You want to buy a house or 2-flat to renovate, where do you begin? What are your financing options for the project? At what point should you hire a contractor? These questions and more are answered below!
To set expectations before getting into all of the details, the basic steps of a gut rehab will look like the list below. The order can vary a bit depending on the scope of your project, the weather, delivery timings, etc.
10 Steps for Finding and Buying a Home or 2-Flat to Rehab
Jump Ahead to a Section Below:
The 20 Stages of a Rehab Project- See the full article on these steps here.
Demolition
Underground Plumbing and Concrete Floor
Framing
Windows
Rough-in Plumbing, HVAC, and Electrical Work
Exterior Work
Insulation
Drywall
Flooring
Trim and Door Installation
Painting
Cabinet Installation
Counter Measurements
Counters are Installed
Final Finishes
Glass Shower Door Measurements
Backsplash Installation
Appliance Installation
Glass Shower Door Installation
The Final Coat of Stain for the Hardwood Floor
10 Steps for Finding and Buying a Home or 2-Flat to Rehab
Step One: Find a Realtor, Contractor, and Architect
Find a good Realtor! An experienced realtor who has personally worked on rehab projects can save a lot of research and time on your end. They should be able to recommend contractors and architects they have tested and are used to working with. A Realtor experienced with renovations can guide buyers with rough pricing for rehab costs as they are looking at places. They also can usually get contractors and architects to come out and evaluate a property free of charge and with minimal notice. If you don’t have those prior established relationships with vendors, that can be hard to do. If you decide to work with a realtor that doesn’t have renovation experience then you should also find a contractor and architect at the beginning of the process, before you start looking for properties. You will need them by steps 4 and 5 at minimum, but it’s nice to be able to consult with them as you go. For tips on evaluating contractors see my post here.
Step Two: Set Your Search Criteria
Once you have a Realtor, work together to narrow down what you are looking for.
The main Items to consider are outlined below. (This list could be much longer and also include items like lot size, yard space, historical details, number of floors, brick or frame house, etc, etc. The below list contains the most important items for considering a rehab.)
Space and square footage- Think about how much space you live in now (or even measure it!) and if you need more, less, or the same amount.
The number of bedrooms and bathrooms- Keep in mind that depending on how large of a rehab project you are willing to do, you can potentially add bathrooms or bedrooms.
Location- This is one thing that can’t be changed with a renovation, so make sure the property is in the right area for you.
Timeline- This is very important when considering rehab properties. It’s also important to work with your realtor and architect to estimate an accurate timeline for work.
Will you need to pull a permit for the type of work you want to do? Often time rehabbing kitchens and baths doesn’t require a permit but updating electrical, changing layouts, adding bathrooms, etc. will require a permit
If your project needs a permit, consider what type of permit it will need. How long does it usually take for the architect to file for that type of permit, and then how long does it take, on average, for the city/town/county to approve the permit? These questions are usually best answered by a local architect since they typically file for permits. Your Realtor may also know some of these answers. In the Chicago market, right now, it will roughly take a month for an architect to put together plans and then 2-3 months for the city to approve a permit.
Budget- There are two main parts of the budget to consider:
The budget for buying the existing home or structure
The rehab budget
Investment Goals- This criteria is most applicable if you are looking to rent out any part or all of the property that you are purchasing. It’s important to establish what returns and cash flow you are targeting for the purchase.
Even for a single-family home, it is important to establish what the property will be worth after you complete the rehab. Most buyers prefer not to spend more money than what the property will be worth after the project. There are some scenarios where a property bought in an up-and-coming area will grow in value over the next few years. So even if you barely break even on the renovation itself, it is okay, the property will still increase in value just from the neighborhood.
Depending on what you decide for the six qualifying criteria listed above, it may help determine what type of rehab you can consider. For example, if you don’t have a tight timeline, then a complete gut rehab project could work fine, but if you need a place to live in 3 months, a gut rehab won’t be possible.
A gut rehab v. partial rehab, along with your budget and the property type, may also help determine what type of loan best suits your needs.
