Flipping Smarter: The Power of Scope of Work

Jonathan Klemm (00:00)
Yeah, I think the golden ticket without question, Dylan, is people using the renovation loans. So there’s two primary ones that we do a lot of. That’s the FHA 203K and the Homestyle loan. Both of those are low down payment. So one FHA is three and a half. The Homestyle is conventional five percent down and you’re able to wrap in your renovation costs into that loan.

Dylan Silver (01:54)
Hey folks, welcome back to the show. Today we’re joined by Jonathan Klemm, a business builder and servant leader who understands that real estate at its core is a people business. He’s focused on building relationships, solving problems and creating value where it actually matters. With a background in heavy civil engineering and prop tech, he’s now the founder of Quality Builders, a Chicago based general contractor helping homeowners, house hackers and investors navigate the complexities of renovations. Welcome to show, Jonathan.

Jonathan Klemm (02:22)
Wow, that was impressive. I don’t know if I wrote that bio or chat GPT did, but that was one of the better ones I’ve heard, Dylan. I appreciate you having us. Thank you.

Dylan Silver (02:31)
Little bit of both. We took some inspiration from what you wrote and also what I’ve seen online. you know, when we talk about the Chicago market specifically, it’s a little bit different than so many other markets. I’ve learned from guests on the show, you know, there’s Aldermen’s in different parts who are kind of like miniature mayors, if you will. How did you get started, you know, in the real estate market in Chicago?

Jonathan Klemm (02:50)
Yeah.

Oh, yeah. Great question. I got started because I was a super scarce minded person and I wanted to figure out how to make money. And, you know, I eventually got into real estate kind of by happenstance. I did kind of like a live and flip type of model where I bought a property through an auction and didn’t really know what I was doing. Ended up trying to do everything myself. Didn’t go great, but I actually was able to use that capital gains tax benefit to avoid my

capital gains because I stayed there for two out of the last five years. That’s how I bootstrapped my way into the real estate market here in Chicago.

Dylan Silver (03:30)
So investing first and then realize, hey, I can not just do this for myself, but also help other investors.

Jonathan Klemm (03:37)
Yeah, I think I slowly realized how difficult it can be working in this smaller residential space with general contractors. So coming from big, heavy, civil, know, hundred million dollar plus jobs, I learned a lot of systems processes, you know, that maybe not every small general contractor is used to. And so our whole goal is to implement those, you know, big process systems from big construction into the small residential space where

There’s a lot more challenges, you know, just with the help of labor and building the right team.

Dylan Silver (04:12)
You know, one of the things that I think is particularly challenging, and I mentioned this, is, you know, between approvals and the local dynamics, I think Chicago can be one of the trickier places to navigate. How do you navigate that? And, you know, what should investors know before getting into a deal in Chicago?

Jonathan Klemm (04:30)
Yeah, I think that’s a great question. You know, I think it happens in every state, but I mean, the key here, you know, Chicago is almost like its own little state here in Illinois. And so being able to understand the different municipalities, the permit processing of the zoning is the key, you know, because if you get hung up in those areas, it can be a super challenging and time consuming process. And so we heavily focus on partnering with the right architects to come up with the right plans, understand all of the zoning.

And then we kind of push things through once we get the project going through all of the

So making sure you have the right team between your general contractor and architect is probably the biggest thing I’d ⁓ echo for importance as far as figuring out the Chicago market and all the permitting and zoning challenges.

Dylan Silver (06:04)
How important is it to build relationships with local officials? You mentioned, know, ⁓ architects, right? But with local officials themselves, and how does someone even begin to do that?

Jonathan Klemm (06:17)
Yeah, I mean, I think that’s going to be a personal preference in that situation and more based on your overall strategy. So if you’re going into projects here Chicago and you’re doing a lot of zoning changes and variances and things that need to get approved by your local alderman, like you said, your mini mayor, you know, then that’s when you need to start thinking about what areas you’re working in, working in the area.

same area over and over again is the key in my opinion to being able to scale so you can build out those systems and processes. And so I think each person has to evaluate what path they’re taking. If it’s just going to be a cosmetic renovation or a gut renovation where you’re not doing a lot of zoning and variance type issues, you’re not going to have to deal with those aldermen’s and having changes. So I think my recommendation is to avoid that.

and or go all in on that. I think you want to do one or the other. I think trying to do zoning stuff once and then not zoning and then a cosmetic and then a full gut renovation. It’s so easy to go in so many different directions. I know that was probably my kryptonite getting started as I said yes to everything. And it’s very, very hard to build a repeatable system to help grow on scale when you’re doing it like that.

Dylan Silver (07:30)
Yeah, I mean, I think finding your niche is so key. Do you see in Chicago specifically a specific avatar of investor, you know, or a persona that tends to succeed or even a deal strategy in the single family space, whether it’s long term holds or flips that you see working particularly well?

