Breaking Down The Rehab Process: Pre, During, And Post-Construction With JD Esajian

Rehabbing a property can make or break an investment. That is why it should be a must to follow a rehab process. In this episode, JD Esajian of CT Homes LLC returns to talk to host Jeff Rutkowski about the rehab process, breaking down the important steps and things to consider pre-construction, during construction, and post-construction. What are the things an investor should be paying attention to in each phase? Should you get a general contractor or have multiple subs? How should your payment go? What is the communication process? JD answers these things and more! Rehabbing is work, but it should be fun. At least, that is what a good process allows you to do. So tune in and don’t miss out.

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Breaking Down The Rehab Process: Pre, During, And Post-Construction With JD Esajian

I’m excited about our episode as always because we have our resident expert, Mr. JD Esajian, Owner of CT Homes LLC here in San Diego. Before we get JD up, it’s time for our word of the week segment. Our word of the week is the Rough Out Phase. We’re going to be getting into the rehab process, which is really a multi-million dollar system that JD and his team have used for years but at a very high level. When you are managing a rehab, your first phase is going to be the demo phase. You’re coming in, you are clearing out everything that you don’t want there any longer, and you’re moving into framing out the property, then your rough out phase.

The rough out phase is once the new walls have been established, you know where you want them and where you don’t want them, and all of that, you’re roughing out the electric, plumbing, and HVAC. The rough out phase is really everything that’s happening inside the walls of rehab before you close them up with drywall. You rough out phase electric, plumbing, HVAC, and then you’re going to slap some installation in there, the city will come out, inspect it sign off, and then you close up those walls. That is the word of the week, your rough out phase. Let’s get into the show.

We have with me none other than Mr. JD Esajian by popular demand.

I’m happy to be here sharing information.

We’ve been getting a lot of great feedback on the show and a lot of great followings. Every time you’re on the show, the ratings are a little higher.

It must be the beard. It could be the information. I’m enjoying doing the show with you and being on and, as importantly, sharing things that have made our business and hundreds and thousands of other students’ businesses successful. It’s been a lot of fun to be here.

I’m excited. The past couple of shows, if you guys didn’t catch them specifically with JD, we went over his company, CT Homes LLC, here in San Diego. There are over a hundred deals a year, 30-40 deals going at any given time, but we focused on how you’re getting more properties under contract. It’s an amazing episode. That’s a must-read. You got to go back and read that episode if you missed it.

I had my wife read that.

Did you? What did she think?

She thought it was great information. She’s been in real estate through us organically, but she completed getting her license. She’s hungry for more information so I said, “If you want to learn how we buy the houses that we buy at CT Homes and do it at the highest level, go read the show I did.”

Once that you hang around Fortune Builders, you’ve heard us say many times traditionally about 1 out of every 25 offers you’re getting under contract. During COVID, during 2020, 2021, you have not gone further, you brought it down to about a 1 out of 14 and probably one of the most competitive markets in the history of our country.

As we wrap up Q3, that number will be even lower than that. If I pull the Q3 stat, we’re literally refining and taking sixteen plus years of information dialing it in and buying more houses during COVID.

If a contractor gets paid weekly for the work they do, they’re going to respond to your text or call a little more. 

I talk to investors all the time. They’re like, “How do I get more properties under contract?” Go read that episode. What I thought we’d focus now is how are you running 30 to 40 projects at any given time?

It’s not easy. We’ve got systems.

I know you’re doing that specifically what you have taught for many years, all across the country, the seven-stage rehab process. I’ll read the seven steps then we’ll chat it up a little bit, but the initial walkthrough, we kick it off with that and then transition into a detailed scope of work, which is key. When I say detailed, how detailed are we talking here?

We were down to item number of SKUs, where to get the material if we have a specific spot, what to pay for it, and color size. It’s one thing to tell your contractor to install new cabinets or to paint your kitchen white in your rehab. There are 20,000 shades of white, maybe. There’s a lot of them. I don’t know if it’s that many, but if you want the outcome to be the way you want it and perfect for what the property needs, then you have to be specific or you have to sit there every day and do it yourself, which isn’t being an entrepreneur.

Not at all. Once we get the detailed scope of work, that sets the contractors up to come and bid, takes away all the guesswork, they know exactly what they’re looking at, then we go through paperwork, contract signing, and the rehab process, number five, where you’re out there, you’re swinging the hammers, the work is getting done, and then the contract closeout final touches. These seven stages is the system. It’s been refined over the years, upgraded, like everything else that you do. This is the system that gives you the ability to not do one project but multiple projects.

If someone is only doing it once and wants to do it one at a time, it gives you the ability to have a life and get the outcome you want, come in on time and on budget. I equate it when I teach to the skeletal system of the rehab. If your body doesn’t have a skeletal system, you fall apart. If you don’t have a system or, in this case, the seven stages to your rehab process, you’re not operating at the highest level. You’re not going to get the outcome you want. I also like to point out that when you went through the seven stages, it’s the fifth stage where you’re starting on the rehab because the important things that we do prior to even starting construction or demo allow us to do the rehab at the highest level.

