Rehabbing is a vital part of a real estate business whether one is landlording, wholesaling, and/or rehabbing to sell retail. To successfully operate your businesses, one has to understand (at least) basic construction, costs, and regulations. Other than improperly valuing a real estate investment, rehabbing is the other component that can make the difference between survival, success, or failure.
That being said, is it safe to say that properly screening your contractor is just as important as analyzing a potential investment, screening a tenant, and determining which loan product is best for a particular situation? Remember the 80/20 rule (or as I refer to as 90/10). 80% just show up, while the remaining 20% actually take charge and do it. We all understand that @95% of all businesses fail in 5 years -right? So just like 80% of your co-workers -who just get by, or for some reason certain real estate investors seem to be thriving….. There is a reason. You want the cream of the crop. The top 20% right?
Tips for screening a contractor:
- Proof of general liability and workman’s comp. insurance
- Properly licensed for the level of work required
- Check former clients from 2, 3, 4 years back
- Check permitted jobs and pass/fail rates at various levels
- Ability to handle common business cash-flow
- Inspect multiple current jobs
Being a hard money lender has given me the opportunity to watch many rehab projects from behind the scenes and talk to many investors about whom is doing what. After being in this business for over a decade, I have learned that it’s important to watch people whom you may do business with. Over time you’ll see if they provide the professionalism that you require.
If I know addresses that a contractor has worked at, I can either go to the county permit office or look up online the time-line and ability to efficiently pass through the permit process. This is a third-party process of looking at their quality of work (from a code standpoint) and how long the project actually took. I’ve known investors to swear by their general contractor who may quote “I maybe expensive but I do it right or I don’t do it” to later find their retail rehab has hack job up-fits from hiding structural issues, newly tiled floors cracking, and newly created electrical hazards that even a high-schooler could recognize as dangerous.
I like to find out what jobs (more than 2) a contractor is working on now. Often if I make repeated trips and show up at unknown times, I get to observe inconsistent work-flow, who’s really doing the work (and has the skills), and whether their is pride of workmanship and professionalism.
Other Red Flags:
- Controlling, know-it all, and never wrong
- Always wanting money ahead of different work stages
- Lack of communication (conveniently not available -even via phone)
- Unorganized and can’t make commitments
As I mentioned in my article: Rehabbing Houses, a contractor is just one component of running a real estate operation; however, all components can make or break you. At our local real estate association we see contractors that cater to our investor members. A common question I’d have for a contractor advising me that they can handle my jobs and know what is required for my success is to ask what other investors from the past 2-4 years can you provide as a reference. Many who tout that they know what it takes has a string of failures in their path.
I actually work with about 3-5 different teams of contractors. Some have skills and costs at landlording levels while others are used for rehab to retail projects. One has to properly assess a contractors skills and fee’s to see if they fit your needs. Whats important is that you always want to play offense by looking forward and keeping your eye on other contractors. I will stop at a house being rehabbed to walk it and see what other investors are doing in the market. When I like what I see, I use the permits to find out whom the contractors are. A common fault is that investors start to rely on one contractor and them rationalize problems while feeling trapped all the while continuing the long painful path of repeated frustrations. To be an effective leader and investor, one has to take charge, confront issues, and make changes when needed.
Rehabbing requires multiple skills and your success will only be as great as your team. Remember the key is doing research. Know whom it is your working with. Strive for top-notch professionalism. Look for success. Demand it.