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Investing Strategies

Remote Rehabbing: Managing Contractors from 2,431 Miles Away

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lori greymontFrom Lori Greymont, Rehabbing Adviser...

This is a continuation of our fascinating conversation with remote rehabber Lori Greymont.

If you've tuned into our previous lessons from Lori, then you already know her modus operandi is buying and rehabbing distressed properties across the country, then reselling them in tiptop shape to passive cash flow investors as turnkey rentals. She does this remotely from her home base near San Jose, CA, and until recently had never even seen any of the 1,350+ houses she’s turned.

Lori and I had an extended, unscripted dialogue about her operation and how she does what she does. And over the last few weeks I've been sharing some of the key lessons from our in-depth conversation for anyone in Mogul who may want to learn how one of the greats does it, or maybe even follow in her footsteps.

So far in our chat with Lori, we've discussed how she selects her target remote market, we've talked about what she buys and how she finds them, and bantered about how she conducts due diligence and how she goes about vetting contractors from 2,431 miles away.

Today she takes us into how she manages her contractors from afar.

Do you find it challenging to effectively manage contractors for your rehab projects?  What if you had to do it from thousands of miles away? Well that’s Lori’s specialty…she does it over and over again, and she’s very, very good at it.

So here’s another slice of awesomeness from our engaging little chat with Lori on how she’s able to manage her rehab contractors from thousands of miles away…

{Mogul Elite members: Download and listen to our full conversation in the Power Pack Tools for this lesson.}

First Thing: Mitigate Cost Over-Runs Before They Happen

handyman window fixedAnyone who has done rehabbing knows that you continuously have growing rehabbing costs.  My Mom and Dad rehabbed houses my entire life growing up, and I once asked my Mom for advice on how to keep contractor costs down. She said,

“You get three contractors to give you a bid, you add those three bid costs up and that’s how much you are going to pay.”

Did you catch that? Most people think you add all three bids together and take the average of them, but she was saying to add all three of them, and plan on that being what you actually pay!

What she was really trying to get across to me is that you’ll always run into cost overruns, and to just plan for it regularly, rather than being constantly surprised by it.

If you go into the game always knowing there are cost overruns then you can work to mitigate the cost over-runs up-front. 

So what we do on our remote rehabs is mitigate the cost over-runs up front by telling the contractor how much we’re going to pay them. Let me explain…

If you recall from previous lessons, we actually have a home inspector on our team who does a very thorough inspection for us remotely, so we know exactly what’s going on with the house, what condition it’s in and what rehab is needed. We've been around long enough now that we have a pretty good idea of what things will cost, so we have a pretty close idea of what we expect to pay out the door by the time we bring our contractor in.

He also realizes that we know what we’re doing – we've not only done our homework, but we aren't paying him full retail “yellow pages customer” pricing for the rehab. Our contractors understand and agree that they’re not making a killing off us on each rehab, but they’re making bank from us over time, with steady, consistent work that keeps them busy, keeps them from looking for new clients, and compensates them fairly for doing so.

Making Our Own Bids

contractor outletAs we discussed previously in our conversation about our remote due diligence process, we actually give a bid to our contractor and they either accept it or adjust it based on any things we may have missed.  But we control the process and the price.

If they feel strongly that we’re off base with our numbers or missing something, then they’re welcome to bring it up to us have a conversation about it right from the get-go. If they need any change orders or suspect they’re going to have any change orders from what we’re agreeing to, they must tell us in the beginning. 

This has allowed us to keep our cost over-runs down to about 10%.  And anyone who knows rehabbing knows that’s a pretty good number.

So we put a fresh contract together with the contractor and they go ahead and get started on the work. 

Timing is Everything

contractor 3 coursesNow we have two pieces of our contract: one piece on budget and the second (more importantly) on time.

We actually start penalizing them if they go over a week in most cases, and most of the time we’re able to have our rehabs done in two weeks.

Timing can be your success or your failure when you are in the business of rehabbing.  Your timing in a lot of ways is almost more critical than your cost.  Of course both are important.

For example, let’s just say you are coming in and buying a property in June, is it going to sell better in July or October?  In July of course – people are looking to move before school starts versus in October when everyone is back to school. 

General Contractor vs. Field Supervisor

Contrary to what many of our competitors do, we generally don’t hire a general contractor. You could hire a general contractor, but it’s going to cost a lot more.

This may seem crazy to you, but again keep in mind, not only do we know our numbers, but we have built a support team to be our eyes and ears on the ground, including our home inspector, our photos guy, and our field supervisor, whose job it is to visit the site and make sure everything is on track. 

With this team in place, we can save a pretty good chunk on each rehab by directly hiring the subcontractors and using our team to help keep things in good working order.

For example, we often times need to have landscaping done; I can go out and hire my own landscaper to do the work a lot cheaper than my general contractor going out and him hiring someone to do the work for me. And my field supervisor is quite capable of meeting the landscaper when needed and making sure he’s doing a good, timely job for us.

In addition to landscaping, other things we’ll hire and manage on our own include: roofing (we have a roofing company that does all our roofs) and HVAC (heating/air conditioning – a lot of times it’s missing or outdated so we’ll go in and do heat pumps with cages over them cemented into the ground so they don’t end up “walking away”).