It’s setting yourself up for success. We were in Orlando and you had maybe 400 something people in the room studying this for three days. Everything that we rattled off here, we can’t cover in one episode. Literally, it’s three days of content, as I said. I think what would benefit the audience the most is if we hung out and spent some time on the rehab process.

That’s the glorified stage that everyone sees on TV that where you go to a commercial and they come back from the commercial and the house is done. Everyone is sitting there watching like, “How do they do that?” If you’re doing it right, you’ve set up the job properly, but it is a good use of time to talk about the rehab stage.

That’s where the magic happens. I remember personally when I saw this for the very first time. I don’t know if I’ve shared this on the show before. 620 Saddle Ridge Road, Orange Connecticut, that was about in 2007, I believe. I became a student of Fortune Builders and that was the first deal that I found. I brought it to JD and the guys that came and checked it out and made me an offer I couldn’t refuse.

Here we are, how many years later, sitting and doing business together. I’m curious. As you look back now and you remember seeing us starting the rehab or the process of the rehab, what was your major takeaway having watched that project from start to finish?

I had done deals prior to that. The best way I can describe it is every deal had done prior to that was chaotic and very reactive. We even did an episode of flipping on the house. One of the things, when we negotiate, is I want it to be there to watch and to learn.

I remember you negotiated that in. I want to be able to be there as often as I want to. We said, “Absolutely.”

You guys call the shots, but I want to watch. I want to see how you’re doing it. I was blown away by obviously the systems but specifically the contractors. In the previous deals, I’d be struggling to get them to show up on jobs. Your guys are there early and working late. I remember we had to do new septic system on the house.

FBL 13| Rehab Process

Rehab Process: If you want the outcome to be the way you want it and perfect for what the property needs, you have to be specific or sit there every day and do it yourself.

We tarred new septic system and leaching field the whole deal.

The contractor that you had brought in was working in the rain on a Sunday to meet the deadline. I remember asking you specific, I said, “JD, how do you get these guys to work so hard for you?” He’s like, “We do a lot of business. They know if they don’t perform, they’re not getting any more work.”

Jeff is his name.

Jeff Stella.

I think we circle back at some point and do a show specifically on contractor management. We’re going to talk about some of it with what we covered now. There’s a whole system behind that, too. When we pay a contractor, why we pay them on a certain day, and how we pay them. You can pay a contractor every two weeks or at the end of the month. If a contractor gets paid weekly from you, and I’m not saying weekly salary but for the work they do, they’re going to respond to your text or your call a little more.

They’re going to show up. You give them a bunch of money upfront and hope and pray that they’re going to get the job done. That doesn’t always happen. There’s a whole method to how that happened. You realize that now, but you see it for the first time. It’s pretty remarkable, but with systems, it’s falling a detailed outline, being diligent and strict on the process that you follow. If you bend here or there, then that’s where things can go awry.

One thing that’s important to mention is we’re going to focus, as I said, on the rehab process. This is where the swinging of the hammers is happening. The one thing that is in place that sets the stage is something you call the Six Critical Documents. We don’t have time to get into all of that now, but one of those is the payment schedule. Before construction begins, you’re setting milestones, weekly payments, benchmarks, all of that. That’s the context that we’re coming in here. Within this rehab process, what we’re going to focus on is pre-construction, during construction, and post. What is going through your mind? What are the things an investor should be paying attention to during the pre-construction part of the rehab process?

There are a few major things. When we’re talking about pre-construction, we’re not even talking about the other four stages that are prior to this in the seven stages. We’re only talking about you’re done, you signed all your contracts, you know whom you’re going to use, and you haven’t started work yet. The pre-construction phase of stage five revolves around a couple of important things. First and foremost, it’s getting everyone on the same page. The way that we do that at the highest level is through a pre-construction meeting. It’s typically referred to in the industry as pre-con. In my opinion, a good contractor that you hire would coordinate that.

As an investor and as the owner of the property, we don’t want to assume that’s happening. We want to make sure that happens. What we do is we get all the contractors together. If a contractor is already doing that, that’s great, but we want to attend. All the trades, whether it’s a general and all the subcontractors, even if they’re part of the work aren’t ready to start yet, we get everyone together at the house before work starts to make sure everyone knows each other. We have the set of plans there or the scope of work, whatever the jobs being ran off of.

This shouldn’t be the first time we do this, but with everyone together, we start off by asking everyone if they have any questions about their scope of work, the plans, or how their work relates to the other trades that are performing. That’s a great opportunity to flush out any questions that a contractor may have about your communication to them or what’s on the plans. Again, we usually do that the day that the work is going to start. We don’t want to waste people’s time and do it a week prior. The day that we’re starting work or demo, whatever it may be, we get everyone together and we go through that rhythm.

I like to tell others and teach others at our training that we, as the investor and owner, run that meeting. It’ll show leadership to the other contractors there. If you do it properly, we’ll set the tone of the job. I think it’s good to remind contractors of the dos and don’ts on the job. The important things that your job should be or look like. For example, no smoking or drinking on the job. Some people might be saying, “That’s standard,” but some people smoke and some people at times smoke on the job. If they want to smoke, that’s fine but they go off property. It’s reminding them of the non-negotiable, the Code of Honor.

