Managing Change Orders on Fix and Flip Projects
Quick Answer
Change orders modify the original scope of work during renovation. They can increase costs and delay timelines. Communicate changes to your lender promptly and document everything in writing.
Table of Contents
What Are Change Orders?
A change order is a formal modification to the original scope of work during a renovation project. Change orders can add new work, remove planned work, or modify existing tasks.
In fix and flip projects, change orders are common because distressed properties often reveal hidden issues once renovation begins.
Common Reasons for Change Orders
Hidden Damage
Once walls are opened up, you may discover:
- Termite or water damage
- Faulty wiring or outdated electrical
- Plumbing leaks behind walls
- Foundation issues not visible during initial inspection
- Mold or asbestos requiring remediation
Code Compliance
Older properties may need upgrades to meet current building codes:
- Electrical panel upgrades
- Smoke and carbon monoxide detectors
- Egress window requirements
- Handrail and stairway updates
Design Changes
Sometimes the planned renovation needs adjustment:
- Material substitutions due to availability
- Layout changes based on market feedback
- Upgrades to improve ARV
- Downgrades to control costs
How to Handle Change Orders
1. Document Everything
Every change order should be in writing and include:
- Description of the change
- Reason for the change
- Cost impact (increase or decrease)
- Timeline impact
- Signatures from both investor and contractor
2. Notify Your Lender
Contact your lender as soon as a significant change order arises. They need to know if:
- The total rehab budget is increasing
- The scope of work is changing materially
- The project timeline is extending
- The ARV estimate is affected
3. Evaluate the Impact
Before approving a change order, consider:
- Does this change improve the ARV?
- Is the additional cost justified by the return?
- How does it affect the project timeline?
- Is there enough contingency budget to cover it?
Preventing Unnecessary Change Orders
- Thorough inspections before purchasing the property
- Detailed scope of work that accounts for likely issues
- Experienced contractors who identify problems early
- Adequate contingency budget (10-15% of rehab costs)
- Regular site visits to catch issues before they escalate
Related Reading
Key Takeaways
- ✓Document all change orders in writing with costs
- ✓Communicate changes to your lender immediately
- ✓A contingency budget helps absorb unexpected changes
- ✓Thorough inspections before closing reduce surprises