This post will teach you how to manage contractors and subs during the rehab/repair portion of a real estate project financed by a hard money loan.
It’s important to accumulate knowledge in various aspects of the fix and flip process. Lack of knowledge will teach you valuable, but often expensive lessons.
Gaining knowledge and experience in the following six topics must be a top priority.
- Knowing real estate values and health of your target market
- Knowing how to find good deals
- Knowing how to quickly estimate repairs
- Knowing how to negotiate with a seller
- Knowing how to manage a rehab project financed by a hard money loan
- Knowing how to finance your deals.
In this article we will discuss topic #5.
Knowing How to Manage a Rehab Project Financed by a Hard Money Loan
Assuming the prior four steps have been successfully accomplished and you have purchased a property at the right price and you have a fairly accurate rehab budget with a contingency, it’s time to get to work. Many (handy) new investors make a business limiting decision at this point and decide to do much of the work themselves. If real estate investing is going to be a hobby, that’s OK to do some of the work yourself. If real estate investing is going to be a business, it’s a big mistake, even if your have the skills, to do your own rehabs. Why you ask? You have just become the bottleneck to growing your business. If you are spending all your time, swinging a hammer or a paint brush, when will you have time to do the marketing required to find your next properties? You will have also turned your new potentially lucrative and time leveraged business into a low paying, time consuming job. The remainder of this article assumes you are dealing with a general contractor or at least several sub-contractors with you acting as general contractor.
Why a General Contractor
A good general contractor can manage the entire project for you including subs and buying materials. They will provide supervision of their self-performing projects and the projects done by subcontractors. If you have a full-time w-2 job and can’t be at the job site every day, a general contractor is the best way to go. Who supervises the general contractor. You do! Unless you have a long history with the general contractor on the project, you still need to be there a minimum of 3 times per week, checking in once a day is ideal. I’ve seen many projects go wrong when the investor hires a general contractor for the 1st time and does not provide adequate supervision.
If you are acting as your own general contractor, you need to be there part of everyday. You also need time to purchase materials, dumpsters, permits, manage subcontractor bids, etc.
Lack of project supervision by the investor is the #1 cause of project failure. It is the reason I no longer lend to out of state investors. An absentee owner/investor is a recipe for failure.
Down payments or not?
I am not a big fan of paying general contractors or subs down payments. I can’t tell you how many times I have heard of contractors/subs running off with the down payment, never to be heard from again. If they are reputable, they will take payment upon completion of the job or at predefined milestones. If they are so hard up for cash that they can’t work this way, call someone else, because you are better off without them. This is also a consideration if you used a lender to finance this rehab. Most hard money lenders, including CCC Holdings, won’t pay a draw for a downpayment. We pay draws as work is completed. If you decide to pay the contractor a down payment, you would need the liquidity to cover that out of pocket. You would recover it when the associated work is completed.
Fixed Price or Time and Materials.
If the scope of work is tight, I prefer a fixed price. Just make sure they are bidding on exactly what you envision the finished product will look like. Take the time upfront to get the project scope as concise as possible. It will make life easier for all parties involved.
Can the unexpected still happen?
Unfortunately, yes. Be prepared to act quickly if it does. Back in the day when I was flipping houses, I did my 1st two deals simultaneously with the same general contractor who was recommended by my realtor at the time. Although those projects were completed with them, they weren’t done up to the quality standard I wanted and the contractor was miserable to deal with. For project #3 I did much more due diligence in selecting a general contractor. I visited several active job sites, talked with current and former customers and selected a new general contractor. Project # 3 went very will and I ended up doing the next 15 or so with that general contractor. We were on the same page with respect to schedules and quality. It got to a point where we would walk through the project together before the start and then again at the end. It was contractor heaven. Until…the contractor went bad. There were signs in the last project that the wheels were falling off, that I ignored, and it ended there. I had another contractor that initially was even better that the last one and he was good for several projects, until he went bad. The moral of this story is don’t get complacent when you are in contractor heaven because it can very quickly turn into contractor hell.
Future issues of this blog will talk about the other my favorite topic, how to finance your deals.
If you would like to get preapproved for a loan and one or more proof of funds letters, please follow this link. https://www.hardmoneypgh.com/loan-request/
Please contact me if you would like to discuss a project by clicking here: https://g.page/r/CTcMtkHdqQHYEBA