We go so far as to post a job site Code of Honor at the property that has 12 or 14 things that we expect on our jobs, how to treat others, things not to do, things to do, and keep the job site clean. Again, it’s ethics, integrity, and code of honor. You, being in the military, understand way better than I do how important that is when things are under pressure.

This pre-con meeting, any contractor that’s going to do work, they’re there and they’re together. You have an incredible project manager, Michelle, that works for you. I’m assuming she’s the one there.

A good contractor that you hire would coordinate a pre-con meeting.

She’s the one conducting that. Also, before you go on, it’s a good opportunity for us, as the owner and the investor, to meet, which we may not have done at this point, the people that are going to work on the job. You might hire a general contractor and he or she might hire subcontractors, which is a normal process but we want to meet those people too because they’re going to be directly and indirectly responsible for finishing, working on the project, then ultimately our brand and reputation.

JD, give a couple of tips to the newer investor or an investor that maybe is not at the level where they have their own project manager, so they’re looking at a job. Oftentimes, I’m sure you get asked this a lot as well. Should I have a general contractor or should I have multiple subs? There’s some project that are bigger than others, but what advice would you give for somebody? When do you go to the GC versus managing?

Both works. There are elements that are pros and cons to both. Starting out for newer investors is more comfortable to hire one person, a general contractor, and let them manage and hire the subs. You have to be careful there because if the general contractor doesn’t hire good subs or isn’t great at managing other people then you’re the one that’s affected. I do think that’s a comfortable place to start because you’re dealing with one person directly, paperwork, and payment but when we do that, it’s very important that you meet the other subcontractors and also interview them the same way you would with the general contractor even if you’re not paying them directly. That’s a good place to start but don’t skip those steps of meeting the subcontractors and vetting them out if you will.

If a contractor or a general doesn’t want you to do that, to me, that’s a red flag because why wouldn’t they if everything was about to board? It’s a good way to also potentially flush-out concerns. I think what happens over time as you gain confidence rehabbing houses is that you meet subs, you develop relationships with trades, men and women, electricians, plumbers and you lean towards hiring them directly because you do have more control over the job, one. Two, you can save money, as you know.

The general contractor is going to markup subcontractors, which is normal and standard. It can range anywhere between 10% to 20%. If you can go higher than that or you’re getting ripped off, between 10% and 20% is my opinion. Let’s say it’s on the low side of that, you can save 10% of your construction costs. People normally evolve and go to that side where they’ll hire individual subcontractors once they have more experience under their belt.

In the pre-construction phase, you’re getting everybody there. The day of construction is going to begin, recasting the vision, the process, the order, and all of that.

Think of a coach in the pre-game speech or the pre-game message to the team before they run out on the field. There are famous movies where they show images of that. You’ve done all this work, you’ve practiced you, and you’ve got the playbook if you will, the scope of work. You’ve got all this stuff, but yet, you got to charge everyone up to go out and perform. This is no different.

Do you have a one-liner you use like a Vince Lombardi quote or how do you got to get the troops fired up?

There’s a lot of things that I’ll say at that meeting. At the end of the day, it’s respectful. I want people to be excited about working for us. I want them to know that if they perform well. This isn’t the last time they’re going to work for us and we can be a regular source of work for them. I also want them to know if they don’t perform, they were going to shake hands and never do business again. Fair but firm. I don’t have any one-liners per se, but I bring a taser gun. No, I do not do that, everyone. Although, sometimes, I wish I had one. Again, it’s like you said, recasting the vision and reminding them of our code of honor. The things reiterating the elevator pitch, which is a way that we introduce ourselves to contractors and reminding them of what got them, hopefully, excited about bidding on our job and working on this job for us in the first place.

That’s pre-construction. That’s the day of. Now we’re into it. We’re starting demo, framing, and roughing, all of that. What are we looking for? How are you managing? What are you doing specifically and systematically through the construction process?

I often get asked about software and tools like that. We have a whole host of, as you know, tools within our coaching program that our investors use to help manage and organize everything. The main components are a combination of whether you’re managing as the owner of the project, which there’s nothing wrong with it, or you have someone else that you’re paying to do that. There’s a rhythm, a frequency and a series of things that you should do when you manage a project. It’s not like the Ronco Rotisserie chicken maker. Remember that show? It was an infomercial. Ron will set it and forget it. You put the chicken in there, you set it and the crowd would yell, “Forget it.”

He’d come back in 45 minutes, the chicken would be moist and juicy, and you’d be ready to go. That’s not how rehab works. You don’t set it and forget it. There’s a variety of things. One of the most important things that I like to share is the frequency with how you visit the job. You want the general and the subcontractors to know and see that you’re there and you’re present that you’re going to be there. Starting off, I tell our team to be at the job site at least twice a week. I also remind them that we go at different times and different days each week to see if I catch them off guard.

Obviously, there are break times and lunchtime and things like that, but you want to keep everyone on their toes. A good project is running from the ownership perspective by being present. Now, again, everyone has their own schedule and you can’t be there all day, every day. That’s not the goal of how we set up the system. At least twice a week, our team goes, the project manager or you go if you’re managing the project, or we go at different times and on different days each week. That’s very important. We then start to talk about what do we do when we go. There’s a variety of things.

