A ‘Contractors Dozen’ Tips for Rehabs

A ‘Contractor’s Dozen’ Tips for Managing Rehab Projects

A good contractor can make the difference between a profitable deal and a nightmare for you as a real estate investor. Sometimes, the costs for the estimated repairs aren’t as accurate as projected partly due to unrealistic contractor bid estimates. Other times the extra monthly carrying costs from missed completion deadlines can wipe out much of the potential profits. If you hope to buy, repair, and flip a house within three to six months, then you had better find a reliable contractor who can provide quality workmanship, a timely schedule, and an accurate budget in order to complete the project as profitably as possible.

The key to success for a high percentage of “Fix and Flip” deals is directly related to the estimating accuracy, quality and speed of the contractor involved with the project. Since these characteristics can be screened and/or managed by you, the investor, the following are twelve suggestions for improving the success of your rehab projects.

1.) Finding a Contractor: The best way to find reliable, honest, and affordable contractors is through referrals from other investors. Asking friends, family, and neighbors for their best recommendations is another related method. Online Referrals are often the easiest and most efficient: checking the National Association of the Remodeling Industry, Zillow, Angie’s List, etc. Recommendations from real estate agents also typically produce good results. Lastly, contractors who want steady work often join and/or visit Real Estate Investment Clubs.

2.) Ask Lots of Questions:  Questions which you may ask the contractor candidates could include these: “Are they experienced with projects like “Fix and Flip” home deals?”, “Can they provide financial references from either banks or suppliers?”, “Can they provide a list of previous satisfied clients?”, and “What type of relationship history do they have with subcontractors in the same region?”

3.) Personality / Demeanor: You should meet face to face with any prospective contractors you wish to hire. A meeting in person will help you determine if your personality is compatible with the contractor since you may be spending a lot of time together over a period of several months. Don’t make a final judgment after just one meeting; if the relationship may go months (or in the case of multiple projects, even years), you’ll want to experience the contractor’s demeanor firsthand on both “good days” and “bad days” before deciding if you want to employ him.

4.) Detailed “Scope of Work”: Preparing a good scope of work helps you define exactly what you want done and communicate this to prospective contractors.  It also signals to the contractors that you are a professional and expect to be treated accordingly.  (Homeowners are not likely to prepare a “Scope of Work” and typically get charged higher prices by contractors.)  A detailed scope of work also helps ensure that the bids more uniformly address what work is to be done, which is helpful in the next step.

5.) Multiple Bids: Get at least 2, 3, or 4 different contractor bids, if possible. First, you should conduct phone interviews after compiling a list of potential contractors. Afterwards, ask each to prepare a written proposal for the work they will perform.  Getting multiple bids serves two purposes: first, you learn more about the project because of the experience and opinions each bidder brings to the job. Secondly, you have the prospective contractors bidding competitively which typically produces a “more fairly” priced set of proposals.

6.) Reviewing Existing Plans: A competent and experienced contractor will typically request a full set of blueprints for a partial or full remodel. These same contractors may then ask you to explain to them in detail your wants, needs, and desires for the renovation project as well as their firm budget price range. To compare various contractor bids, you should ask all of the contractors who are interested in working on the job to break down the exact costs of material, labor, profit margins, and any other expenses.

7.) Best Price vs. Best Deal: Some investors simply choose the lowest bidder. Others completely ignore the lowest bid as it may be unbelievable to them if it is significantly lower than any other competing bids. Or, these same investors may believe that the contractor is knowingly not providing them with accurate numbers primarily just to get the job unfairly. Checking references is the best protection against this latter practice, unfortunately common in the industry.

8.) Realistic Timeframe: With “Fix and Flip” deals, time is money! Some investors need a job completed within 30 or 60 days in order to reach their target profit goals. Other investors may have more flexibility partly since their carrying costs are lower. Regardless, investors need to emphasize both verbally and in writing their desired time frame for the contractor and their Subcontractors to finish the work. Some investors offer cash bonuses to contractors who finish earlier than their target dates which may really motivate a contractor to focus on their job.

9.) Quality of Materials (Materials List): Is your contractor buying supplies for the cheapest price possible at the local “Big Box” chain store, or are they buying from high-end suppliers? This desired quality of materials should be conveyed at the very beginning so you don’t end up with inexpensive laminate countertops as opposed to the more preferred Granite or Marble intended to help you net a much higher home price.

10.) Quality of Workmanship: Is the painter a teenager with minimal painting skills, or a 20-year veteran with skills that could match other artists in museums? What are the reputations of the plumbing, electric, and HVAC sub-contractors used by your contractor? It is very wise to review the reputations, backgrounds and skills of the proposed subcontractors in addition to the contractor.

11.) Supervisory Style/Skills: It is imperative to confirm prior to the start of the construction work whether or not the contractor will be “hands-on” in regard to actually being at the project site for much of the time instead of spending most of his time at several other projects. The lack of proper construction supervision can lead to significant delays and poor quality work, which means lost potential profits for the investor.

12.) Draw Schedule: An appropriate and well-managed schedule for disbursement of funds is one of the most important aspects of any contract. The mismanagement of funds for a construction job may be the primary cause of trouble and delays. The Draw Schedule may best protect the Investor / Rehabber and the contractor in that funds are only released after the work has been finished. Savvy investors also typically don’t agree to advance too much money upfront in terms of a normal deposit after the contractor agrees to take the job. If excess funds are advanced prior to the start of the job, then the contractor may not be as motivated to finish the job as quickly and/or may inadvertently utilize those funds for other projects.

13.) Putting Everything in Writing: These written contracts, document proofs, and signed budgets may include payment schedules and time estimates, proof of liability insurance, a list of the specific materials and supplies to be used, a list of the prospective Subcontractors, and a written requirement and confirmation from the contractor that he or she will obtain lien releases from all subcontractors and suppliers after their work is completed. If not, then Mechanic’s Liens from workers on the “Fix and Flip” property could cloud the title and hold up a quick sale.

There you have it, and like most rehab projects, we had an overrun (13 tips instead of 12). Remember, both you and the contractor are looking for repeat business. The smoother, more efficient, and more profitable that the first deal is for both sides, the more likely you will want to work together on future deals. More deals typically leads to more profits for all parties involved, so it is very important to effectively communicate as much as possible in order to best match everyone’s desired expectations and goals for the deal.

You must be logged in to post a comment Login