ripped him off at every opportunity, and siphoned money from the project all the way through. My client unfortunately did not know enough about the building process to verify what was happening so had carried on paying the builder even though he was some nine months behind programme and a few hundred thousand pounds over budget.
Whilst these are two extremes of when people come to me too late, unfortunately there are those who come to me early on and leave disappointed because their dream project doesn’t stack up; BUT I would much rather that than they buy something and it all goes wrong much further down the line.
YPN: Do you ever explore alternative options when a client comes to you with a project that doesn’t work financially?
Martin: I really enjoy looking at reconfiguration and better use of space and asking “what if”? For the less experienced, it might be a simple factor stopping them doing what is best.
I worked with a client who couldn’t see how to make a kitchen layout work because there was a radiator in the way. I explained that moving it would cost around £200 and allow for a much better layout, which would then mean the property could become an HMO. My client had been blinkered by the radiator being in the way and yet in the whole scheme it was a minor cost to relocate.
YPN: How important is it to understand regulations, for example knowing how to maximise the space whilst meeting room size requirements?
Martin: This is really important. When I ran my building business, investors would tell me they wanted a building converted into “an HMO that met regulations”. At the time I had no idea what the regulations were or even what an HMO was. I now explain to investors that meeting regulations is their responsibility: they must tell the builder exactly what they are and what size the rooms need to be, rather than leaving the builder to find out.
YPN: Would you agree that different investors have different skillsets? They might be good at raising money or sourcing, for example, but that doesn’t necessarily translate to the skills needed to manage a build.
Martin: Without question. I call myself a project manager and manage the trades because I know how to do that from experience. I know the shortcuts and where they’re going to try and pull the wool over my eyes. Just because I can do that doesn’t mean I could manage an IT installation, because I am not an IT expert, I’m a construction expert. There are those who think, because they have done some project management before, how difficult can it be! This was the gap I realised I could fill – being a project manager for investors. So to understand how to look at things through the eyes of an investor, I enrolled on Simon Zutshi’s Mastermind course.
YPN: How did you find the Mastermind experience?
Martin: I had started by doing the Property Investor’s Quick Start course with my wife, Sarah to learn what investors were being taught about refurbishments. By lunchtime Sarah decided this was her future and she would leave her job! From there we went on to the three-day Accelerator course, then on to the twelve-month Mastermind programme.
Things didn’t quite go as planned. Unfortunately we didn’t work together as closely as we should have – we do now but we learnt the hard way. I lost direction and totally forgot that I wanted to help other people and work with them on their deals. Instead I spent twelve months looking for motivated sellers and BMV deals, which wasn’t what I was good at, so by the end of our Mastermind year we sadly had nothing to show for it. After an honest heart-to-heart back in April 2014, we decided to go right back to the beginning, went through everything again and realised we needed to work as a team and focus on our skills.
Now I spend most of my time working with other investors rather than looking for my own deals because that isn’t where my skillset lies. I look for people who want and need my skills either on a fee basis or through a JV.
YPN: How do your JV partnerships work?
Martin: It depends. One of my early deals was with someone I met at the first property meeting I ever attended. Over the years he had shown me several projects but nothing stacked up. Then he invited me to see a dentist’s surgery that he wanted to turn into an HMO. We came up with an offer that eventually turned into a lease option because the owner of the building was an investor and had rented the building out commercially. It needed a lot of money spent on it. Our first offer was rejected. Someone else’s was accepted but after six months it hadn’t completed, so we had another go. I managed the refurbishment and my JV partner manages the HMO and we split the profit monthly.
On other projects I come in as a consultant on a lump sum fee basis because that suits them better. I recommend to investors that the earlier I get involved, the more value I can add.
YPN: When is the right time to talk to you? The window between finding a deal and costing things out before someone else nips in and buys it is time sensitive, isn’t it?
Martin: Investors generally try and get cost information from builders, who aren’t always the best people to provide that and, as importantly, won’t think about things from an investor’s perspective. I do a lot of telephone consultancy, where investors have floor plans and ideas and just want a sense-check that their numbers are there or thereabouts. On slightly bigger deals, I can often work out budgets without having to see the properties.
If you’ve got a complicated project, you really need to find someone that can give you their expertise. It’s all about building relationships from networking, but an awful lot of people still don’t even realise that this kind of service is available.
Martin’s Top Tips for Flips and Refurbs
YPN: What are your top tips for anyone looking for their first flip or refurbishment project? Things they perhaps wouldn’t consider, but could end up costing the shirt off their back.
Martin: Look beyond the curtains, wallpaper and carpet because you’re always going to replace those.
Look for structural problems – floors that feel bouncy, flooring that seems to be lifting, walls covered in cracks, render that looks old or perhaps covered in moss, gutters that seem to be falling off the walls.
People talk about “smelly buildings” but look at the deeper structure; it’s the structure that’s important.
Consider the ongoing maintenance of the building, particularly for HMOs. For example, if it has a flat roof extension, ask yourself how long it’s likely to last? Most flat roofs only last ten to fifteen years so consider when you might need to replace it.
Inspect the kitchen and consider how long it will last given usage in an HMO, then factor in the inconvenience of replacing it when you have five or six tenants in the building a few years down the line.
YPN: Unfortunately it’s pretty difficult to know the extent of the work on an older property until you start. How do you overcome that?
Martin: You’ve got to be a detective in the 30-minute viewing window. If the market’s hot that might be the only opportunity you get to make a decision. Delve as deep as you possibly can and look for clues.
Become good at knowing the age of the property you’re going to see, because different-aged properties have different kinds of defects. Victorian terraces often have rotten timber, so (when no one’s looking) have a little bounce in the corner and see if the floor moves. That will indicate whether there is some timber decay which might mean a few thousand pounds’ spend for repairs. Also, check the condition of the timber from underneath if you can.
Unfortunately, people often learn the hard way, and then become an expert. That’s one way of learning and I suppose it’s how I’ve learned over the years – the big difference being that as a building contractor, it was the client who found problems later on and we helped repair them.
I’ve seen all sorts of defects over the years and so know what to look for. But I can’t say I’m an expert. I’ve driven away from countless properties, then realised I forgot to check, for example, where the electric meter was. Not everyone can get it right and it just comes down to experience in the end.
YPN: From your experience of property education, do you feel the subject of costings is covered enough?
Martin: No. Consequently Sarah, Paul Merrison and I have joined forces to run a Refurbishment Masterclass focusing on investors’ first two-three projects.
One of the things I’ve tried to do for years is to simplify construction. I always introduce myself as being bilingual: I speak English to investors, and ‘builder’ to builders! I want to take the mystery out of the middle and explain in simple terms exactly what is going on, what the process entails and what the costs might be. I believe there is a need for more training around refurbishment and that’s why we have set up this course.
If you are interested in attending one of Martin’s training courses (the next one is on 16th October) or if you would like to know more about working with Martin you can contact him via email, email@example.com or call him on 07934 271371.
With the market changing and more of us looking at the flipping strategy it’s becoming increasingly important to get things right if we are to manage our investments profitably. And this (in our opinion anyway) is where the skill sets of those like Martin become invaluable.
Knowing how much a build or conversion is going to cost is unique to each development and guess work could mean the differencebetween make or break. Maybe we all need a Martin Rapley in our lives!