FBL 13| Rehab Process

Rehab Process: If your body doesn’t have a skeletal system, you fall apart. In this case, if you don’t have the seven stages to your rehab process, you’re not operating at the highest level.

Starting out, we always bring with us the plans, the scope of work, and the payment schedule. Whatever the job is being run off of. From day one, that first week when you’re going to the job site, immediately, you’re looking at in relationship to what we decided we were going to get done that week per the scope of work, where are we at in that week. If you go on Wednesday of the first week and you already haven’t completed half of the work of that first week, you’re already behind. Now, if you’re not there the first week, you don’t get there until the third week and you’re behind, you’re not going to catch up.

Starting from day one, we’re looking at. We’re going twice a week, at least and maybe more, and we’re checking on not only is where the work at in relation to that week, but where it’s at in terms of the overall job. The project is, let’s say, two months, you’ve got eight weeks. If you’re in week two, you need to be at a certain point to hit your target. Not only with work, but you’re also looking at your budget, too.

As an example, if you get there in the middle of the project after one month of a two-month job and you’ve spent 75% of the budget at that point, you’re in trouble. You want boots on the ground, but you want to be intentional with what you do and what you look for. It’s the scope of work in relation to that week in the overall project, and then it’s the budget as well. We take tons of photos when we go, too.

For those of you that are reading, some investors like myself will rehab remotely or mine hold remotely and all of these different things, this works in that context as well. Not too long ago, I finished a project in Virginia. Every Thursday, 90-minute meeting with the contractor. Ahead of that meeting was all the photos, all the videos, and the proof of work if inspections had to be done. We reviewed them together. If you’re listening through that context, you could apply it remotely.

You have to set up a rhythm as you did. Hopefully, it needs to have some version of boots on the ground in that area, so you gather that information. It’s the frequency and its diligence at the project. Immediately, when you see something that you know is behind in terms of work then you want to course correct and you want to find out why that happened. Maybe there’s a legitimate reason, they’re planning on working late the rest of the week, the material didn’t show up or something like that. When that happens, you need to make adjustments and get it in writing as to how that’s going to get adjusted and get caught up. We document it.

Your payment rhythm is weekly payment based on certain milestones being worked.

As you shared in those first four stages, one of them is the contract signing. In the contracts, there are six critical documents, as you alluded to. One of those is the payment schedule like you said. In that payment schedule, we break down the scope of work either for the general contractor if they’re covering everything or the individual subs together with them, we lay out what’s going to get done week by week in the jobs and we correlate an appropriate amount of money for that work in relation to the percentage of that work that it relates to the overall budget. We’re paying as work gets done, which is extremely important.

I never quote my brother, but I’m going to quote him here because it’s a good one. He said, “Sometimes the best motivation and sometimes the only motivation you have with contractors is the money you haven’t paid them.” It’s true. Ultimately, we want to be in a situation where there’s trust built up and we can rely on them. That’s the goal, but starting out, we need to build that trust. We want to make sure that we pay as the work gets done. We’re paying as the work gets done. We pay for that work, which is why we do it on a weekly basis because most people like the ability to get paid weekly but it’s not just a draw. It’s based on the work that they got done.

You are then always holding a little at the end for those final touches.

Money held at the end.

One thing I learned the hard way early on and they’re after one deal, then I found it to be effective. I started off financing a lot of my properties through a hard money lender. That would hold the rehab money and they would issue it on draws but they would also want to come out and inspect to make sure that property is done before they released it. What I learned after one deal is to make sure that I’m lining up the milestones with my contractor to match the money draws from the hard money lenders.

This dovetails, our system dovetails with that perfectly because as you said, a hard money lender is going to do that anyways but you need to get with the contractor ahead of time and let them know that, so they’re not expecting that you’re going to be a human ATM machine and pour out money to them. It relates to the work that they get done. Inherently in that process with a hard money lender, you’re going to have that built-in but it is important that you mentioned it upfront.

Those are the things I’m trying to think as we talk about this stuff. It brings back all these memories and stories. What’s the craziest thing you ever saw a contractor do like they showed up on the job and you’re like, “What is this guy thinking?”

A good project is running from the ownership perspective by being present.

I got a lot of them. I can think of a story that happened maybe the second year I’m in business. Maybe it was late 2004, early 2005 before we had developed the system that we’re talking about now. We’d hire them, we’d have a scope of work, and the contractor would ask for money upfront because they said they needed it. We gave them an amount of money that was way inappropriate for no work being done. The next day my brother saw that contractor pull up to the job site in a brand-new Cadillac escalade.

No, he didn’t? How much money did you give the guy?

You know how much Cadillac escalade rage in. That might’ve been a year or two years, but nevertheless, more than that contractor should have. Do you think he might’ve been a little bit smarter about what he drove over to the job site? That isn’t the craziest thing. It’s out there but we’re protecting ourselves. Sometimes people are better with money than others and circumstances having people.

I’m not saying this was the case with this contractor but people want to do the right thing, then they get jammed up on another job because that other customer hasn’t paid them yet. They use the money that we paid them to go cover another job, but they can’t afford materials on our jobs. Stuff happens, but we want to protect our interest in our investment.

