House Flipping Business: The Empty Seat Audit

The jobs must be divided, being classified as contractor, bookkeeper, lender, agent, and project manager. The vacancy is not obvious right away, but only becomes clear on down the road due to inflated holding costs or missed financial projections.

This article takes a close look at each of these jobs one-by-one. Each position is assigned a job description and a rough financial value of what happens if the position is left open. The numbers used come from Mark Ferguson at Invest Four More, Home Depot's business plan guide, and Ferguson Homes' team building guide.

Ferguson Homes is a supplier and is not affiliated with Ferguson's company Mark Ferguson.

Where assumptions are made, the article makes this clear.

Capacity Math: When Flipping Property Becomes a House Flipping Business

Who is doing what? The starting point is output, because the (supposed) roles were created to protect that. In 2020, for example, Mark Ferguson flipped 26 homes with an average profit of just under $30,000 per flip. He has conducted as many as 22 flips concurrently, each one taking about six months from purchase to sale.

A six-month period equates to two project cycles a year a slot. With a profit of $30,000 a cycle, one slot makes $60,000 a year while four slots make $240,000. These figures are merely an example based on his averages and are not indicative.

It's better to have a buffer. Home Depot's book advises a 20% addition to time and budget. This makes a six-month window 7.2 months.

Each slot can finish 1.67 cycles in a year and get $50,000 rather than $60,000.

That's 17% of capacity before anything unexpected comes in - the cost of a reasonable plan.

A house flipping business really sells capacity. You have capacity. Any vacant role reduces that capacity.

Seat by Seat: What an Empty Chair Costs in Flipping Property

The Ferguson Home compares owners to coaches of a network, where players have defined roles. Here are the roles that matter most, listed in the order in which losses typically are incurred.

Seat One: The General Contractor

Duties: Manage renovation, set deadline, and engage trades.

Vacancy Cost: After Mark Ferguson's DIY attempt, it lasted about six months and resulted in at least $2,832 of carry cost. He guesses, factoring in lost business, the real cost was closer to $25,000. Because of this, he has all work done by contractors and advises neighbors, family and friends for leads.

It's more about time management than technique. Every hour you spend manual labour is time you're not working on the next deal.

Position Two: The Bookkeeper

Duties: Document expenses and payments to contractors, and inform the CPA and owner of the results.

Vacancy Cost: The line between what is real and what is an estimate is indistinct. At $50,000 with 20% contingency as suggested by Home Depot, there is a $10,000 cushion. Absent a bank statement, it is only when that cushion is running out that you know that it is running out.

"This case could be defined as hope-based bookkeeping, so far still manageable until the third invoice arrives...."

Seat Three: The Lender

Duties: The funding is to be provided as per the project schedule.

Cost of Vacancy: Worst mistake is choosing an unqualified lender. Ferguson puts the carrying cost at $23.28/day on a $100K property on a $75K loan at 5.25%. A 15% hard money loan on $110K runs $57.80/day. That's $4,190 compared to $10,404 over 180 days, a difference of over $6,214.

Moreover, your bank will need 25% down and does not finance repairs. A lender who is in sync with the project schedule is a role to interview for.

Seat Four: The Agent

Leadership: Presenting leads, indicating sale prices, and buyer interest.

Cost of Vacancy: The biggest impact is slowing down. Ferguson receives the majority of his transactions through the MLS, which he monitors several times a day. His assistant will prepare an offer through DocuSign, and Ferguson can turn in an offer within an hour of a new listing. In a multiple-offer scenario, he will go as high as he can without sacrificing his desired profit margins.

If agents are not present then potential opportunities are lost, as your competitors buy the property first. They also set the exit price and can give you tips on staging. Ferguson started staging at the same time as his competitors, who learnt that the faster the property can be sold and the more it sells for.

Seat Five: The Project Manager

Tasks: Arrange the deal and relay information to the owner.

Cost of Vacancy: At first glance, this appears to be a savings, but it is necessary when buying several projects. Ferguson has a project manager and office costs, which brings his average profit down from nearly $35,000 to almost $30,000. This is $5,000 per flip or 14% of the headline profit.

To sum up, having a project manager in the team is not an extra on your bottom line, it allows to run several projects at the same time.

Seat Six: The CPA and the Lawyer

Responsibilities: Formation of a business, tax managing, protect personal property.

Cost of vacancy: Difficult to give a specific dollar amount as this varies by location. Organization type: Ferguson Home designates the CPA as the person who establish the business structure, which may be a sole proprietorship, partnership, LLC or corporation. When Australians buy, they need to include stamp duty and GST and determine if a sale is income or capital gain. Be sure to confirm all of these before an initial purchase with an accountant.

Who Sits in the Owner's Seat in a Flipping Property Business

The last occupied seat goes to the proprietor. Home Depot's strategy suggests always hiring an agent, legal representative, CPA, lender, examiner and contractor before you buy. It also recommends that you develop alternate exit plans - lease when a backup plan.

The owner's work cannot be delegated and is one of a kind. The owner is the one who chooses the deal, defines the scope and also sets the price. Ferguson insists he is only involved in these activities and leave the Return on Time aspect to the expert.

It is mandatory to include in the calculations all the hours that have been used as a cost of the deal.

These are other deals that could have been done.

How FlipSync IQ Keeps Flipping Property Seats Talking to Each Other

Communication gaps often occur when switching over to another role. The contractor finishes, but the bookkeeper hasn't been told. The lender drops the money, but the budget doesn't get updated. Your property flipping company needs a single set of financial information for all of your roles.

Budget vs. Actual for every project in Flip Sync IQ includes red and green variance indicators. It tracks receipts, invoices, staged payments against budget.

It also maintains site check-in and check-out history and photo logs of onsite team members and their times in and out.

Role-based permissions can restrict the trades' financial module access while the project manager has the access to all features. There is no limit to the number of project team members.

Each feature takes care of a particular function in your public accounting task. Even so, none of them can take the spot of the role where the human was sitting.

Run Your Own Flipping Property Seat Check

Pick your current business and answer four questions. They will determine if you have an owner for each of the following roles in your property flipping business.

1. Who does the weekly actuals vs. estimates review? If the answer is "I am, if I have time," then the bookkeeper position is still open.
2. How much the cost of the lender per day if the project gets delayed by eight weeks? If you don't know the answer, the lender role remains vacant.
3. Who rings the trades when a start date is not met? If it's you then the job is not filled.
4. When was the last time that you turned down a deal because you were busy closing the deal that you are working on now? If the answer is never, then you are trying to do everything yourself.

Fill the Seats Before You Scale Flipping Property into a House Flipping Business

Property flipping pays investors who treat each project as a matter of assigning roles. It's a different way of saying the house itself doesn't change. The key factor is whether one owns the finance, the timeline, the capital, and the sale. Property flipping business grows only as fast as roles do.

Audit your roles before acquiring another. Each open role gets assigned a daily dollar amount. Then purchase, outsource, or hire the right system to fill it.

An open role rarely shows up in the settlement statement so most owners discover it late.

Every property flipping business that succeeds past the first project will address it first. Try Flip Sync IQ for free and see the financial numbers of each role on one all-inclusive dashboard.