You got it.
Contractor says one thing. The actual end product, or action, or quality of work, is very, very different. For instance, the contractor keeps talking about how little money he is going to make. Or, “I really should have had another $10k-$20k for this job.” Or my favorite, the Mr. Silent contractor — the one who won’t call, won’t text for days at a time. That really drives me crazy.
The past month or so, I have had to deal with these types of issues not once, but twice. Both on (relatively) large projects.
First, lets talk about the bigger one. We will call it Flip #1. It’s a large project — $100k or so remodel — a big, beautiful house. The contractor started out doing pretty well, and then slowly started getting behind. And more behind. And more behind. And then all the sudden, we get a request for a draw, for a lot of money. Nearly all of which we had already paid in a previous draw, for work that was still not completed.
Let me reiterate. A lot. Of money.
So for several weeks I worked together with my partner on the deal to limp the contractor along and get the job to the finish line. This contractor milked us for several thousand more dollars, telling us problems and issues we had run into, and wham — the afternoon text message. He grabbed his tools (he had apparently been planning for several days or weeks to do this, seeing how fast he was out of there) and sent a message saying he left.
This house should have been on the market a long time ago, and instead of making more money and selling it on schedule, we had to scramble, call in the reserve GC buddy who happened to be available, and knock it out both within a limited timeframe and with a now extended (over) budget, over timeline, and unhappy partner.
This kind of stuff… it happens. It sucks.
But you have to deal with it, and you have to get a plan in place. Time is absolutely money in our business.
I have been running things myself, bringing in my guys and more sub contractors and a painter/handyman who worked for me. This house, partially neglected due to Flip #1 (not good either, but true), was also behind, but had a different situation. First, my painter, who was more interested in milking the clock than doing a great job, got talk after talk on working harder, doing a more thorough job, being careful and completing one task before starting another. I guess it didn’t translate. After he had been on the job a long time, the paint was still not complete and had many issues. He got fired this week.
In addition to the paint fiasco, the tile guy and contractor scheduled for the job decided to put me off for a week. Mind you, he was incapable of answering a phone call or returning an email or text message. Not just for a day — sometimes for a week. He was highly recommend, did great work on other jobs, was in budget with what we needed.
One week passed, and he had to finish up with one job to get to ours. Week two passed; we were behind, but from our understanding, we would have his guy on our job for several days, and he’d be ready to start mid-week. That never happened. I finally got him on the phone, got all the apologies, all the I-will-be-there’s, all the we-will-take-care-of-it’s. All of it.
And guess what? He didn’t show on Monday. Week three, behind. And tile guy was still nowhere to be found.
Fixing the Problem
For Flip #1, the new contractor came in and happened to be available literally the very next week. We were able to get moving, make a ton of progress, and at least have a final timeline and general end budget. This house should be on the market here in about a week or so. I am so thankful to have that contractor, his guys, and the fact that he was willing to come into a pretty crappy situation and really make the best out of it for us (and for him).
FINALLY. We have the end in sight.
For Flip #2, the paint problem is solved. All the lights, faucets, toilets, and everything else is getting put back together. The house is killer. New hardwoods and hip Pottery Barn kinds of colors. I have found a new tile guy through a friend and home designer who can start next week. We’re now working on the framer/contractor to finish some bathroom framing and plumbing, and we are off and running.
This one is just a week or two from the finish line as well.
The End Result
On Flip #1, we don’t have a final tally, but it’s tens of thousands of dollars over budget. Yes. That one hurts. The one great positive in this is that the area where the house is located, we had a good mix of buying the house right (yes!) and an area that is super hot with little inventory and rising prices. So, although we did end up eating that large chunk of money, our listing price will actually end up being high enough to cover our overage and more.
This is a blessing, but this doesn’t happen very often. We got lucky. We would have still come out of the deal making money if the prices hadn’t gone up that much, but it wouldn’t have been much compared to the investment of capital and time.
What a great reminder to make sure you remember you make the money on the BUY, not on the sale.
For Flip #2, we are actually going to end up (likely) pretty darn close to our budget. Through some design choices, value engineering a bit on some fixtures, good negotiating on prices from our contractors, and sub-contracting versus having a big crew out, we will do ok.
Food for Thought
I don’t know exactly how many flips I have done. I know it’s 20-30, maybe more. I’ve had a few go a bit sideways on me, but not so many problems all at once like the past few weeks.
You must keep a calm head about you as best you can. Sometimes I do well at this, sometimes not.
Be able to make quick decisions, but not rushed ones. Keep the entire project in mind, understand what all the players are involved in a deal — with GCs, partners, bankers, private money, etc.
Dealing with this kind of stuff is downright terrible — but things do happen. None of us like to face the fact that the deal isn’t going quite right. Or what we might have done a better job on. Or that the guys we hired didn’t do what they said they would do. Or that the quality of work we paid for wasn’t there.
Why Are These Projects Back on Track?
- We kept cool heads. We processed the situation and made decisions.
- We called in experts we knew who could come in and fix the problems — on a budget and on a timeline.
- My partner and I, although sometimes very uncomfortably, worked together to problem solve.
- We weren’t afraid to execute, fire, change, more around, and figure out a solution.
- We didn’t dwell on the failure. We got our heads around the problem and found the steps to take ourselves, our projects, and our wounded pride to the finish line.
I pride myself on being a skilled, seasoned investor. In fact, I have another deal that sold this week for full price before even hitting the market. We will likely make 5-4% higher than we anticipated on the deal. But just because we know what we are doing doesn’t mean we don’t have more to learn, and that we can’t put better processes in place, or find better contractors, or have a more detailed method in place dealing with contractors.
In the future I have will much more stringent methods for draws, accounting, and timelines with my GCs on large projects. For now I am not having any in-house employees, but rather hiring in companies that come in and handle from beginning to end, whether that be tile, carpet, or a painter.
It’s been a lesson in management and style. It’s about when to nitpick and when not to.
Real estate investing is no joke. It has changed my family’s life forever. My wife can stay home because of it. Sooner than later, we will have our entire monthly budget covered by passive rental income. And our business continues to grow with amazing partners. But there are always going to be bumps in the road — sometimes small ones and sometimes ones that feel like a mountain.
Stick it out. Get yourself out of bed (sometimes even at 4 a.m. if that is what it takes) and get the job done. Don’t make excuses, make results. Your partners will thank you, respect you, and ultimately, you will get better at your craft, make more money, and have a long, prosperous business in real estate.
What are you dealing with right now? And what have you done to help save your deal, or your relationship, or your partnership? And what will YOU do differently next time?
Let’s talk in the comments section below!