That’s a crazy story, but it brings up a good teaching point though. A lot of contractors do push for money upfront. That’s something we teach our students how to handle that. What are you saying to the contractor? How are you overcoming that objection? I think that will help the audience.

First off, there are states that have certain guidelines in terms of how much a contractor can even ask for, legally. Let’s assume that isn’t the case and there is no guideline around that. My first question back to a contractor is, why do you need the money upfront? Depending on what they say, then that’ll dictate what I say next. Many times, contractors will say, “I needed to pay for materials or I needed to escalate,” if they’re not thinking. A common answer you’re going to get is I needed to buy materials. Part of our interviewing process of contractors is to make sure that those contractors already have accounts established and lines of credit at places like Home Depot and material suppliers, where they can put material on that.

Assuming we’ve done that job in research and the contractor has the ability to do that, we know that it’s not needed for the material then I would handle that objection by saying, “We already talked about your line of credit at Home Depot where you can use that line of credit to buy material. We’re paying at the end of the week, so you can then go pay off that material. Why do you need that money upfront?” “JD, I don’t do any work for anyone unless I get paid upfront because I’ve gotten screwed in the past,” which is another common answer.

I hear that a lot, then I ask this, “I can understand that. I’ve got screwed too in the past where we’ve paid contractors that didn’t honor their obligations. It sounds like we’re very similar and we’ve had that happen before. I want to make sure that you’re comfortable doing work for us and we want to make sure that you’re going to do the work that we’ve decided to do together. Here’s what we’re going to do. We’re going to get started and we’re going to do more frequent payments of smaller amounts until we build up a trust with each other.” I don’t recommend we do this all the time and we don’t. Pay maybe every or every other day based off of a more microscope of work to get them comfortable with the fact that, “When you do what we’ve agreed to, we’re going to pay you.”

Another way to handle that same thing is to put money into a fund control account where you’re not controlling the money, a third party is, and that third party is dictated or you communicate to them how to distribute that money based off of the work. Some of them are like when you borrow money from a hard money lender. Those are some things how we handle that objection and things that we do to overcome that. If a contractor is still not comfortable at that point, we don’t use them.

Instead of weekly draws, your milestones within that week until trust is established.

It’s good to, as is it, from the beginning where if they’re saying they’re concerned about not getting paid because we’re in the same boat. We’re concerned about paying and not getting the work. It’s a real conversation, then we can manage it a couple of different ways with the ideas that I discussed.

In the bottom of that, there’s a lot of good contractors out there. If you’re dealing with one that’s telling you they’re not starting, if they can’t float materials for a week, to me, that would concern.

It does concern me, too, which I agree. We definitely want to sit here and communicate that every contractor is out to get money to buy something that they want, but there’s tons of good contractors out there. We need to protect ourselves and we need to be sure that we found the good contractors before we start releasing draws faster.

FBL 13| Rehab Process

Rehab Process: If the general contractor doesn’t hire good subs or isn’t great at managing other people, you’re the one affected.

I want to move on here. I want to cover five quick things, but first and foremost, as always, for all of our audience, we have a weekly training coming up, a virtual one-day seminar if you’re interested in learning how to get started in real estate investing. This is where I started. This is where over 30,000 students now across the country learn these systems and how to apply it to their business.

If that’s something that interests you, type in FortuneBuildersShow.com into your URL and that’ll get you started. Rehab is underway, kicking it off with the demo, and the main thing is there. You want to make sure everything that was supposed to be removed is removed and everything that was supposed to stay, stay, then you move on to the framing. In framing, I’ve found that to be the place and the opportunity to make adjustments. Hopefully, you’re not making many or none would be ideal. Talk about the framing part of it. What are you looking for there? You have plans on paper. Now, you’re getting a better sense of what it’s going to pan out.

Depending on your knowledge of construction or maybe you’re starting out and you have none. You don’t know what is appropriate framing or not. You’re looking for obvious signs when walls are opened up of deterioration. We’re looking for those things that making sure that we’re not only covering them up or the contractor’s not covering them up. If you have a set of plans or your scope of work, you’re making sure that’s being followed. If you’ve got a set of plans and the engineers designed this wall to be opened up, you want to make sure that’s happening.

In conjunction with that, sometimes measurements on plans don’t necessarily line up exactly what the looks at the house. You’re verifying things, making sure you have enough room ultimately for the way that you’ve laid out the kitchen, the bathroom tub or whatever area we’re talking about. We’re looking for obvious signs of deterioration in areas that maybe we aren’t already planning on replacing because we want to deal with those.

We want to look for a structural deficiency and making sure that if we open up something we thought was not load-bearing and it turns out that it was so we have to get another engineer in there to address that and then making sure what’s on the plans or what was drawn out or the layout that we wanted is doable after we open up the walls. Those are some quick things that we’re looking for in the framing process.

How are you communicating? How are you dealing with the contractor if a change is required? We’ve all heard of change orders and things like that. How are you dealing with that?

