Renovating a Property

[Account Closed]

Against everyone's advice, I decided to do some renovations in San Antonio while living out-of-state in San Francisco. Now that I have some battle scars from this good learning experience, I have some questions

1) Assume you are there in person, what are you doing day to day? Are you meeting with the contractor in the morning to review what will be done that day? Are you reviewing the work that was done yesterday to see if it was completed to your satisfication?

2) Say you already have an agreed upon list of items to fix with expected costs. What happends when a new issue comes up? Do you have the contractor send you a new agreement to sign with the updated total? Do you take a day or two to think about whether you want the issue fixed or not?

3) Say you don't want to work with the contractor anymore, but in the original contract there is still remaining work to do. How can you end this transaction? Is there a clause in the contract saying you can back out? Have you ever faced retribution because of backing out?

4) When picking out materials, do you usually buy the materials and deliver them on site or do you let the contractor buy it?

[Cathy B.]

Jason,

Some thoughts and my answers are geared towards the assumption that you have verbally directed the scope of work (no drawings or specs) and signed a simple contract with description of the work.

1) Assume you are there in person, what are you doing day to day? Are you meeting with the contractor in the morning to review what will be done that day? Are you reviewing the work that was done yesterday to see if it was completed to your satisfication?  I would be reviewing items that I care about such as finish work, wall locations, etc. at the end of the day when the Contractor is gone.  I would let them know first thing the following morning if I had any questions or concerns. On one hand, you don't want to be too much of a helicopter owner, but on the other you don't want them continuing forward with something you are concerned over. .  This may not be required, but I'm pretty particular and unless you have a top notch Contractor, it would be a good idea.

2) Say you already have an agreed upon list of items to fix with expected costs. What happends when a new issue comes up? Do you have the contractor send you a new agreement to sign with the updated total? Do you take a day or two to think about whether you want the issue fixed or not?  Usually they will provide an estimate or change order, not an entirely new contract per se, but yes, you would have to agree formally to something.  If you wait too long, the window for completion would get pushed and it may affect the Contractors scheduling with other clients or the work needing to be done is on hold without any progress.  It could affect their bottom line.  Communication is key if you need time to think about it.  Hash it out with them so you understand their concerns on schedule and needs for completion.

3) Say you don't want to work with the contractor anymore, but in the original contract there is still remaining work to do. How can you end this transaction? Is there a clause in the contract saying you can back out? Have you ever faced retribution because of backing out?  Usually the contract would spell this out.  Its possible small time contractors may not use the most thorough paperwork.  Normal thing to do is to inform the Contractor in writing to stop work then they can bill you for the work that has been completed as well as any materials purchased.  You would both need to agree on what % complete it is.  It would be best to get this in writing, signed by both parties to avoid any future issues.  I've never had this issue myself.

4) When picking out materials, do you usually buy the materials and deliver them on site or do you let the contractor buy it?  This is usually negotiated and spelled out up front and either can be the case and its likelihood of owner purchase and delivery may depend on the type of item.  In some cases, I've asked Contractors to pick items up from the warehouse that I've purchased from. I always make sure they know that before they give me a price. If it was not written out on the contract or discussed then its possible both parties (Owner and Contractor) assumed the other was purchasing.  If you brought your favorite tile sample to the Contractor when you were asking about the job . . . they may have assumed you have already purchased it, so its best to be explicit where there is room for confusion.

[Eric Fernwood]

Hello @Account Closed,

I will respond to your post more broadly because there are a lot of things to consider when it comes to renovating a property.

I will start with deciding what to renovate.

What to Renovate?

Renovation is where things can fall apart. People redecorate properties to their taste as if they will be living in the property, driving up costs and sometimes making the property less desirable to your target tenant segment.

So, how do you know what to renovate?

Consider what would be the ideal condition for your target tenant segment. List potential renovation items.

You will not have enough money to make this an “ideal” property, so prioritize renovation items in the following order:

1. Health and safety - Do all items necessary to provide a safe living environment. Not correcting all health and safety issues could result in injuries and litigation.
2. Attract the right tenant segment - Do what is necessary to attract your target tenant segment. Failing to do so may result in undesirable tenants and financial loss.

