If there’s one set of real estate rehabbing tips that the would-be fix and flip investor seems to want to know more about, it’s the construction process of house flipping.
That’s because many of the most common, and costliest, mistakes made when rehabbing real estate occur in that all-important construction part of an investing deal.
There are many question to consider for the real estate rehabber: how do you find a contractor?; how do you know what the contractor should do?; and how do you ensure you don’t get exposed legally, and financially, when entering a deal?
In the belief that the best real estate rehabbing tips are those that give you a broader sense of the rehab property big-picture, here’s a quick overview of how the construction process works, from beginning to end.
Understanding The Construction Part of the Real Estate Rehabbing Process
1. Creating a Detailed Scope of Work
The first step of the construction process does not involve contacting a contractor or signing an agreement. It’s completing a detailed and written scope of work.
The Scope of Work (SOW) is the foundation of a rehab project. In essence, the SOW is the rehab investor’s to-do list, an agreement with a contractor regarding the project’s extent and materials used.
As Paul Esajian explains in his book “The Real Estate Rehab Investing Bible”: “A SOW minimizes miscommunications between parties and holds the contractor accountable to the agreed-upon terms and exactly what you want and need done.”
A detailed and written SOW helps ensure the investor and contractor are on the same page regarding the extent of the project. An SOW also helps ensure the contractor completely knows and understands the agreed-upon deliverables. (Not always the case.)
Developing a good and detailed SOW means checking out a property thoroughly and determining the priority items that need redeveloping. These items may include removing or demolishing certain features, as well as renovating or adding new items that boost the market value of a property.
Once a rough SOW has been established, and meets the projections of a fix and flip investor, the next part is making the SOW as detailed as possible. A detailed SOW should include more than just numbers, but also a bid package that rehab investors send to potential contractors who might be interested in joining a project.
2. Finding a Contractor
Finding a good and trustworthy contractor can make the rehab process easier and less stressful. (Not to mention save you time when it comes to sourcing your next rehab project.)
Some investors, who want to save money, make the mistake of getting an inexperienced or cheap contractor, which in many cases may lead to disaster and ultimately dip into a project’s profits. While a more experienced contractor may cost the investor more upfront, chances are, the project will be finished within the deadline set and delivered with quality craftsmanship.
It’s crucial an investor pre-screen a contractor for a project. How do you pre-screen? Here are a couple of key questions to ask would-be contractors:
- How long has the contractor worked in the industry?
- Does the contractor have proper tools needed for the job?
- How many workers does the contractor have on his/her crew?
- How many jobs does the contractor’s crew work on at the moment?
- Does the contractor have a license and relevant permits?
- Does the contractor carry liability insurance?
- Does the contractor provide workers compensation insurance?
- Does the contractor use subcontractors?
This may seem like a lot of questions, but better to ask ahead of time –- rather than be burned later on.
3. The Bidding Process (and Choosing a Contractor)
Once a fix and flip investor has identified pre-qualified contractors for the project, they can start the bidding process. The investor’s bid packet should, at the very least, include:
- The SOW
- A Quote Itemization Form
- A Contractor Application
Invite between three to five pre-qualified contractors to provide bids on each project. The investor should inform contractors where to send bids and the specific bidding deadline.
The investor should evaluate the bids based on accuracy, professionalism, as well as overall feel. (It’s okay to trust your gut, just be sure to mix it with a bit of empiric data as well.)
4. Executing the 6 Critical Documents
Before a single nail is hammered, as an investor you must ensure all necessary paperwork is complete. While the contractor will be expected to provide “some” documents such as licensure and liability insurance, the investor must provide six critical documents to safeguard the project and protect all participants.
These documents include:
- Independent Contractor Agreement (the investor’s main binding agreement with the contractor)
- Final SOW (the final agreement on the project’s extent and materials that will be used)
- Payment schedule (which can be based on completed project milestones)
- Insurance indemnification form (which states the contractor’s insurance requirements)
- W-9 (which puts all workers on a contract basis)
- Final and Unconditional Lien Waiver (which will only be signed when the project had ended and the contractor has been fully paid)
5. Managing the Rehab
Most of the work on a rehab project leads up to this moment: construction actually beginning. (And you managing the project to ensure goals are met in a timely fashion.)
But don’t worry, you don’t have to know how to turn on a single power tool to manage a rehab project. In fact, the more able you are to set workflow milestones with the contractor, along with a payment schedule and time for building inspections, the less you have to do as an investor during this phase.
A general recommendation is to fix the project’s exterior first, and work from the outside in. (Example: The workflow stages begin with demolition and trash removal and lead all the way to the final cosmetic touches on the property.)
What’s key is that all work match the original SOW. The middle of a rehab project is not the time for improvising or changing “on the fly.” Stick with the plan, and the plan will save you money.
6. Closing the Rehab and Final Payment
You’ve reached the most exciting part of a real estate rehabbing project: staging the project for selling!
The goal in this stage is to make the project appealing to as many prospective buyers as possible. Staging techniques should include a walk-through with the contractor to make sure all deliverables in the final punch list have been addressed and completed.
This is also the stage to schedule final inspections needed to close out the building permits of a project. At this point, you should also be ready to provide the final lien waiver and payment to the contractor. (And take possession of a great-looking property which you can now sell.
Don’t Need to Pick Up a Single Hammer
Construction can be an overwhelming part of the rehab process for the new (ish) rehab investor. It’s important, when scouring for the latest real estate rehabbing tips, to remember your job is not to pick up a single hammer or lay a piece of drywall.
As a rehab investor your job is to have a clear vision of a project: what needs to be done, when and how to keep the project from straying off-course. Don’t worry if you don’t know how every aspect of a build is performed. Your primary task is to stick to your guns, point out anything that doesn’t meet your SOW, and sign off on the deal only when it reaches your expectations.
Do this and you’ll not only feel less stressed, and be more respected, but you’ll increase the likelihood of you realizing a profitable deal.