A few basic financing options for a home-owner-occupied rehab project include:
A traditional home mortgage where the buyer covers the cost of the rehab in cash
A home equity line of credit is usually the best option for smaller rehab projects like updating kitchens and baths, under $100k.
A rehab loan is a type of loan that is usually only available for larger projects over $100k. More information on this loan type is below.
Rehab loans have many advantages over a traditional home mortgage:
Oftentimes, the entire cost of the project can be tied into your home mortgage with the same interest rate. This makes rehabs more possible for buyers that don’t have the cash to cover the entire project. This advantage alone makes it worth all of the disadvantages listed below.
Most rehab loans require buyers to only pay interest (not principal) during the rehab work. Once a buyer moves in, regular payments with principal and interest start.
There are some disadvantages to rehab loans:
They often require complete architectural plans and a contractor’s budget as part of their loan underwriting process. This is almost impossible if the seller wants a 30 days close. Most rehab loans require 60 days to close.
Some rehab loan options require two closings, one when you purchase it and another when the rehab is finished. Two closings add to cash costs upfront.
The loans often require a minimum rehab cost, usually a minimum of $100k of work.
There are often restrictions on the number of units allowed for a home-owner-occupied rehab loan. Most lenders only offer these loans for two units or less.
There is a lot of additional paperwork and red tape required for a rehab loan. Every time your contractor is ready for payment there are multiple steps and forms required to draw the money from the bank.
If you need a rehab loan to make the project work, keep that in mind when looking for properties. If there’s a multiple-offer situation, the seller may not want to take the offer with the 60-day close for a rehab loan.
Step 3: Find a property!
As you start going on showings, there are a few key things to look for depending on how extensive of a rehab you are targeting. Once you have a property under contract, the inspector will evaluate these items more closely. Inspectors cost money and aren't always cheap; the more you can spot and evaluate on your own, the better!
For gut rehab projects:
Exterior building material
Brick- Look for: Are there large cracks that look like steps around the exterior of the property? Does the top foot or so below the roof line (called the parapet) look more deteriorated than the rest of the brick? Are there areas you can tell that mortar between the bricks is missing? All of these items can indicate issues that will add to the cost of the project. The step cracks on the brick can be an indication of a larger issue with the foundation, structure, or window lintels. Brick homes tend to have a higher resale value because they are brick, but they make things more difficult for a rehab project. In a brick home, it is usually best to leave the window and exterior door placement where it is and design a floor plan around the existing windows. Existing windows can technically be closed up, and new windows can be cut out of the brick, but both are expensive options. Changing floor and ceiling heights in a brick home is also harder.
Siding. For siding, you need to consider whether or not it needs to be replaced. Keep in mind that even if the siding is in good shape, if you add any new windows, change exterior door locations or add new venting for laundry or HVAC, the existing siding may be damaged and need to be replaced. I prefer to buy framed buildings with siding rather than brick buildings. It is less expensive to add or change windows and doors, and it is easier to move the height of floors and ceilings (to make a taller basement or taller attic).
Square footage. Knowing the square footage of the property helps determine the cost of the rehab. It also helps to establish the potentially usable space you can have after the renovation. Most contractors can provide a rough price per square foot for a gut rehab. If you are doing a partial rehab square footage numbers are useful to estimate painting costs, costs for installing hardwood floors, etc. There are a few ways to determine the square footage:
Floor plans provided by the seller
A survey of the property- A property survey is designed to show land boundaries and is required for most closings. The survey also shows the outer dimensions of the entire building structure. Reviewing a survey is one of the easiest ways to determine the total usable square footage of a property. If the building is 23’ wide by 46’ long, there are roughly 1,058 square feet per floor. Then you can multiply that number by the cost per square foot to gut rehab the property to come up with an easy estimate of costs. Unfortunately, many sellers don’t have a survey readily available at the time of listing. It often isn’t ordered until closer to closing.
c. Measuring yourself when onsite. I recommend bringing a laser measuring tool. If there is no survey available, during a showing you can quickly measure the total length and width of the building using the laser measuring tool.
