If you are new to the flix and flip market, you understandably will rely a lot on your contractor to explain the ins and outs of residential construction. That being said, it's imperative that the real estate investor be the one to manage the timeline, budget, and overall outcome of the rehab project, regardless of their skill or experience level. But why...?
If the contractor is reputable and knows more about home renovation than you do, you may be tempted to defer to him. But it's ultimately the flipper who has to stay accountable for each cent of the budget and the draw schedule.
For example, if Phase One consists of just demolition vs. demo, electrical, and plumbing, the amount that the contractor requests should reflect the scope of work. A small upfront payment may be acceptable, but there is no reason a contractor should be requesting tens of thousands of dollars to perform demo.
Borrowers Should File Permits
Sometimes there is a blurred line regarding who is responsible for the permit process.
The fix and flipper may want the contractor to file and submit permits, but this may cause delays in the project timeline because the contractor doesn't have the same incentive to get paperwork submitted as the person responsible for paying for the project.
Regardless of their experience in construction and development,the real estate investor needs to own the process in and out.
In real estate, there is fixed compensation and variable compensation. The contractor has fixed compensation. Whether the job takes two weeks or two months, they will be paid what the contract states. On the other hand, the borrower's compensation is entirely variable. If the fix and flip investor doesn't manage the timeline by pushing permits through and visiting the job site regularly to ensure that installs, colors and materials are all checking out as intended, money is slipping through the cracks.
As The Months Go By...
If six months of the loan term come and go, and it's time to exercise the option for a loan extension, it's the borrower, not the contractor, who will be paying that fee. In some cases, if the lender feels the project is not advancing or is disorganized, questions may arrise whether the borrower will be able to pay the lender off when the loan matures. If a lender doesn't approve an extension and the project is not near completion, this can be a sginificant problem for the borrower.
Time + Budget = $ Profit $
Ultimately, it's the borrower that determines the profitability of the project. If you can control costs and stay on schedule, you will meet or exceed your ROI. Here are a few key recommendations for managing your fix and flip while maintaining a balanced relationship with your contractor:
Be the Face of Your Project.
Drop permit applications off personally, shake hands and get facetime with the permit processors to see who your inspectors will be. Try to get in front of those inspectors to ask a question — even if you don't have one — and convey any notes in regards to the project. Stand out - in a good way.
Visit the Job Site Frequently.
Check into the project site a couple times a week to ensure that thetimeline is on track and your expectations are being met. The contractor and subs should know to expect you on the job site on a regular basis. There are major benefits of staying fully engaged, as well. Issues are quickly resolved, questions are answered in a timely manner, and you can note design changes in the early stages of construction to help reduce additional costs.
Be Controlling Yet Respectful.
Even if you don't know as much about the construction process as the contractor, you still need to give gentle nudges to keep the ball moving. However, stay on the contractor's good side. If the contractor feels that the borrower is being demeaning, disrespectful or unreasonable, they can very well walk off the job site. Once there are cracks in the foundation of that relationship, it will be much harder to get back in their good graces and it will provde difficult to find a new contractor to start up a halfway-finished job.
Read more about the construction phase in Part Two of the eBook:
Real Estate Investing 101
Walnut Street Finance is a provider of hard-money loans, bridge financing and other non-bank financial solutions for real estate investors and developers in the Washington DC region.