We’d like to isolate those. Hopefully, there are a few of them and sometimes there are not a few of them. There’s a lot of them depending on the house and the age of it. We want to back up when we interview a contractor. We want to recognize and let them know that we understand that there could be things that come up on the job that we’re not aware of. No one can see everything. Seeing the walls that’s not possible. First off, we want to already have had a conversation with the contractor about how we’re going to handle that. How we handle that is we isolate that issue, whatever it is, maybe we open up a wall and there’s a couple of 2×4’s that were rotted that no one knew, it’s going to take time and money to fix.

We want to isolate that cost of whatever that is and we want to negotiate that individually. We want to also make sure that our contractor knows that no change order is going to be paid for or approved if we don’t know about it before the work is done. That’s key because I’ve heard horror stories. Unfortunately, I’ve faced them in the past in the early years where we didn’t know that. A contractor would do a dozen things that we never heard about.

In the end, we get a change order for $30,000. We’re looking at this like, “What is this? We didn’t know about any of these.” “They needed to be done.” That may or may not be the case, but we want to make sure we know about them prior to them doing the work then we want to negotiate that item. In my opinion, in my communication with contractors, that should be done at cost.

I agree with that. That is key because otherwise, what happens is the contractor finds it. They make the change, “JD, here’s the bill for$2,000. We took care of it for you.”

You have no way of verifying what the $2,000 worth of work.

We’re onto the rough end. We’re roughing in plumbing, electrical, and HVAC. Basically, everything is happening within the walls.

All the stuff in the wall that no one ever sees, but arguably is the most important for a home.

“Sometimes the best motivation and sometimes the only motivation you have with contractors is the money you haven’t paid them.”

One tip you gave me years ago that I always remembered. Taking the time to walk through the house and see the placement of the switches and the outlets to make sure that it makes sense for the new buyer. You walk into a room, you don’t want to be in the dark and have to walk across that. Little things like that.

The light switches behind the door because you didn’t dictate or no one knew how the door is going to swing. Though, you’re right. It’s important. They can ask me how I know that problem. Walking through before the walls are closed up and going through all that.

Plumbers and electricians would think of these things, but they don’t always do so we want to be the ones on top of that.

I’ll give you a quick story. I have some photos of a before house that I’ll show you in a second. Not this house that I’m talking about, but we’re building a 3,300 square foot home here in our neck of the woods, Pacific Beach. We had specifically talked about where the washer and dryer are going to go. I always like to the walls install this recessed box where the gas line comes in for the dryer and there’s also a pre-done hole where you can hook up your dryer vent, too. It’s great. It’s recessed, so it’s easy. It makes everything nice and neat. The washer hookups that they put into the walls. It drains right there the hot and cold water.

I like to put those on the walls because one, it looks great and convenient, then to that, in the wall, we attached the dryer vent that goes out of the house. We had those there and I had the dryer box sitting about 24 inches. Maybe it was three feet from where the dryer was going to go. We let the plumber in, though, that was installing the gas line that’s there. Unfortunately, they put in the gas line. The box was in reach of them.

They didn’t put it in. They put in the gas line without installing the box and they put in some junky connection for the dryer vent. Things happened that were in the scope of work that was already in the plans. If you don’t walk through the home prior to the drywall, you’re not going to catch that then it looks bad and the connections are messy. The plumbers there now changing that because we have a rough inspection on that house where we’re going to insulate and we’re going to get drywall hung.

It brings up a good point. Don’t pay for that phase of the project until the inspection is done by the town and were signed off.

Benchmarks for payments are great anchored around inspections. Those are also great times to be at the job site.

The roughing is done, the inspection is going to happen, hopefully, you get the thumbs up, throwing the installation, you’re closing up the walls, all of that, then you’re moving onto the finishing stage. Walk us through a high level the order and process of the finishing stage.

After the drywall is up, texture and everything, some contractors do it different ways, but we like to get a coat of paint on the walls, primer then a finished coat. I personally like to do paint behind the cabinets when we’re installing new cabinets. Definitely primer and, if not, a finish coat. What happens is we paint the walls. We’ve got all that done. Maybe it’s a primer and a first coat and then we’d come back with a finished coat after everything is done minor knicks. After the painting is done, then we start the flooring. The flooring goes in, whether it’s tile or wood. If it’s carpet, we usually wait until the end, and then we start doing the trim out work, which is going to be like door trims, hinging doors. We’re starting those things and then in that same time period, we start to get cabinets installed.

At this point, we’ve got cabinets going in, doors and trim, baseboard going in, then when that’s wrapping up, we get the countertops in, whether it’s prefab or templated countertops, then we start to do the finished fixtures like lighting and door handles. We start getting the appliances in as well. At some point around this time, then we start to go around and do the final painting. If we’re doing floors that need to be sanded or need to be finished if it’s unfinished wood, then we have a couple of day periods where they go in and finish the wood. If we’re doing pre-finished wood, then that’s not needed.

One thing I’ll say is, when you get that flooring in, pre-finished or not pre-finished, you want to have that contractor cover it up right away for obvious reasons. It doesn’t get damaged as they’re bringing in countertops or as they’re doing other work. Finished fixtures, lighting, hardware, and faucets in the sinks. Those things all go in and then somewhere around the same time, depending on what we’re doing on the outside, finishing up landscaping, things like that, final touches, that brings us to the finish line. Depending on the scope, we’re getting the final inspection. Putting in the water heater, those finishing touches, and getting all the electrical hooked up to the panel. Again, I’m talking a little bit more about maybe bigger construction projects but some elements of this are going on in every renovation.