3. Ceiling heights on each floor. Ceiling heights are important because they can determine which floors can legally be rehabbed and used as livable space. Most municipalities require a minimum ceiling height to use a basement as a livable space. In Chicago, 7’ is required. Attic space may also need certain ceiling heights to be legal or even just functional. In a frame building, it is worth measuring the ceiling height on every floor of the property. If the basement is only 6’ tall, but the floor above is 10’ you can consider moving the floor to make the basement 7’ and the main floor 9’.
4. Views and clearance on each side of the property. The views and setbacks from the street and neighboring buildings are items that can’t be changed with renovations, so they are important to consider when buying a property. Many buyers like to have southern exposure for lots of light. In Chicago, shorter neighboring buildings that don’t block the side light throughout the whole property are a bonus. Does the property look out at a park or a gas station? These views will be what you look at for hours, so keep them in mind!
5. Yard space and front setbacks. The width of the street out front also affects how much natural light the property gets. Mature trees in yards are also bonuses and provide shade as well as views.
6. Window sizes and locations. Although window sizes and locations can technically be changed, it’s not always cheap to do so. The more windows that are already framed out in locations that you want, the more savings there are. In a masonry building, this is especially important since opening new windows and closing up pre-existing windows is very costly.
7. The Foundation. Although a lot of work can be done to save old deteriorated foundations, that work can add a lot of expense to a project. Look for large cracks in the foundation (on the inside or outside) and look for deteriorating mason, stone or concrete (whatever the foundation is made of). If the foundation is all covered with drywall, check to see if there are any spots where it is exposed in mechanical rooms, or near exterior entrances.
8. Structural Support. In the basement check to see if the beams in the basement are old original wood ones or if they are steal. Also check to see if the support posts are original wood ones or metal. In both cases the original wood components can still be okay depending on the condition of them. Check for large cracks and separation, or rotting wood. Many of my clients automatically assume sloped floors = structural issues. That is not always the case. It is normal for 100 year old buildings to have settled quick a bit. An inspector should be able to help identify any issues, and if needed a structural engineer could be called in as well.
For partial rehabs:
The breaker box, and electrical wiring/outlets- Check to see how old they look.
Plumbing pipes
Roof- Look at the condition of the roof, and then also look for any signs of leaks from the inside.
Condition of the exterior brick or siding
Basement moisture- Look for any signs or current moisture or past flooding.
Basement sump pump- Is there one?
Basement ejector pump- Is there one? One is only needed if there is a basement bathroom.
Age and condition of windows- Are they original to the building or have they been updated? Check how cold they feel in the winter months.
Step 4: Inspect the Property
Your real estate agent should be able to recommend an inspector that they use regularly. I recommend talking to the inspector about your rehab plans for the property. Many inspectors are experienced doing rehab projects themselves and can speak to both the condition of items in the home that will affect the rehab and also general ideas for layouts and recommended updates.
For my own gut rehab projects, I will sometimes do deals as-is. As-is means agreeing to not ask for credits for repairs or issues found during the inspection—it does not mean not doing an inspection. In an as-is deal, you can still cancel the contract for issues discovered during the inspection. For most deals though, I will waive the inspection altogether. I try to have my contractor join for the initial showing, and his opinion is usually all that I need to move forward with the deal. Waiving the inspection helps me to negotiate a lower price and be more competitive in a multiple-offer situation. I only recommend it if you have a contractor that you have worked with before and completely trust though.
Step 5: Financing and Architectural Plans
Once you have made it through the inspection the next step is the underwriting of the mortgage for your loan (unless you are a cash buyer).
If you are doing a rehab loan, line up your architect to visit the property right away. The architect will need access to get full measurements of the existing property to create as-is plans. These measurements are needed to create the new plans, which are needed for the underwriting of the rehab loan.
Even if you aren’t doing a rehab loan, if the sellers will allow you to have access, I still recommend providing the architect access to take measurements and start working on the as-is plans. In a rehab project, time is money, so getting the ball rolling with the architect saves time down the line when you are the one paying for the mortgage, taxes, utilities, etc on the property.
