Investing in real estate as a passive investor is, in some ways, a giant leap of faith. After all, you’re trusting that the investment firm you’re working with is truly doing their due diligence and making smart investing decisions with your funds, while you stay above the fray and out of the dirty work.
When deciding which investing firm to work with, it’s important to discuss the variables that go into their decision-making process, such as how they determine what developers to fund and how involved they are with the process. One of the biggest indicators of a reputable investing firm is their knowledge and relationships not only with the developers, but with the contractors as well. Working with a great contractor will keep everything running smoothly, whereas a poor contractor could end up taking a job from “promising returns” to “huge failure” in a matter of days.
When a real estate investment firm, like Walnut Street Finance, is working with borrowers one of the things that we look at is the contractor they plan on working with (or, if they are the contractor, what their experience is). Here are some of the factors that we examine when evaluating the contractor of a deal.
It should go without saying that a contractor's experience is one of the most important things that we look at. If this is the first big job that a contractor is handling, that may be a red flag as that means they’re a bit of an unknown entity. They could be a stellar contractor who will do impeccable work and keep everything moving smoothly – but without a proven track record we simply have no way of verifying that information. And working with a bad contractor can mean bad news for investments. For every day or week that a project gets held up, returns are potentially negatively impacted. There’s also the consideration that a contractor that isn’t on top of their game may feel that taking shortcuts is acceptable or they may try to compensate for shortcomings by rushing through important aspects of the project.
In order to make a determination about the worthiness of a contractor, it’s important to actually meet with them and see what they’re all about. Even after we’ve made the decision to lend to a borrower, Walnut Street Finance keeps a close ear to the ground on every project and in most cases we take at least one trip on site to ensure that things are running smoothly. When we’re speaking with the general contractor at the project site we ask them questions about the plan's progress, but also about their materials and labor budgets. A good contractor will have the answers readily available, and a great contractor will know the information off the top of their head. As a group that has worked in the industry before, the WSF team stays apprised of general material and labor rates – if we feel that the contractor isn’t getting the best pricing on materials, we may speak with the borrower about how to increase efficiency on the project to ensure that returns are high for our investors.