The renovation of your real estate investment is often overlooked. An argument can be made that it is more important than any other skill set you will need to develop to be a successful real estate investor. Van Sturgeon Toronto
If you don’t have a clue on a renovation, how will you be able to determine the cost and work needed on a potential purchase?
“Oh…I’ll just hire a home inspector at $300 – $500 a pop.”
That might be one approach if you’ve got deep pockets, but there will be opportunities that will come around, that you will only have a few hours to decide whether to make a deal.
Now, what do you do?
Once you get a property that needs renovation and you get involved with contractors, you will find that they are a hard bunch to deal with. Trying to get contractors to perform to your expectation will be the most frustrating part of the renovation process.
Given that, I wanted to take a few minutes to summarize some of the methods I have put in place to ensure that I only hire and keep the best, brightest, and most motivated contractors and to ensure that my contractors stay motivated throughout each project.
So…I have 8 rules for you to learn how to manage your contractors.
1. Establish your goals!
What do you want to accomplish with a renovation?
The goal of a renovation will mean different things to different people. For some people, the renovation is to create a more enjoyable and livable surrounding for their family. If this is your goal, it will be a pretty stark contrast to a real estate investor looking to flip a property.
If you are flipping a property, you need to research what is being offered by the properties that are for sale in the area and draw out the critical elements that your property will need to sell. At the same time, you will better understand your competition, what you will need to sell your property faster, and at what price.
The cost of the renovation and the final sale price will guide you later by identifying the elements that you will need to renovate in your property. For now, you need to accumulate the information and state a specific goal because you will be referring back to this goal as you move through the renovation process.
Once you have your goal, please write it down! Put it somewhere so that you can see it every day.
2. Create a Scope of Work
As a general contractor, I see the same mistake over and over again. A property owner wants to complete a renovation and starts calling up general contractors to give them a price on a renovation to their property.
This owner has done any of the necessary preparation or research on what to renovate and the types of finishes they will want in their completed renovation.
This is a recipe for disaster…
Why? You may ask…
Well…Every quote that will be created on the property will be different from one contractor to another. Since there are no drawings, specifications, or directions on what and how to renovate the property, general contractors will assume that certain things should be renovated, while others will not.
How will you compare “apples” to “apples” if all of the quotes you received are based on different things?
Do the research and spend time creating a scope of work for your renovation. In this document, you will have all of the essential information needed for a contractor to quote your renovation properly. You will also be able to see what you might need to eliminate if all of the quotes total to more than you have budgeted for the entire project.
3. Contracts and Change Orders
You must have a signed contract between you and the contractor, as this document will provide the specifics to all parties’ responsibilities. Without a contract, you will have a situation where it is a “he said,” “she said,” and nothing ever gets resolved until you take it in front of a judge.
To avoid all of that wasted time and pain, always incorporate your Scope of Work with a basic contract and a payment schedule. This ensures that all parties are aware of their responsibilities, and it’s a document that you can point to if you feel that a contractor is not holding up to their end of the bargain.
Also, there should be a mechanism within the contract to handle change orders. To give you an example, I have renovated homes where we took out the carpet and discovered beautiful hardwood floors that just needed to be refinished.
If the contract you have with your flooring contractor included new hardwood floors throughout the house, how will you be able to remove that item from the contract?
This would apply to situations where additional work is needed that was not expected and in the contract. For example, in your renovation, you spot termite damage to the subfloor, and it will require several new floor joists. You want your contractor to quote the additional work, and you must approve it in writing before a contractor can move to repair.
You need to specify the order of steps for a contractor to take when they need a change order, or you will have situations where the contractor will go ahead and complete the additional work and charge you for it, without your approval,
4. Research a contractor before you hire.
Many renovators will ask contractors for references and never follow through with checking out the quality of work and the experience that previous clients had with this contractor.
You want to avoid problems, right?
At least, you need to look at the quality of work from a contractor and attempt to talk with the owner to verify the work that the contractor claims to have completed and how the whole process was completed.
If you can’t talk with the owner, you need to examine the work and make sure that the quality is acceptable to you. Obtain the addresses from the contractor of previous work, and drive to each location and check it out. At each location, attempt to speak to the owner and get more information on the contractor.
Ask these owners pointed questions about how well the contractor maintained the schedule, the budget, and the overall quality of the work. Lastly, ask the owner if they would hire the contractor again.
If you can’t speak with the owner, you need to carefully examine the quality of workmanship and decide on using this contractor for your project.
The best place to view work is at a project that a contractor is currently working on. There, you will see how the contractor looks after the project site, inspect the work, and see who they have in their crew.