Once the as-is plans are created, work with the architect to create new plans for the project.
**If you are only rehabbing kitchens, and baths, or doing more cosmetic work, you likely don’t need to involve an architect at all. Architects are typically only required when you are doing an addition, changing floor plans, or doing significant updates to electrical, plumbing, or HVAC. Architects are the ones who file plans and permits with the city or local municipality. Check your local laws to see what type of work requires permits and/or plans. That will help determine whether or not you need to involve an architect.***
While working on plans with the architect, keep in mind window placement and where the property gets the most natural light. Also, think through spaces you have lived in before and how you like to use the space. How much closet space works for you, would you use a pantry, a dry bar, etc?
Once you have finalized the floor plan, the architect will start to work on the mechanical plans. There will also be electric, plumbing, HVAC, and structural plans. When these plans are created, although they can be confusing, take the time to review them in detail.
Check on the outlet and light fixture placement carefully. Are there outlets where you want to plug in a vacuum or charge a robot vacuum? Are there enough outlets in the bathroom for toothbrushes, razors, hair appliances, etc? Do you want a fixture in the center of your entryway vs. a canned light? Don’t forget about exterior lighting and outlets too. Keep in mind if you need outlets for security cameras or wiring for gates and doorbells.
Architectural plans often include schedules outlining the types of interior and exterior doors, the type of windows, and more. Don’t forget to review these schedules too.
Step 6: Hire a Contractor
It may seem weird to hire a contractor before you even officially own the property but some lenders that offer rehab loans require the contractor to be vetted in their system before closing. Hopefully, you have already been consulting with a contractor throughout the process on rough pricing, the inspection, etc.
I also recommend having the contractor review the new floor plan before it is finished. He/she may have suggestions on changes that can help with the budget or timeline.
Almost all rehab loans require a contractor’s budget as part of the underwriting process. As soon as you have finalized plans from the architect, send them to your contractor so that he/she can start working on the budget. The contractor needs time to send the plans to his/her subcontractors (the electrician, plumber, roofer, etc) to get their numbers to include in the budget.
Once you have the plans and budget, the lender can finish their underwriting process. This can take another couple of weeks on their end.
Keep in mind that steps 5 and 6 (and 7 below) need to happen in the 60-day timeline before closing (or whatever closing timeline you negotiated as part of the sale). It is usually very tight to get it all accomplished in that time frame. Stay on top of all parties involved and have quick response times when reviewing the plans to keep everything moving.
Step 7: Buy Insurance
When doing a large rehab project you will need a builder’s risk insurance policy while the work is being performed. This insurance will be required for closing. Once the rehab is complete, contact your insurance broker to have them switch the plan to a traditional homeowner’s plan.
Step 8: Close on the Property
Congrats you have made it this far! Finding a property to rehab and getting through the underwriting for a rehab loan are big accomplishments! At this stage:
Switch utilities over to your name
Stop by the property to turn off any dripping faucets
Turn off lights
Ensure all windows and doors are properly locked.
If you close on the property in the winter, work with your contractor to winterize the pipes and ensure the heat is working. You want to prevent any frozen pipes while the property is vacant.
Step 9: File a Permit with the City
As soon as you close on the property, notify your architect to file for permits with the city or local municipality. This is one advantage of starting the process with the architect ahead of time, even if you aren’t using a rehab loan. It saves another 30 to 60 days of working on plans before you can file for a permit. Filing for the permit will likely require you to complete some additional paperwork that the architect can guide you through. Once everything is submitted, waiting for the permit can take a week or months, it depends on where you live and the type of permit you are filing for. Your architect should be able to provide a rough timeline for how long the project will take.
Step 10: The Work Begins!
Once you have received your permit, notify your contractor, and the work can start! Some areas require the permit to be posted onsite at the property, be sure to post it if it is required. Check out my post that describes the 20 stages of a renovation project here.
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