Jonathan Klemm (07:50)
Yeah, I mean, I see it working well in the right suburbs, you know, typically. And, you know, there’s different suburbs that have different restrictions. So a lot of the south suburbs here in Chicago have quite a bit less restrictions. And so they’re good for a buy and hold. And some of the ones that have more restrictions are actually easier to ⁓ fix and flip. And, you know, and I would say those western suburbs are some of the ones that have some more restrictions. You could think Lyons, Berwyn, Cicero.

And down towards the south side, kind of have ⁓ Dalton, ⁓ Blue Island, and some of those other south suburbs that I see a lot more buy and hold investors in. And some of the western suburbs, I see more fix and flip type investors.

Dylan Silver (08:32)
It’s

it sounds like you know you’re bullish on certain areas of Chicago for certain strategies. Are there any specific pockets where you would say OK if I had to you know just pick one area of Chicago to do deals in or or investors that I’m working with are doing a lot of deals in. Would it be the south side. Would it be the west part of Chicago.

Jonathan Klemm (08:52)
Yeah, I mean, my personal preference is a southeast quarter, I’ll call it. for listeners who know Chicago, if you’re on 90 going south, you know, there’s an area between 90 and the Skyway East that runs along the lake. And so those neighborhoods would be Washington Park, Bronzeville, South Shore, Woodlawn. And all of those areas continue to gentrify.

You know, and mainly because in Chicago you want to follow the path of progress and the path of progress here in Chicago is completely based on where we have transit, public transit. And so that green line, green line and it’s a green line that runs down in that area, you know, continues to be extended. And so I really, really like that southeast quarter. think it’s going to be it’s a great area for not only appreciation, but also cash flow on the northwest side of Chicago.

along the blue line where you see a lot of more house hackers, people in that two to four unit space, they’re banking a lot more on appreciation than cashflow. And I think that works fine. Like that was a strategy for me early on. Like I broke even

Dylan Silver (09:58)
Hmm.

Jonathan Klemm (10:37)
on a lot of my two unit properties, but the appreciation can be in the six digit range. And that makes it worth it as long as you have enough cashflow coming in to support that lifestyle.

Dylan Silver (10:50)
Are there any deal killers or red flags that you see in deals where you would immediately say to a client or if it’s a deal that you’re looking at, know, we’re not gonna touch this.

Jonathan Klemm (11:02)
Yeah, I think the easiest one to point out is, you know, there’s a lot of areas on the South Side Chicago where, you know, it’s a little rougher is a nice way of putting it. And I think to a lot of outside investors, they see what the numbers look like. You know, the higher cash on cash returns, what they, you know, don’t understand the heavy lifting that comes with the property management in those areas. I learned firsthand personally on a building, 7033 South Indiana in Greater Grand Crossing.

And I bought into the building and we tried to stabilize it. We ended up having squatters. We ended up having two different drug dealers. One drug dealer set another drug dealers tier on fire that resulted in a $400,000 fire claim. And we just couldn’t get the building repaired fast enough to get it back and stabilized on the market. And so it literally sank into the ground $50,000 later.

Dylan Silver (11:57)
Yeah, I think when people talk about the influence that a neighborhood can have on your property, it can impact so many different things from property management, but also you’re having to then deal with potentially change over in tenants more regularly, right? Because people might not be as inclined to stay for longer and longer times. I do want to pivot though and ask you about building the business as a GC as a general contractor. How did that?

pivot come about for you? And then what was it like, on the ground level building that business?

Jonathan Klemm (12:30)
Yeah, so it started with actually my own development. So I had a lot in the Northwest side Chicago and I’d been working for a property technology company, networking quite a bit. Like it really started with me networking. I went to every kind of local Rio city event for probably two years straight, had built a very strong Rolodex of subcontractors and, you know, had priced out the project to different GCs. I realized like how much

it was going to cost with other GCs and realized my background was in general contracting for the last 10 years. And it just made sense to do it myself. And after that, you know, and all the struggles that I also had with other general contractors, it just seemed like there was a gap in that market and a better way of doing things. for us at Quality Builders, like we don’t want to be electric home builder. think that’s what any smart general contractor does. He goes where he can go make more margin.

We actually still want to be focused on this kind of like economical to middle grade client, whether they are a homeowner, investor or house hacker and be able to provide a quality product at maybe a ⁓ bit lower price than we probably could and really build more of a volume based business.

Dylan Silver (13:42)
How does your background in engineering give you an edge compared to other contractors?

Jonathan Klemm (13:49)
I mean, I think it’s not necessarily the school, but it’s just the mindset and the way of thinking, right? When you go through engineering school and you do all this calculus and physics and all these crazy numbers, like you’re just become such an analytical thinker that you processing is very quickly. And for me, I think that’s the key is I’m able to think quicker, solve problems faster, and ultimately, hopefully get projects done sooner.