Enhancements:

• Sometimes required due to market competition: For example, if all similar properties on the market have granite counters in the kitchen and your property has laminate, you may need to install granite to rent the property at market rate.
• Cost-justifiable enhancements: Changes that increase rent and have a reasonable payback period.

The formula we use for estimating the payback period:

• Payback Months = (item cost) / (monthly savings or increased rent)

For example, suppose the property has laminate kitchen counters. With laminate, the rent will be $1,700/Mo. With granite, the rent will be $1,900/Mo. The cost to install granite counters is $2,500. What is the payback period?

• Payback Months = $2,500 / ($1,900/Mo - $1,700/Mo) = 12.5 Months

If I can recover the cost in less than three years, I will almost always do the enhancement. The shorter the payback period, the more inclined I am to spend the money.

Documentation, Documentation, Documentation

This is where it falls down. The biggest problem is not writing comprehensive specifications. For example, how would you specify painting the interior of a house?

The interior, ceilings, walls, doors, casings, and baseboards will be painted as follows:

• Walls: Sherwin Williams White Duck in eggshell sheen. The code is SW 7010.
• Ceilings: Behr Flat White ceiling paint.
• Doors, casings, and baseboards: Swiss Coffee, semi-gloss sheen.

The original receipts for all paint will be provided. The price includes labor and materials, as well as surface preparation and cleanup. All switch and plug cover plates will be removed and reinstalled after the paint is dry. All door knobs will be removed and reinstalled after the paint is dry. Doors will be removed, sanded, spray painted, and reinstalled. The hinges will not be painted.

An unopened one-gallon container of each of the three paint colors will be left in the garage, and the names and sheen will be marked on the top of each can.

Even when I document each task as I did above, I sometimes have the vendor walk through the property and describe each task they will perform, how they will do the tasks, how many people will be working each day, and approximately when the work and cleanup will be complete. I video this walk-through, and it becomes part of the documentation.

Occasionally, a vendor claimed they did not agree to do something and wanted to charge extra. I showed them the video, which ended the discussion.

Creating unambiguous documentation for every item is time-consuming but essential.

Overwatch

We do several renovations each month, so we have a dedicated person to overwatch what is happening and take a progress video every other day. Unless you have a trained person (working for you, not the GC) monitoring progress and quality, the renovation will cost more, take longer, and the quality will be less than desired. Also, if the vendor knows there will be frequent inspections, they do better quality work and are less likely to play schedule games.

Coordination of Vendors

The order in which work is performed is important. For example, you do not want the walls painted and then have the electrician cutting into the walls to install wiring.

Changes

Every time there is a significant change, it must be documented with a change order. The change order must include a description of the change, the additional cost (labor and materials), and how much more time will be required. If there is no signed change order, we do not pay for it.

Final Acceptance

The final acceptance standard must be in the documentation. This should include an evaluation of all items on the original work order plus all change orders. Until all items are complete and the job site is broom clean, there will be no final payment.

Payments

We generally pay 50% of the estimated cost upfront and the balance upon completion. Sometimes, if there are significant material costs, we will make a progress payment but hold back a significant percentage until final acceptance is complete.

Who Does the Work?

We have tried several GCs, and the work they provided was consistently overpriced and of poor quality. Additionally, they did not make any effort to adhere to the agreed-upon schedule.

For the last ~350 properties, we’ve worked with a handyman service. Where needed, we have licensed people do the work (significant plumbing, electrical, roofing, etc.) We are a high ticket customer for the handyman, where we were just a noise level nuisance for GCs.

Remote Renovations

You need to work with an investment team. The team provides a lot of work to the GC. The GC knows that in order to keep the business of the team, they have to execute every job, big or small, on schedule and budget.

Summary

• What you like or don’t like is irrelevant; only what the target tenant segment wants is relevant.
• There are no verbal agreements; document everything. Consider videoing the GC walking the job.
• Your job is too small to matter to most GCs. Working with an investment team provides the leverage you need to get your renovation done.

Jason, I hope this helps you and others.