Let’s bring it to life. I’m excited. I didn’t even know you had pictures with you. This is going to be good to see.

FBL 13| Rehab Process

Rehab Process: You want the general and the subcontractors to know and see that you’re present and that you’re going to be there.

I try to under-promise and over-deliver. You didn’t know these were coming. This is a home that was done with now. It’s going on the market. That was the outside. This is what it looked like on the inside. It’s dated. It’s got these older cabinets, nutty wood pine cabinets and this old tile countertop. This view that we’re at now, there’s a wall between this kitchen and the living area.

Let’s see what else do we got here. We got a bedroom here. This is what it looked like before. Popcorn on the ceilings. This is the master bedroom. It’s got a nice big backyard. We got an extremely dated bathroom here. The kitchen is here. It’s got this cool living room in the back. Let me show a couple. That’s the living room in the front of the house. As you go to the back of the home, it got this big living room. Let me show you the fireplace here so you can get a visual. You can see it on the left-hand side of this photo. It’s got one of those old school-like rock-faced fireplaces. It looks nothing like this now because we finished it and I’ve got that after the walkthrough. It’s like a six-minute video. Do you want to play it?

Let’s do it.

We’ll play this quick video and we’ll come back and wrap up. It’s me walking through this home that we looked at before. It’s being done now. Let’s roll that video. “Everyone in podcast land watching us. I wanted to walk you through a finished quick home walkthrough, give you some insight into how we think about finishing a home, how we look at price points, talk a little bit about the finishes and what it takes to bring a property to market in this market.”

“Let’s talk about the outside here. This particular neighborhood of San Diego is a neighborhood called Serra Mesa. It’s a very centrally located neighborhood. I would say affordable homes for our county. More of a median price point neighborhood. A lot of the homes are similar in that builder, built a few different models of them, so we see a lot of the same homes in this neighborhood, but when we renovate, we want to separate our home and have it stand out in a good way in the neighborhood.”

“First off, it’s important to know your price points because if you have a lower to medium price point home, but you finish it to the high end, you might be spending money you don’t need to. Here, we have median price point finishes. It doesn’t mean that we scale back on the quality. It means that we pick appropriate finishes to fit the style of the home, to fit the architecture of the home and also fit our budget. One thing that we always do on the outside of our homes creates some accent and some sizzle, as we call it.”

“On a lot of our homes nowadays, we’re putting some version of a wood accent, which is what you see here. It’s not done yet because it has to be stained but by picking a portion of the home and giving it some color and some dimension, it’ll make the house stand out in photos. It’ll make the buyers feel more connected to it when they come to the house. That’s what you see here. It’s almost finished. It still needs some color on it and then the sealer to wrap it all up. The other thing that we like to do on the outside and inside of the houses is add some color pop to the door. Obviously, the house is more of a neutral white color but we give some color to the door. Again, in pictures, it creates pop. It creates a dimension for the home.”

“This is interesting and you don’t want to overlook it. We add a substantial meaning, not an inexpensive handle to the door. The reason is as crazy as it sounds, this is typically the potential buyer’s first contact, like physical contact with the home. If you have a cheap handle here, it’s not installed properly or it doesn’t look good, their first physical connection with the home is going to be subpar. We always put a substantial handle.”

“As crazy as that sounds, it makes a difference. Now, no secret on the inside of the home. We try to create more open space, which is what we have here. It wasn’t always that way. There used to be a wall here that we took down, but interestingly enough, we were able to leave a support wall here and the demolition of the wall was very quick and very inexpensive. It also creates an anchor point for this corner of the kitchen. The most important thing it does is create open space in this nice great room feel and because the kitchen isn’t, I would say, enormous although it is a good size, we’ve used more of a light color palette to make the whole space feel a lot bigger. New cabinets and hard surface countertop. This is courts, which we’re using more commonly now than granite.”

“A nice functional new kitchen for someone very soon to be enjoying cooking family meals and enjoying this space with their family. I’ll take you to the master bedroom because that’s the decision-makers room, primarily whether it’s a couple or a single person, it doesn’t matter. This is the room that the person who’s investing in this home and buying the home is typically going to use. This home has vaulted ceilings. We didn’t add that or we did vault the ceilings. They were already here, but that creates a lot of nice volume in this space. The other thing that we do when we renovate is we always look to make the master bathroom the best bathroom in the house.”

“Again, this isn’t a huge bathroom, but unlike the other bathroom, it has custom tile accents. It’s got nice finishes. The other bathroom has nice finishes too, but we add something unique and special in this bathroom here, being the tile to attract that decision-maker. Check this out. What? A lighted mirror? I can pluck my eyebrows and see everything right there. They have these mirrors now you can buy with a little bit of power requirements on the back. They light up as this one does. Some of them defog automatically, too.”