I don’t pretend like it’s all sunshine and rainbows. I think every project almost always ends up costing more and taking longer than we expect. That’s kind of the nature of renovation. you know, having that analytical mindset has just helped me, you know, build systems and processes to help our business slowly scale.

Dylan Silver (14:35)
For folks who are listening and thinking about doing their first renovation or their first house hack or their first flip in Chicago, what’s one thing that you would say they absolutely have to get right from day one?

Jonathan Klemm (14:50)
Yeah, I mean, super easy answer. It’s just like the scope of work. You you have to know exactly what you want to do in order to know how much it’s going to cost.

So many clients come to us and don’t exactly know what the scope is because they don’t know how much it’s to cost. And it becomes this like chicken in the egg game of, OK, well, what if I do this first? What if I do that? And I think the best clients we have have a crystal clear vision on what they want. And when they have that, it’s a lot easier for us to move the process.

forward quicker. so spending that upfront time on the pre-construction of figuring out exactly what materials you want, where those are going, has been the key for us that we’ve really had to rebuild our business upon, is making sure that we’re taking the time upfront, not letting clients rush us into projects. And so making sure that they have a crystal clear scope of work is the number one thing I can recommend to anyone listening who’s getting going.

Dylan Silver (16:22)
Now, I’m sure you’ve seen everything that there is to see at working with investors, homeowners, flippers, being a general contractor yourself. Any horror stories that stand out to you that you can share with our audience.

Jonathan Klemm (16:36)
I mean, yeah, many. There’s been several projects for us, I think, that have been very, very challenging. Each time while we were growing over the last five years, we continually took on more challenging projects. And when you take on more challenging projects, there’s just a lot more room for things to happen that you weren’t aware of. And so, I think specifically back on a property where we added a third story to a two-unit building,

And there was just so many details on like the metal framing that isn’t necessarily traditional. And the project ended up taking about like two and a half to three months longer and probably costing at least 10 to 15 % more than we had anticipated. you know, understanding the level of risk with bigger projects is one of the things I think everyone has to factor into their numbers more is just having that right contingency. know, the bigger the project is,

the more contingency you probably need to have, especially if you’re adding square footage. So think adding additions, extensions, or digging down in basements, which is super common here in Chicago.

Dylan Silver (17:43)
thinking about the avatar of the individual who invests in Chicago from an investment standpoint and being that there’s a lot of competition, it’s already highly developed. I’m imagining most of the people investing in the single family space in Chicago are themselves also physically living in Chicago or in the greater area. Am I wrong?

Jonathan Klemm (18:05)
Yeah, I would say that’s probably spot on, right? The people who are investing in single family are close to home more often than not. It’s often the people who are investing in the 10 plus multi-family, outside money from New York or California or wherever it might be, that are investing out of state. And a lot of the people who are closer to home are investing in those single family properties because they’re just ⁓ getting going in that process.

Dylan Silver (18:34)
I do want to ask you, we are coming up on time here, but you mentioned all the different folks that you assist, whether it’s investors, folks who are doing some type of house hack, renovating their own property. Where would you say is the biggest source of ⁓ equity and cash for people? Is it in their personal home? Is it in an investment property? If they’re looking to make an investment, are people doing HELOCs?

putting together money between friends. How are people affording to make their first investment in the Chicago area?

Jonathan Klemm (19:06)
Yeah, I think the golden ticket without question, Dylan, is people using the renovation loans. So there’s two primary ones that we do a lot of. That’s the FHA 203K and the Homestyle loan. Both of those are low down payment. So one FHA is three and a half. The Homestyle is conventional five percent down and you’re able to wrap in your renovation costs into that

I mean, just imagine the bank’s giving you.

30 years to pay off a three or $400,000 renovation, the amount of equity you’re able to build by the bank financing that renovation is just, know, earth staggering. by far the best thing I think anyone can do who’s looking at getting in the game is look at one of those two to four unit properties in Chicago and take advantage of one of the renovation loans I just mentioned.

Dylan Silver (19:55)
Coming up on time here, Jonathan, any new projects that you’re working on and then as well, what’s the best way for folks to reach out to you or your team?

Jonathan Klemm (20:02)
Yeah, we got new projects coming up all the time. We got a pretty cool one coming up in the kind of downtown area in the River North. That’s what I was trying to think about. It’s going to be a cool commercial space and ⁓ two units up top. And that’s going to be a little bit different for us, a little bit more higher end model, which I’m excited about. for people looking to get in touch with us, the easiest place is by far our website. If anyone just goes to www.qualitybuilders.com. You can sign up for a free consultation. And we also have a free instant estimator on there. So if people are trying to get some rough numbers and have some idea on the property, whether it’s multifamily, single family, the square footage, you can get some decent realistic numbers if you hop on our website and use our instant estimate.