Hey Moguls, Chris Seder here…
What if I told you that managing a rehab project correctly is more important than any other part of your real estate business? Let’s think about it for a second…
We all know you make money when you buy… which pretty much means when you buy a house at a discount, you are instantly creating equity in a property that will create your profit on the back end. But a lot of new real estate investors waste money on a rehab project because they don’t manage it correctly.
Are you currently throwing away $5,000, $10,000 or more that could go in your pocket?
You worked hard to find an awesome deal, negotiated it and bought the house – so why are you still throwing money down the drain?
A lot of new real estate investors I talk to make HUGE mistakes when managing a rehab process and typically it ends up costing them time and money. I even have made some dumb mistakes. One mistake cost me over $18,000 and an extra month of time. Believe me, all rehabbers make mistakes, sometimes the only way to really learn is to make a big one.
If you’re not on top of the management process, you can have a $20,000 rehab budget spiral out of control and end up costing you double that. Ask me how I know. Like I said, I’ve been there and made mistakes that cost me tens of thousands. It’s taken me several years to finally streamline my process and run my rehab projects like a well-oiled machine.
So, I want to share with you a few of my favorite ways that help me limit mistakes and make my rehab process run a lot smoother…
Here are my 5 best tips for managing your rehab project and keeping yourself on budget.
1. Have a Specific Budget and Task Sheet
This is very important…
Before even starting a rehab project you need to create a very specific budget. For my business, I get as detailed as possible.
For example, I break every single task down into specific jobs and give that specific job a price. Let’s look at a bathroom. In our average bathrooms, we replace the vinyl flooring, tub surround, lights and vents, the vanity, and paint it and work on a few other smaller items.
Most rehabbers I know will just throw out a number like $500 to do the entire job. But I break it down on my task sheet and budget:
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Install vinyl $50
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Install tub surround $100
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Install light $30
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Install toilet $50
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Install vanity and plumbing $100
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Paint the bathroom $100
I break it down like this because I want to know exactly what each task is going to cost, and then I can pay my contractor for what has been completed.
It may seem like a lot of work to break down specifics, but this is what I have found to be the very best way to help manage a rehab properly. Some contractors will fight it, believe me, because they will say, ‘Well, I really don’t know what it’s going to take until I get in there...’
You need to be stern with them and let them know this is what it’s going to be.
2. You Should Purchase the Material, not the Contractor
This is a topic some real estate investors might disagree with me on, but I’ve tried it both ways – and for my business, we purchase 90% of the material.
The reason we do this is because we can then effectively manage our money better and also manage the specific material that is going into our project. For my business, we pretty much use the same exact material for everything. I can easily place an order at Lowe’s and have them deliver all of the material that I want to the job site and don't have to do anything more than submit a material sheet to them.
I have tried to let contractors go get their own material, but it ends up costing me. For example, the standard lights I put in my houses look amazing and cost around $30 for 2 lights. A typical contractor would probably pick out a single $50 light then charge extra for their time getting the materials.
The best use of a contractor's time is working on the house not browsing Lowe’s for light fixtures.
3. Stay Ahead on Payments
What I mean by stay ahead on payments is that you only want to be paying for work that has been completed and not paying contractors for future work to be done.
Some contractors will insist on being paid something up front, but I personally never do this. If they want to get paid, they need to put the work in.
Depending on the contracting company I use, I typically pay them weekly. So on Friday I go through the job to see what’s been completed using our detailed budget sheet, and then pay them for what has been done – NOT what is going to be completed over the weekend but what is DONE right now.
If some jobs are half completed, they maybe will get ¼ of what is owed, and then the rest when it's finished.
4. Always Know What's Happening
As a rehabber, I personally visit my job sites a few times a week. When your contractor starts to realize you are going to be making random visits at the house, he is more likely to show up.
In the past, I used to show up to a job once a week. What do you think happened when the only time I would show up was on Friday afternoons? Of course the contractors were there working, but the job seemed to be going in slow motion.
By randomly showing up – sometimes in the morning, afternoon or whenever – the contractors are more likely to be on the job more often.
Nothing is more frustrating than showing up on a job site at 10 am Monday morning and no one is around, then showing up Tuesday and still no one. Get in the habit of letting your contractor know that you will be showing up randomly with material or to check out the property.
5. Voice Your Concerns
This is an absolute MUST…
If you are not on the same page with the contractor and don’t let them know exactly what you expect, it's going to be a long and frustrating journey for you. You may piss off a contractor or two but that's okay. YOU are the one paying them, so you need to make sure everything is done to your standard.
Remember that if you do not tell your contractor exactly what you want, it will get done the way they think is right.
With my contractor, not only do I let him know what I expect, but I also ask for his opinion on certain items. This helps to get him more involved in a project and gets both of you on the same page.
Whatcha Gotta Say?
Do you have any rehab tips to add? Share in the comments section below.
Create your own itemized list of Job tasks and list what you think each specific job should cost.
Make a material list by looking on lowes.com or homedepot.com and save all of the common items you use: lights, drywall, vanity, carpet, hinges, door knobs, etc.
Talk to local contractors and real estate investors on how they run and manage their rehab projects.
Walk through other people's job sites and see what is going on.
Randomly show up at your job site to make sure the work is getting done in a timely manner.
Voice your concerns with the contractor when necessary.
Consider not paying your contractors until each task is done.