REI INK - Cover Story
Padlocking Flip Projects Into Profits

Flip Factory App Solves the Flipping "Cashflow Problem"

Carole Vansickle Ellis

Aug 1, 2021

When Raleigh-based flippers and general contractors Jake Harris and Juan Huerta invented the Flip Factory App, they were aiming for a solution to one of the oldest problems in the fix-and-flip industry: cashflow. “There is one key component in real estate without which nothing else functions,” Harris explained. “Before we could solve any other problem in flipping, we had to attack and solve that component, cashflow. After that, the rest comes naturally.”

Intriguingly, the “cashflow problem” Harris and Huerta describe is not exactly what most investors reading might think. Instead, it is an issue much more pervasive than simply gaining access to capital and much more insidious than making the wrong decision about which project upon which to lend money. “The issue is mistrust,” Huerta said ruefully. “Misappropriation, robbing Peter to pay Paul, has become a hugely problematic side effect of the way flippers and lenders handle funding on their projects. In the traditional cashflow model, once funds are commingled it can be really hard to escape that hole that investors both new and experienced create for themselves. Flip Factory App helps you avoid that pit from the beginning and get out if you are already in it.”

The compassion with which Harris and Huerta describe flipping’s “cashflow problem” rings clearly through their description of the creation of their app. Flip Factory App is exactly what the name implies: an app that enables fix-and-flip investors and every real estate professional involved in the flipping process to handle a project from start to finish from the screen of a phone. The unique program not only simplifies the process for investors; it also strengthens the degree of security lenders can feel about projects. Funds flow through the app only to designated projects and properties, and the program helps contractors and professionals document their progress and get paid in almost real time when their portion of the work is completed.

“We built Flip Factory App from the inside out because we were building the program for ourselves as well as for the industry,” Harris said. “We knew that the best way to make the whole process work from beginning to end would be to provide value across all the personas involved in the renovation or construction process.”

“We can hold a conversation with anyone in this industry about any aspect of this industry,” Huerta added proudly. “We are from this world, and we built Flip Factory App for ourselves so we could do more projects. We are not tech guys who built the program and then started looking for a home for it in real estate. We were already at home in this industry when we created the system.”

The Challenge: “Padlocking” a Project in a Way that Supports Everyone

Because Harris and Huerta were initially simply trying to design a system that would enable them to complete projects in a more efficient, streamlined fashion, the creation of Flip Factory App started out, appropriately enough, in an extremely traditional format. The first version of the system manifested in the form of a flowchart laid out on a diner table under the nose of a somewhat exasperated waitress.

“We were together at a local breakfast restaurant having one of many conversations about the process of flipping a house,” Harris recalled. “We started writing down everything that needed to be done on flashcards and arranging them on the table.”

“I think we might have really annoyed our waitress,” Huerta laughed, “but the end result was a template that we used and constantly improved upon as we continued to build and renovate houses.” That original “flashcard layout” can be seen today on the Flip Factory App website, where the founders’ “How to Flip a House—in Phase Order” educational breakdown showcases the final result of all that fine-tuning.

“Little did we know when we were getting started that we were going to be able to solve a problem that was plaguing (and continues to plague) so much of our industry,” Huerta noted. “We were just trying to develop something to make ourselves better!”

Those efforts soon paid off, with the duo handling more projects with greater efficiency than ever before. Soon, they were describing the flipping “template” and all of the interconnected but often independently provided processes to one of their lenders. That was when the lender issued them a challenge that would change everything. “They said to us, ‘If you could put a padlock on that schedule, that process, and the budget of a project, you would really have something,” Huerta recalled. “We took that challenge and were on the way to changing everything.”

The reason lenders often wish for a “padlock” on projects is that traditional cashflow models in fix-and-flip projects usually involve the lender making funding available directly to the investor. Then, the investor disburses those funds to the general contractor, and the general contractor disburses them to subcontractors. “That is the way it almost always works and almost always has worked,” Huerta said. “It sounds like a straight line, but really funds often end up commingled between projects. That is where the mistrust between lenders and investors and between investors and contractors comes in, and that mistrust makes it harder to borrow money if you are a new investor or if you are experienced but working with a lender who is new to working with you.”

To create a truly straight line for the cashflow process, Harris and Huerta created a digital “wallet” for each project in a Flip Factory App account. The wallet functions as an individualized bank account for the property, holding the funds that normally would be distributed directly to the investor by the lender until itemized benchmarks are reached. Once a benchmark is documented by a contractor and the work is approved by the investor, funds assigned to that piece of the project are distributed directly to the service provider.

“As investors and contractors ourselves, we know that the commingling of funds is almost never malicious,” Huerta explained. “In most cases, investors end up in this type of scenario unintentionally because they do not have a clear, direct process that takes them from A to B to C, etc. Using Flip Factory App, the funds in the project wallet can only be used for the specified project and, furthermore, for the specified portion of the project. This prevents investors from falling into the misuse ‘hole’ in the first place.”

In the event that a contractor, service provider, or investor needs additional funds for a portion of a project, they file a change order through the app. While this might sound time-consuming, the Flip Factory App creators say that keeping the process streamlined was critical to their process. The change order process can be completed in about 30 seconds on-site and in real time, they explained, because the process is simply a matter of documenting the need and filling in a few blanks. For example, if an electrician is working in the attic of a property and realizes they will need $50 more than expected to make a repair, the app simply requires they document the need with photos, provide the amount of money needed and the reason, and estimate the amount of time the additional work and funding will add or subtract from the project timeline.

“You just take photographs of what you are describing, explain why you need more money, and hit the submit button,” Harris explained. “Then the investor gets an urgent notice on their phone that they need to view a change order. They look at the photos and the reason and swipe for approval. The money is deposited in the wallet, tracked, and it becomes part of the billing and payment process automatically.”