We also have an appliance delivery company that handles all of our appliances.  

Your Rehab Needs Babysitting

contractor bowelsWe've talked about this in a previous lesson, but it’s worth reiterating here that rehabs really do have to be babysat from start to finish. 

As I've said, my field supervisor is my eyes, ears and feet on the ground. He makes trips there every 5-6 weeks. Then we have other people who are our eyes and ears with contractor backgrounds that help us out. They check on the projects and take pictures, etc.

For us, it’s one of our old contractors who can’t take on the bigger projects we have now, so we’ll often task him with making sure everything is being taken care of on a project, the rehab is moving forward, etc. if/when our field supervisor isn't available.  Then he becomes our eyes, ears and feet on the ground.

We don’t involve him in crafting our numbers because that’s an internal thing and we don’t want him involved with any of our numbers.  We just want him to be the eyes and watching the rehab and ensuring that things are being done right and moving forward, when our field supervisor can’t do so.

Bottom line: Someone has to be “babysitting” for us.

When We Pay

In a typical rehab, the way you effectively manage a rehabber is to show up and watch the progress.  Those who don’t check in regularly with the contractor are the ones who usually have the problems.

As I mentioned in Vetting Contractors, most of our contractors come by referral and NONE of them get paid until the project is completely finished.

If you are working with a contractor that can’t do the entire project without being paid up front then you shouldn't be working with them. 

We now work only with contractors on the ground who can wait 2 weeks to get paid – our rehabs only takes 2-3 weeks so they are going to get paid quickly.  It’s great motivation for them to stay on task so they get paid. 

The only exception really is for some smaller contractors with a clear need for an advance on the equipment or supplies for a particular project, but we don’t ever advance funds on the labor.

The first time you let a contractor get ahead of you on the labor funds is the last time you’ll ever do it, trust me. Motivation = gone. And possibly your money = gone.

My One Wish: Contractors to Actually Complete a Job 100%

contractor duct tapeRight now my remote rehabbing system is running pretty darn smoothly if I do say so myself. But there is one aspect I wish I could…

Just as soon as a contractor comes to us and says, “OK, I’m done with the job!”, we’ll have our guy go for a final inspection before cutting any final monies – our field supervisor, if he’s in town or the guy who does the after photos – someone will go walk through the property.

And inevitably they’ll discover the job is close, but no cigar. 95% done is not 100% done. But somehow, to contractors, it seems to be.  

So we’ll break it to the contractor that he’s not quite done. He is of course invariably surprised and taken aback. But has to go finish the last 3-5% nonetheless.

Then we send our guy out again in a few days to check that the job is completely done – and even then, we might still not be quite finished up. Again, we aren't paying and they are motivated to come back out but it takes so much effort to get the last 3-5% done.

But it’s often that last 3-5%  is what really makes the project look good and sell quickly!

Key is not paying until 100% done

Far too many investors experience this last 5% problem.  It’s a chronic illness with contractors – and strangely the last 5% can often seem to take about as long to complete as the other 95%!

The best you can do to offset this is be clear with your contractors up front that you will not pay them their final check until things are 100% wrapped up. Nothing left to clean, nothing left to tighten up, no final trim painting, no unswept debris – everything.

Then you have to actually stick to it. Make sure you leave them with enough financial incentive to feel motivated to finish up quickly. Otherwise, if you only owe them a hundred bucks or so, they’re already on to the next job.

Don’t Be Afraid to Fire Your Contractor

contractor kaboomFinally I urge you not to be afraid to fire a contractor and definitely NOT to hire them again on another project.

The sad truth is, contractors are often working your job to pay the bills from the last job. I’m not trying to paint a picture like all contractors are deadbeats. I’m just telling you what a lot of my experiences have taught me over the years.

You have to understand the industry. They are handymen and contractors. They often aren't great at managing money or budgeting. If you help them set up systems to help them manage their money, processes and time then they are going to be grateful to you. I've done this before.

But ultimately you have to know when to hold ‘em and when to fold ‘em.  You also have to learn when to let go before you've been through the wringer or things get too weird. 

And yes, it’s hard because we are all into relationships and helping each other. But sometimes the best way to help someone is to say “bye!”


Do It To It! Immediate Action Steps

Did this make you think – “I need to be a bit tougher with my contractors?” Just remember if you don’t finish your rehab on time and on budget it’s going to eat into your profit very quickly.  You gotta remember the following:

  • Mitigate cost over-runs before they happen – remember, you are in charge, give the potential contractors YOUR bid and let them accept it or amend it.
  • Babysit your rehabs – someone has to be the eyes, ears and feet on the ground to make sure your rehab is on track and there are no issues.
  • Daily check-ins – your or someone on your team has to check-in daily with your contractor to be sure things are on track, there aren't any problems, etc.
  • Don’t pay your contractors until they are 100% done (95% is not done and if you pay them at that point it’s highly unlikely they’ll finish the last 5% - which is the final touches that help you sell your rehab)
  • Don’t be afraid to fire or not hire your contractor again!

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