Rehab Question - Allocation of Funds

8 Replies

Greetings BP members,

I'm looking to purchase a property and rehab it to flip.  My question, is there a rule of thumb about how the funds should be paid out to the contractor?  For example, if a contractor gave me a quote of $30K to rehab my property that will take him/her 2 months, what percentage do I give up front and how should the remaining funds be distributed throughout the 2 months?

Thanks,

Eric Johnson

Whatever you do dont do 50% down and the other 50% when completed.  

I would look at something more like 4-5 draws.

I definitely agree with Curtis, giving a contractor $15,000 up front is way too much. Split it up a few times. And ask for references, you want to thoroughly vet anyone doing a project that big.

Yes, make milestone draws, i.e kitchen done. draw. Bathroom done, draw.  Always make the contractor a little behind on his money and wait until the lien period is over before you give him his last 10%  (about 30 days).

In CA a licensed contractor may not receive more than 10% upfront---though he may ask you for more when materials are delivered even if it is the day after the contract is signed.  If a lot of appliances are involved you could wait until delivery to pay for him for those but do not give 50%-50%.

Absolutely have a written contract spelling out exactly what the scope is and get a signed change order on all changes with scope and cost extra BEFORE the work is done.

so Far all good answers and @Martin Scherer  alluded to the greatest tool ever. The Scope of Work (SOW). That way you can pay for come lowered projects not the contractors idea when they desire money. This is Your project and Your money not his. Take Care of it and be successful.  

First, I'm not a huge fan of letting one contractor do THAT much work (I'm assuming he's doing work in multiple trades).  Jack-of-all-trade type contractors will often be difficult to work with for several reasons:

-  They will have many tasks partially completed, making determination of progress difficult and replacement of the contractor difficult, if necessary

-  Their quality will tend to be average (you can't be great at everything)

-  They will often get bored and run out of steam before a project is completed

-  They will often overrun schedules and budgets (hard to be good at budgeting and scheduling for every trade)

If you're going to use a contractor like this, my recommendations:

-  Have a VERY detailed Scope of Work (SOW)

-  Have a VERY detailed schedule, with LOTS of milestones

-  Go over the budget very carefully and expect overruns

-  Pay upon completion of tasks and never pay for a task that is only partially completed

-  Hold back payment for the final 10% of work until it's absolutely complete

Thanks for all the great feedback!

@J Scott i am working up an SOW now based off your template in the fileshare.

Can you give some examples of "Have a VERY detailed schedule, with LOTS of milestones"

I have dollar amounts associated with each bathroom, painting the interior, exterior repairs & painting, wood flooring, carpet, lighting, sheetrock repair, kitchen, demo, initial payment and final payment.  Do you get more detailed than that?

Originally posted by @Shawn Thom:

@J Scott i am working up an SOW now based off your template in the fileshare.

Can you give some examples of "Have a VERY detailed schedule, with LOTS of milestones"

I have dollar amounts associated with each bathroom, painting the interior, exterior repairs & painting, wood flooring, carpet, lighting, sheetrock repair, kitchen, demo, initial payment and final payment.  Do you get more detailed than that?

Not sure exactly which fileshare doc you're looking at.  But, this is how I do it (images taken from my BP Flipping book)...

For SOW, first I like to break the project up into the basic rehab components:

Then, for each component, I define the specific tasks that need to be completed.  Here's an example of what the Electrical (Component #13) task list might look like:

The entire task list for all components comprises my SOW for that house.

I'll then provide the appropriate parts of the SOW to the appropriate contractors, and let them provide line-item bids.

For milestones and payments, if I were using a single contractor, I'd take my SOW task list and organize it in sequential order based on scheduling and then insert milestones at various points throughout the schedule.

For example, your schedule would likely be ordered something like this:

Insert the specific list of tasks as they relate to the scheduling order above (so, for example, the Electrical SOW from above would be part of #17 and #33), and then add in your milestones.

In theory, if you had tasks relating to all 40 of the scheduling components above, you might have 40 milestones, and make a payment after each is completed.  You can break up the milestones into as few/many and as big/small as you and your contractor agree. 

But, if I were using a single contractor, I'd want to know that he was doing things in pretty much the order above, and wasn't starting on 10 different components at once, leaving them all half finished.

Does that make sense?

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