Assigning Numbers & Values for Every Facet of the Deal

This smooth process is possible because the individual wallet format in Flip Factory App requires investors to set up each project, in detail, before they receive funding. Users download one of five templates that best fits their specific project. The options range from light cosmetic renovation to full gut jobs. The Flip Factory App team works with investors to customize each template for additions, renovations, and cosmetic upgrades at every phase of the project, enabling a user to “cut away” pieces of any template that are unneeded and add more information and phases to the project when necessary.

“Once your project is loaded into Flip Factory App, you invite your general contractor to review the project and provide input on your projected schedule and costs, which helps you craft a perfect financial project plan,” said Huerta. “You bat the details back and forth using the same exact list until you both agree you have an actual project. It’s only then that you invite a lender in and they can make a decision on their end about the project’s viability.”

Because Flip Factory App is free to use up to the point that other parties like the general contractor and the lender are invited to participate in the process, many users leverage the program to help them evaluate deals as well. Harris and Huerta plan to leverage the data from the app to help all investors make accurate estimates about future acquisition costs, a timely service in today’s volatile construction materials market.

“Our tech team is actively building a Flip Factory App index, to be called the ‘Build Wallet Index,’ that will give our lenders, our general contractors, our subcontractors, and our investors the confidence to know what the industry averages really are,” said Harris. “Thanks to the app, we are getting this information and real-time updates in the form of change orders from our subcontractors as well as at higher levels. This data will enable our users to get out in front of pricing spikes like the ones going on right now in the lumber sector because we will be able to send out alerts when the change orders indicate a shift in a marketplace.” The Build Wallet indices are expected to debut in December 2021 (see sidebar).

“A lot of times, contractors have a lot of difficulty knowing how to price materials in this kind of market,” Huerta explained. “This means they have to put a price on a project that they believe will cover them if prices rise, but both the investor and the general contractor are getting hurt at that point because they are in a breeding ground for a bad relationship. Even worse, if the price does not cover the contractor, they have to make up that loss on other projects. That hurts their ability to do business and do their work well.” Harris and Huerta believe having access to real-time changes and cost trends in a variety of real estate-related sectors will be a lifesaver for many contractors and the investors they work with as well as for the lenders trying to determine before the project has even started whether or not it will be successful.

“We love our industry and we believe we owe it to the real estate industry to make this information accessible and actionable,” Harris said proudly. “We are going to give this information back to the industry and provide cost data so every player in a project can make informed decisions.”

Sidebar 1:

Being a Team Player Helps Every Project Team

When Flip Factory App co-founders Juan Huerta and Jake Harris started work on the process project that eventually became Flip Factory App, they brought intimate, firsthand, generational experience to the table when it came to how contractors and subcontractors handle the daily logistics of a labor-intensive, complicated job. While subcontractors may appear to have the “luxury” of focusing on one area of expertise, running a business based around providing that expert service still requires a great deal of flexibility and attention to detail throughout the small business. This can be difficult when the contractor provides much or all of the actual labor themselves in addition to handling business logistics like invoicing, billing, and customer service. Huerta, who grew up translating for many different people who were often in the construction business, has firsthand knowledge of how complicated this dual role in a business can be—especially for contractors working in the United States who may not speak English as their first language or who may have little formal training in the overwhelming details of running a small business.

“For many contractors, it is profoundly difficult to spend all day doing the labor associated with a project and then come home and have to figure out how to handle the paperwork on the back end as well,” Huerta explained. As a contractor himself who went from “zero to being able to translate” for his family and other people in the space of six months at the age of eight, Huerta knows how difficult it can be to navigate running a business in a second and unfamiliar language. “The older I got, the more I was tasked with translating everything from code books to invoices. This experience made it really important to me to create a system that would help the hardworking contractors and subcontractors out there keep their businesses running,” he said.

“I consider that early experience a blessing because I was able to work with the tech team to embed the knowledge and experience I gained starting from such a young age working side-by-side with contractors into Flip Factory App,” Huerta said. “It was so important to provide our contractors as well as our investors and lenders with the ability to operate their businesses on the same competitive level as everyone else in the industry. A lot of contractors are ‘one-man-show’ operations. Because Flip Factory App removes the issue of chasing down payments and difficulties associated with the language barrier so specialists can focus on what they are really good at, they are able to focus on the work and doing the best job possible for their clients.”

“When we started the creative process that led to Flip Factory App, we did it because we wanted to scale up in the industry we loved,” Harris added. “This application is designed to provide a certain degree of security on the business side so that everyone using it can focus on working in the trade that they love.”

Part of that security also comes from the ironclad protection of the “padlocked” project process in Flip Factory App. “When a lender puts funds in a project wallet, it goes into a real bank account with our banking partner and has $250,000 FDIC insurance immediately,” Harris noted proudly. “The lender knows they are providing funding that is going into a real bank for a real project that has been vetted not just by the lender, but extensively by the service providers and the investor in tandem as well.”

Sidebar 2:

Coming Soon: The BuildWallet Platform

Flip Factory App has already made waves throughout the residential real estate industry, so it will come as no surprise to investors already using the app that there is a major expansion scheduled for the program in 2022. Jake Harris and Juan Huerta recently announced they will begin accepting new construction, multifamily, and commercial construction projects in the Flip Factory App, to be rebranded BuildWallet for this evolution, starting in Q4 2021.

“We think of it as moving from a really finely-tuned go-kart to a Formula One racer for our users,” Harris said proudly. “Our lenders, investors, and subcontractors will all be able to access the new, extended products to build their portfolios.”

Learn more about BuildWallet at www.buildwallet.com