“A lot of advances made in mirrors these days. The last basis I’ll take you to the huge living room that this home has and the outdoor space. Dining area, garage. We got a big pantry. This pantry is bigger than the first apartment I rented. This was already here but it creates a lot of nice storage for the kitchen. This particular home has a nice and big family room that we, of course, accentuated new paint, and created a space with the staging and the style of the staging that people can see themselves hanging out here, watching TV, connected to their backyard, and coming home after a long day. I might stay here. That couch is comfortable and it’s big.”

“Anytime we have that indoor, outdoor space to accentuate, it’s a great thing. This house already had that nice, big cupboard outdoor patio, which we painted and added this cool oversized fan. Most importantly, we’ve staged the outdoor space. If we didn’t have the staging here, whether it’s out there on the artificial turf or here, it’d still be a nice yard, but it’d be a nice empty yard. Now, by adding the staging that you’ve seen throughout the house, it defines a space and creates a motion. This particular yard is a good size for this neighborhood but we’ve made it obviously better by landscaping it and not over landscaping.”

“Artificial turf, dry scape plants here in California, certainly other markets as well, water is expensive and it takes maintenance to cut your grass. Not everyone wants to do that, so we’ve designed a landscape here where people don’t have to worry about that. The shed was already here and we’ve kept it as great storage for the home. These are some things that help accentuate our renovations and helps the home sell faster. Most importantly, give someone what they need to make a good, strong buying decision in any market. Hope you enjoy the walkthrough. See you back in the studio.”

Rehabbing is work, but it should be fun. That’s what a good system allows you to do.

There you have it, folks. That’s the result of a multi-million-dollar system.

The seven stages right on the process there, the rehab stage like we talked about, and breaking that down into pre-con during construction after. It was even staged in there too so you got to see some of those finishing touches.

That was impressive. How do you want to wrap it up? Any closing remarks on this final stage?

This is my 16th year rehabbing houses and I’ve rehabbed over 1,000 homes. What I can tell you as we recap is nothing to me is more exciting when it’s done properly of the before and the after and that transformation. It’s a great feeling because you’re revitalizing not only the home but the community. You’re increasing property values, you’re stimulating the economy with the contractors, you hire the staging companies, all the different people and vendors that you work with. On the other side of that coin, when you don’t follow a system, you don’t know where you’re going and you’re reactive like you said, then the process sucks.

It can cost you money. You can lose money. It’s a drain. You don’t get to focus on the real benefits of rehabbing a home. Rehabbing is work. We’re never going to say that it isn’t, but it should be fun. That’s what a good system allows you to do. It allows you to have fun in the work that you’re doing. Whether it’s your first project or your thousand-plus like we’re at now and I’m at personally with CT Homes, it should be fun and you should have a system to follow to help make it fun.

That’s why you hear us all the time. We talk about the education and how important that is. The reality is you can make a lot of money in real estate, but how much can you lose? All of it.

You can go get your own sixteen-plus years of information and that’s fine or you can leapfrog and get cross that bridge faster and lean on someone else’s education.

We have a lot of audiences that I’ve interacted with on social media since we started the show. They haven’t done anything yet and then they question you, “Can I do this?” I was talking to one of them. Correct me if I’m wrong with this. I believe if you put your head down and maybe dedicated 10-15 hours a week for 3 or 4 months learning, you’re ready to step out there and you can make this happen.

You can because doing that within our program and in our education, you’re never going to know everything but dedicating 10 to 15 hours a week, as you said, for a couple of months, you’re going to have plenty of information to get started.

FBL 13| Rehab Process

Rehab Process: Great benchmarks for payments are anchored around inspections.

It’s great when we co-teach the bootcamp. You’re teaching the rehab bootcamp. I’m teaching the wholesaling bootcamp. It’s amazing seeing the transformation in those three days, the confidence arises that people are ready to go take on the world.

They’re getting fired up to implement. That’s the power of good coaching and good education. That’s that final step implementing.

It’s always an honor. It’s good to have you.

It’s great to be here.

Thank you, everybody, who read the show. Start learning. You have what it takes to be a real estate investor, whether it’s full-time or a few deals a year around what you’re currently doing. You can do this. If you want our help with it, we’d be honored to help you. It starts by going to website, FortunateBuildersShow.com. See you guys on the next episode. Take care.

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About JD Esajian

JD is the President of CT Homes LLC, a real estate investment and redevelopment company headquartered in San Diego, CA. JD oversees all deals and rehabs with as many as a dozen active deals going at one time. He has over 10 years of experience in residential redevelopment and has been involved in over 500 deals in his career, making him one of the premier investors in the country.

CT Homes LLC, founded in Connecticut, is a nationally recognized real estate company featured on A&E’s Flip this House. JD starred on Flip this House for the duration of series with brother Paul Esajian and business partner Than Merrill. In 2009, JD and CT Homes relocated to San Diego and have completed hundreds of real estate deals since.

In addition to managing an active real estate business, JD is a national speaker and real estate educator for FortuneBuilders, the premier real estate investment education business in the country.

Outside of work, JD’s passions are his Family, Health, Music, Real Estate and Cooking. He is regularly involved with FortuneBuilders Gives, a charitable initiative focused on Children, Education and Housing.