5. Establish a schedule with the contractor.
As I explained in the previous example of how important contracts are, this is one item that I would include in the contract.
You must establish a schedule with the contractor to provide the amount of time and when they would like to appear during the renovation process. By obtaining this information, you are better positioned to plan out the entire renovation schedule because you will know the length of time a contractor needs and how often and when to show up to the project site.
Whether you write the schedule or your contractor writes the schedule, it’s important to ensure an agreed-upon schedule for any project, no matter how small the project might be. It would be best if you had a schedule to know when the work will be completed. You can also set certain milestones or penalties for work being completed and when the contractor gets paid.
6. Never pay ahead of the work that’s been completed.
Speaking as a general contractor who has been in the business for over 30 years, I have always pushed to get as much money as possible upfront from clients I did not know. I would ask for money upfront for mobilization and then more money for material. During the renovation process, I would continually ask for more money as the project was being completed.
That’s the nature of a general contractor. If we don’t know who you are as a client, we want to get as much money upfront as possible as we complete our work. We want this money because we fear that you won’t pay us, and if things turn bad, we can always walk away from the renovation and have enough money to cover our cost and make a tidy profit.
That’s the life of a contractor, but that does not mean you have to agree with their requests. It starts with a clear payment schedule that everyone has agreed upon and sticking to it. Some contractors will ask for a deposit so that you have reserved them for a period of time to complete their work. That’s a fair request, but you should establish a payment schedule that will absorb that upfront deposit into actual work that has been performed.
You need to be in a position where a contractor performs work, and then they are paid. If you pay them more than the work performed, you may run into a situation where a contractor will leave your project and never return.
How are you going to get your money back?
Always create a payment schedule where a contractor is performing work and then is getting paid for it. Don’t pay ahead of time! If you have it set up this way, then if the contractor doesn’t show up for work and they have completed some work, that work will be for free, and they lose money. Nobody wants to lose money, so you will see contractors who will show up on time and do their work because they are owed money. They quickly realize if they leave the renovation, then they will lose money.
In certain cases, contractors need more money upfront because of the material. You have to understand that if you have never worked with this contractor, they fear you as much as you are fearful of them. In these situations, work out an arrangement where you pay for the material upfront directly to the supplier and ensure that the material is delivered to the property. Ensure that the invoice is in your name or at least has an area on the invoice that shows that you had paid for the order. You want to do this to establish ownership of the material that you bought.
7. Visit your renovation often.
Nothing creates more of a stir than the boss strolling in!
It would be best if you visited the renovation on an almost daily basis. Even though you are constantly communicating with your contractors, it is still a good idea to visit the renovation daily.
Don’t always appear at the same time, nor provide notice to a contractor when you show up. You want your contractors to work at a full pace and not waste time. By virtue of them knowing that you can appear through the front door at any time, it will keep many contractors honest about doing quality work in a timely fashion.
One of the reasons you want to check up on things daily is that contractors will “fudge” the information they give you for their benefit. The life of a contractor is pretty rough. It’s feast or famine for business, and if you have a contractor who is juggling several projects simultaneously, he will take liberties with your renovation than someone else’s. By showing up daily and making those visits random in the day, it forces a contractor to live up to their commitments.
8. Get rid of problem contractors right away.
Nobody wants to get rid of a contractor. It’s not easy to find a replacement, as contractors will be weary in doing business with you, and they will be concerned with the work that has been completed. There will be questions about you as a good payer in a contractor’s mind and whether they will inherit a bunch of problems that the previous contractor has left behind.
Typically, the new contractor will want more money to finish the work. That’s due to the cleaning up whatever was left behind by the previous contractor. Another reason is the warranty that they will have to provide on the work completed by the previous contractor. Finally, this contractor knows that you are in a tough spot, so they’ll take advantage of you.
That’s why it is so important to do your due diligence on any contractor you hire so that the risk of this happening to you will be greatly minimized.
Now…Don’t let all of this stuff persuade you to keep this loser contractor on your renovation.
One of the biggest mistakes that I see many renovators make is not getting rid of bad contractors. Renovators keep thinking that this contractor will get better, and it’s just a matter of them finishing up another project, and then they will be free to complete yours.
It rarely happens, and you end up getting more frustrated, and you lose time. You lose time because other contractors are waiting for this particular component of the renovation to be completed so that they can finish and get paid. It’s a bad situation, so you have to be proactive and cut cancer out right away.
There are plenty of good contractors out there. Please go out and find them.
For more information on house renovations and real estate investing, visit VanSturgeon.com to help you in your real estate investment journey.