This blog is written by Jen Josey, Real Estate Investor, and REIGN Coach. She is not a professional writer and writes as she talks so put your red pen away. Jen is extremely opinionated but reserves the right to change her opinion at any time because, well, that's the way she rolls. She may also use colorful language so don't be offended. Jen does not claim to be an expert, she is just sharing her personal thoughts and adding a perspective on investor topics that may benefit her readers. Jen also finds it strange to write in the third person. Enjoy!
Well...let me start by saying, no rehab project has ever been completely flawless. You're always going to stumble across some obstacles but being prepared for those hurdles will save you some sanity. Here are six stages for an almost flawless flip...
1. Detailed Scope of Work
A scope of work is a step-by-step checklist of what needs to be done to your property. This begins with your repair estimator. During your initial walk-through of the property, you should be checking for items that need to be repaired or replaced and put a monetary value on them. This can be very overwhelming to a newbie which is why investing in education is so important. You CAN, however, find some repair estimators online but expect to dish out some cash for it. A good repair estimator will have sections for each area of the house with an estimated price for materials and sometimes labor. In our initial walk-through, we will circle the exterior of the house to check the roof, facia/soffit, count all windows, take a photo of the HVAC serial number to check the age, foundation, deck, and landscaping needs. Then we go in the front door and look for cracks in the walls, level of the floors, what updates are needed, check the electrical, look for water stains, etc.
Next, start creating your detailed scope of work by being very explicit about what needs to be done. You can include pictures from Houzz or Pinterest so there is no mystery of how you expect a task to look. Instead of saying, "Clean up the landscaping" you should say, "Trim all bushes to be the same height, add 10 bags of brown mulch, remove all branches within 3 feet of the roof."
As part of your scope of work, look up prices for items and include the SKU numbers so your contractors know you have done your research. Don't forget to include specific colors if there are several options. There will be items you may not be able to price out so you always want to estimate on the higher end to allow for padding of the profits.
2. Contractor Bids
By completing a scope of work, you will have a better idea of how much the materials will cost. The next stage is having contractors bid on the job. During the bidding process, they should be telling you the cost of their labor only. You should always let your contractors know that you are not a retail customer and that you expect wholesale prices. We tell them that if they do great work for a good price, there will be plenty more to follow. Also, remember...everything is negotiable.
You can choose to have them buy the materials or you can buy the materials. Some contractors will add a surcharge to materials so it's in your best interest to purchase your own materials. On the other hand, some contractors can get the materials cheaper. In that situation, we have them purchase the materials and allow them to keep the difference.
You should never pay for labor upfront. Let me say that again...do NOT pay for labor upfront! There are times where they may need a deposit for materials so you may want to pay the supply house directly in that situation. If the contractor will be working over a long period of time, you can set up a payment schedule. Determine benchmarks when once achieved, you will pay for that portion of the job.
Timing is also crucial in the bidding process. If your contractor has a great price but can't start until six weeks after you need them, you may have to go with a more expensive contractor. Time is money and waiting on contractors can cost you more in the long run.
Lastly, you should always hire contractors that are licensed and insured.
3. Contracts
Never begin a project without clear communication of your contract and what is expected of your team. We require signatures on the following six documents...
-Independent Contractor Agreement
-Scope of Work
-Indemnification Insurance Agreement
-Payment Schedule
-W-9
-Lien Waiver
The independent contractor agreement includes the amount agreed upon during the bidding process, time frame, 1-year warranty, services provided, and more. One item we include is a daily penalty for every day over their determined completion date. If they tell us the job will be completed by the 15th, we give a little buffer and then will start to deduct $100 a day from their pay for each day they go over. Yes...things happen...like weather delays, for which we do not hold the contractor accountable.
The scope of work is signed by both parties so it is completely clear what is expected to be done on the property.
The indemnification insurance agreement basically adds you, the investor, to the contractor's insurance policy which protects both parties. This is very common. All they have to do is call their insurance provider and add you to the policy (no cost to you) during the length of the job.
The payment schedule is a list of milestones or benchmarks that must be met before payment is distributed.
A W-9 is a tax document that needs to be completed by anyone you pay more than $600 a year. It is super smart to get this signed in the beginning so you are not chasing down contractors at tax season...ask me how I know...
A lien waiver is the only document signed at the completion of a project. It states that all work has been completed and paid for, including any material provided by the contractor. This very document saved us one time when a window installer provided the materials for our project, we paid him and then he never paid the window supply house. Having his signature on that form protected us from a costly lawsuit.
4. Managing the Rehab
At all of our projects, we post a code of conduct so anyone that enters the property will understand what is expected of them. Items include cleaning up at the end of each day, no loud music, the last sub to leave is responsible to close and lock all doors and windows, etc. As the project is going on, you will need to check up on your subcontractor often until there is a level of trust built and even then, you still need to check-in.
While you expect the work to be completed, you must also keep your word and pay on time. Budgeting payments is vital to keep a project flowing smoothly. If a contractor completes their work and you are late on a payment, word spreads quickly! You will find that no one will want to work with you on future projects. When you find great contractors, it's important to treat them like gold!
5. Rehab Closeout
When all work is completed, you must do a walk-through before the final payment is delivered. I use blue painter's tape on items that I want the contractors to check out. After all the work is to your satisfaction, have the contractor sign the lien waiver before you hand over the final payment. This is also a good time to remind them that their work is guaranteed for a year per their contract. This is a great selling feature to share with the new homeowners.
6. Sale Prep
As soon as we purchase a home to renovate, we start pre-selling it immediately. We post a sign in the yard stating, "Coming Soon! Watch our progress at www.jolific.com!" Other buyers may have just missed purchasing the home and will be relieved to know they have a second chance to own it completely renovated. Also, nosey neighbors love to stalk the progress so they can get renovation ideas for their own homes.
When the renovation is complete, it's so important to do a solid cleaning of the property. I have spent many hours scrubbing the construction dust off windows and countertops. It is totally worth the money to bring in the professionals. There are always spots that you never think to clean that make a huge difference.
Lastly, you must decide if you are going to stage the property. If you are at a price point where there is a huge demand, you can probably save your money and not stage it if you think it will sell fast. However, if you are in a higher price point or have an odd layout, I strongly recommend having professional stagers come in and make your renovation feel like a home. Staging can cost anywhere from a few hundred bucks to a few thousand, depending on the size of the property. All of the homes we have staged have sold quicker than comps in that same neighborhood.
In conclusion, having systems in place will make your renovation go a lot smoother. Will it be flawless? I doubt it, but every bump in the road will only teach you how to create a smoother path towards perfection.
If you would like to read more blogs by Jen Josey, you can find them at www.REIGNmastermind.com/blog. or visit www.TheRealJenJosey.com.
If you would like to listen to some blogs narrated by Jen herself, search for "Real Estate Investor Growth Network" anywhere you listen to podcasts. Now go out there and make it a great day!