Using Property Management Company to manage rehab

[Michael Wyatt]

I am looking into the possibility of having a property management company who I am using to source deals and manage them once rent ready.  Curious if it's the standard for a PM to take the entire lump sum of the rehab up front and distribute to their guys as work is completed?  Rather than I fund it on a draw schedule.  Seems to eliminate the need for a rehab loan.  The problem is it becomes a huge up front cost to close and have to fund the rehab right away.  

[Richard F.]

As a PM, I managed over 100 complete renos for many owners. To start with, most were already long term Clients of the company, but as a lot of the very long term Tenants vacated, I provided the Owners with lots of images of the clean, but vacated unit and providing them with fairly detailed notes of specific observations as well as recommendations. We had several Licensed and Insured Contractors that we utilized with fair regularity. Depending on which one had a schedule opening I would meet with the Contractor, and sometimes the Owner as well if they were local or chose to fly in, and walk the property, discussing various issues. A few days later the Contractor would send me the Proposal, which I would review to ensure we were on the same page (these contracts were pretty informal, usually only 3 or 4 pages total, usually with a total cost and estimated completion date). I would then send this to the Owner for his review, we would have a phone call to discuss, Owner would sign and send a check for the full amount to our office to be held in our Trust Account. As soon as the Contractor confirmed a Start date, we would have a 1/3 payment ready for him. Depending on size of the project, they might request a draw after substantial work was complete. We would always hold back 10% until after fully completed, and approved by myself and the Owner if they were local. 

If there were changes, which were pretty rare, the Contractor would provide a verbal cost estimate at the time of the change, and a written addendum to the original contract reflecting the final total. The Contractors pulled permits, and I was the one making material selections where necessary, unless the Owner mentioned something specific. We were pretty much standardized, although certainly over time the standard did change due to consumer preferences.

The PM is not going to have his Vendors performing work with no funds in hand to pay, and will not front the funds for a Client. Our "normal" spending limit with Owners for routine repairs and maintenance was no more than one full month rent for the unit being worked on. A few had lower limits. Any projects that would cost more than the usually available funds, we would request additional from Owner before starting the project.