How to Control Renovation Costs When Dealing with Contractors
Most real estate investors have developed excellent skills when it comes to finding properties, marketing for buyers, marketing for tenants, and even creative financing techniques. However, I’ve found that many investors still don’t have a good handle on their renovations. Keeping costs down and accurately projecting repair numbers are critical components to a real estate investing business.
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Granted, some investors are content to do a few flips a year and perform the renovation themselves. While this is a great means of keeping costs down, it's definitely not a good strategy for growing a business and potential income. Real estate investors that are serious about growing their business and the number of properties they can do in a year, absolutely need to contract the renovations to a reliable contractor.
In order to be successful in the fix and flip business, investors need to know how to accurately price a property (or have somebody you work with closely that can). Like anything else, the more houses you renovate, the better you get at predicting repair dollars. We’ve found that while you may be able to estimate a property within $5K to $10K of the actual rehab number within a short visit to the property, it takes time and attention to detail to estimate a renovation accurately.
Having hired and fired a number of different contractors over the years, we’ve learned that the way to control your costs is to control the estimate from the get go. Once you’ve got a handle on material and labor costs for specific repairs, you can build a template scope of work that will enable you to accurately project what your repair number will be on a given property.
Where most investors get burned is the lack of detail provided to a contractor when the job begins. Even if you have categories such as plumbing, electrical, paint, etc. outlined in a work order, most contractors will still come back to you at the end of the job with overages and change orders that can blow up your budget.
We've found that the absolute best way to control the renovation is to create the scope of work up front with every single task itemized and priced accordingly. Rather than asking the contractor to price the job for us, we ask the contractor if they want the job that we've already priced. If for some reason they don't, we move on to the next contractor. That said, this almost never happens as we've developed great relationships with our contractors over the years and know how to price a job fairly.
Keeping in mind the fact that you can never account for everything, we also build in a contingency budget into every property. There will almost always be some amount of unexpected repairs â¦. However, if you've got a line item in your budget for this, you shouldn't get caught off guard when your contractor alerts you to some amount of additional work. Again, the goal is to be on the same page with your contractor so that the actual renovation costs come in at the price you budgeted.
I think many investors have resigned themselves to the fact that the nature of a renovation budget is simply a crapshoot. It’s so common to run over budget that it becomes perfectly acceptable for contractors to hand you a bill for overages at the end of the job. I’ve found that if investors can get a hold of this side of their business, it’s possible to save thousands of dollars. While it may not be that big of a deal on one job, saving thousands of dollars on multiple jobs over a period of time can add up to a significant amount. Investing the time to develop a skill for pricing a property and managing your contractor carefully may seem like a lot of work, but one that can add up to serious dollars in the long run.
Photo Credit: Mandajuice