How to Succeed in Real Estate by Managing Your Contractors
If you are a real estate investorlooking to fix and flip homes for profit, one of the significant problems you wouldencounter is managingyour contractors. After going through the arduous process of locating a property and obtaining the necessary finances to purchase it, whatlies aheadis the task of renovating it. Since renovations and repairs are unavoidable in real estate business, the most challenging task is to hire the best contractors to ensure that the projects are completed on time and within budget.
To be a successful real estate investor, you need to acquire two significant skills. First, you need to be proactive. That means you should be able to identify good fix-and-flip opportunities and sign the contract at the optimal price. Another significant skill is project management. It would be best if you were vigilant to ensure that the construction crew adheres to quality at every stage while also ensuring timely delivery of the project. The keynote to this part is how to manage the contractors efficiently so that they don’t compromise on quality. Managing contractors to improve their productivity levels while maintaining a successful working relationship is our focus today.
Below mentioned are some guidelines to handle your contractors for future fix-and-flip or buy-and-hold renovation projects.
Define your rehab goals and stick to them
Identifying whom to hire for a property repair or innovation is one of the biggest challenges to face in real estate investment. It’s important to hire the right contractor for the job. And for that, you need to define two major aspects of your renovation. The first is whether the process requires permits or not. This would help you identify the type of contractor you need to hire for your project. If your project requires esthetic or exterior repairs that are relatively inexpensive, you can hire a crew of unlicensed contractors. Typically, rehab projects that revolve around $20000 to $50000 can be accomplished by hiring an unlicensed crew.
On the other hand, there are complex renovations that demand permits. For instance, if you are rehabbing a dilapidated property in Washington DC, there are high chances that you will need permits before you hire a contractor. Hence it’s better to realize it before the local authorities slap a stop order on the project.
The second important thing to decide is your exit strategy. Whether you wish to flip a property or intend to use it as a rental will decide the scope of your renovation. If you have decided to sell your house, an appealing aesthetic is important to attract potential buyers as they are more likely to exhibit a positive response if it looks fabulous and inviting to them. But if you prefer to hold on to the property for yourself, the chances are that you’ll be more focused on itsmarket value and its ability to withstand wear-and-tear in the long run.
Prepare the Scope of Work (SOW)
In a construction project, an initial SOW document clarifies the doubts before the execution of the project. It’s a mutually written statement of work that is clear, concise, and logical so that it’s understood by both the parties at hand i.e the contractor and the investor. SOW describes what is expected from the contractor and is used as a measuring tool by the investor to ensure the project deliverables are met consistently. So task your contractor with developing it. If a borrower fails to develop a thorough SOW, he is more likely to struggle with managing his construction business.
If you are applying for hard money loans, the chances are that your lender will require you to provide them with a scope of work. In many cases, their underwriting decision will depend on whether your scope of work is detailed enough to show your competence as a real estate investor.
Decide the payment terms with your contractor beforehand
Decide the payment terms and payment mode with your contractor in advance of beginning the project. Mostly contractors demand payments in advance,while your preference might be to pay for the completed work only. Any mutual decision taken needs to be documented. If you decide to pay an advance, make sure that it is a relatively satisfactory amount that covers the initial demolition cost. It’s always advisable that you separate the labor and material cost.
Be empathetic to the crew and keep them busy
Contractors have the power to make your project a bust, or success. Just like you are worried about being cheated by the amateurish contractor, they are equally worried about completing the work and not being paid. “If you find a crew that does not compromise on quality, works with a sense of urgency, and doesn’t charge you an arm and a leg, make sure you keep them happy and busy,” says Kyle Sennott, Managing Partner of New Funding Resources, Maryland’s top hard money lender.