Working With Rehab Contractors: What NOT to Do

In the real estate rehab business, you make money when you buy. However, as a hard money lender, I cannot emphasize enough the importance of a well-planned and efficient renovation process. Your general contractor and crew can make you additional money or, at minimum, save you time and hassle. Alternatively, they can drain your profits and make your life a living hell. So how do you avoid being driven nuts managing them? For starters, try to avoid these six costly mistakes:

Mistake #1: NOT GETTING MULTIPLE REHAB QUOTES

Putting your eggs in one basket can prove costly unless you have a proven track record working with a particular crew. Get quotes from at least three different contractors. Spend a day at the property meeting and interviewing them. There are several compelling reasons to do it:

1. You will have a better understanding of the going rate for your rehab.
2. You will get free advice from the experts to help you avoid mistakes, save money, and get more design ideas.
3. You will have a potential backup if the contractor of your choice flakes out and you need to find a replacement.

Mistake #2: NOT HAVING A DETAILED SCOPE OF WORK

As a hard money lender, I can testify that not having a detailed description of your renovation project leads to misunderstandings and frustration. In contrast, a detailed scope of work is the foundation for a successful relationship with your contractor. You can find a sample on our website. My other recommendation is to take detailed notes of your conversations with contractors you’ve interviewed. Do not rely on your memory. Use your notes to expand and make your list as specific as possible.

Mistake #3: NOT SEPARATING COSTS OF MATERIALS FROM COSTS OF LABOR

Contractors are notorious for giving vague quotes that are open to interpretation in the future – typically in their favor. Let’s assume you have three quotes for redoing the bathroom. One quote is for $3,000, the second quote is for $5,000, and the third is for $10,000. Which one is better? You tell me, because I have no idea what “redo the bathroom” means.

Let’s try again. Let’s say you are getting a quote that includes new tile, a new sink, a new toilet bowl, new overhead lighting, and a new vanity in the bathroom. We are getting closer, but you still will not be able to evaluate the quotes between different contractors effectively. Sinks, vanities, lighting, and tile vary in price.

The labor ranges in price, too. A contractor might be undercutting the competition by offering you the bottom-of-the-line materials and charging a premium for his labor. One way to avoid confusion is to ask for a quote based on labor only. This way, you can effectively compare oranges to oranges and apples to apples. You would also be in creative control of what kind of materials to use.

Mistake #4: NOT UNDERSTANDING THE PROS AND CONS OF YOUR CONTRACTOR

To make money flipping homes, you need to control your costs. Renovation costs are your largest expense, so you must manage them extremely well. However, in our experience as a hard money lender, going with the cheapest option might not necessarily mean going with the best option. Let me give you an example.

If one of your contractors is offering a price that is significantly below his competition, you need to understand (or at least guess) the reasons for it. Is it because the contractor is just starting out and might have challenges keeping his crew busy? Is it because he is a one-man show, a jack of all trades, and can keep his costs low? Or is there any other reason – such as poor quality of work – that might compel him to deeply discount? You’ve got to look for well-priced labor, but you should also be able to deal with the cons that might come with it. For example, if you found a “one-man show contractor,” the chances are it will take him longer because he does not have a crew to assist him.

Mistake #5: PAYING YOUR CONTRACTORS UPFRONT

If there is one piece of advice I can offer you as a hard money lender it is not pay for your contractor’s labor upfront. Let’s face it, folks have more sense of urgency when you dangle money in front of them. To make sure that the arrangement is fair to both parties, develop a detailed draw schedule that lists everything that the contractor needs to do before the next installment. To get started, visit our borrower’s tools and resources page and download our draw schedule sample.

Mistake #6: MACRO-MANAGING YOUR REHAB

It’s a fallacy to believe that your project would require only occasional involvement. As a hard money lender, we rarely see our successful borrowers staying above the fray. If you want it done right and on time, prepare to invest time. Even if you are working with a reliable and trustworthy contractor, you will have to make numerous decisions that only the owner can make. If you’ve taken my advice and are paying for labor and materials separately, you will have to purchase these materials or tell your contractors exactly what to buy and where. You will have to make sure that the contractor is doing his job within the time frame you’ve agreed on. You will have to inspect the progress before you release the draws. You need to maintain detailed records, be available on weekends, to handle emergencies, … etc.

To give you a real-life example, we have several successful borrowers we have been working with for years. They have their crews, their renovation style, and can usually turn a high-quality renovation job in three to four months. They have many flips under their belt and a proven success formula. But they stay involved every step of the way. I talked to one of them recently to congratulate him on a successful sale. “Hey, it’s not easy,” – he said.” I need to be with my crew everyday at 6 am. I check on them in the middle of the day. And I am often there at 7 pm when they are finishing up.” He never ever gave up on being involved, even with the crew he know and trusts. This is a true leader and a true entrepreneur. And this is why he makes big bucks.

Mistake #7: Not Treating Your Contractor Well

You don’t have to be a jerk to be a good manager. If you find a vendor you like and trust, treat them with respect. Pay them on time. Be fair. Don’t sweat small things and imperfections. We’ve had a share of difficult borrowers who go nuclear at every minor disagreement with their contractor, their real estate agent, and their private lender. They never last too long in the business because they burn every bridge and can never sustain mutually beneficial relationships.

For more information on managing your rehab and contractors, visit our other blogs: Managing Contractors: Four Principles of Success and Eight Ways to Find Contractors for Your Next Rehab.

New Funding Resources is one of the top local hard money lenders doing business exclusively in Maryland, Washington, DC and Virginia. In business for over 11 years, we work closely with the DC area rehabbers to help them make money and manage their risk.