Most real estate enthusiasts and experts look forward to flipping properties as a means to earn nice, fast income. And why shouldn’t they? After all, flipping is all about buying an undervalued property that needs a good amount of fixing up, then once you have your renovations done, selling it at the market rate. So, once you sell, you make that sweet profit. But that’s quite a misconception, as you don’t ever make money when you SELL, but when you BUY. Buying cheap will leave you enough room for any errors that could potentially arise later down the track. Of course, you’ll need a good margin to operate, and for that you require a great team that makes those numbers work for you.
One of the most crucial team members to help you with successfully flip your properties is your contractor. He won’t be there for the sale, but he will be your main cost. Often the houses that you consider flipping need renovations far beyond what you thought initially. And believe me, it’s not easy to find a good contractor. Want to get a feel of how bad things can get? Check out my previous post on how I got burned on a shady deal.
These days, the low standards and controls on the market allow almost everyone to be in the business of flipping properties. You have to separate experts from novices. So I’m here to help you make that distinction. To begin, you need to shortlist a few good contractors. There are many fish in the sea, and doing some research will probably get you some great candidates. After you’ve shortlisted the contractors through referrals, recommendations, online research and finally, your gut feeling, you need to make a decision. Which one will you go for?
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Before you even begin to think about explaining the issues and work that needs to be done to your contractors, consider their credentials. Not just what people are saying online, but far more in depth. Will they be able to do a quality job within the specified time period? Have they got the necessary license and insurance from state and municipal authorities to be qualified contractors? Contractors need a current Homeowners Warranty Insurance policy, which covers the homeowner for defective results and non-completion of the work, in case the contractor runs away. Similarly, to work as a contractor, they need a license.
In addition to these, ensure that your contractor has a clean bill of health from the Better Business Bureau and from your state’s consumer protection agency. These credentials speak a thousand words about the authenticity of your contractor. Once you have taken a look at these things, ask your contractor for references. If he’s good in his profession, he should have no issues in providing at least 20 recent and relevant references. It makes sense to get associated with a contractor with a solid reputation. I suggest you re-read this paragraph. If only I followed my words above instead of rushing. As the saying goes, “Measure twice and cut once.” I wasn’t even measuring–just cutting/hiring. I had houses sitting that needed renovations, and I didn’t spend the time conducting extra due diligence on the contractors I hired. Don’t make the same mistakes that I did.
At this point it’s important to mention that though we all look for the cheapest option when it comes to repair work, you should probably curb your drive to go price hunting, at least to some extent. Pricing is an important factor to flipping houses, but only considering the cheapest contractors will set you up for failure. “Cheap Cheap Cheap” is definitely not the way to go. It is always worth spending a few extra dollars on the rehab as long you can completely remove yourself from the day to day calls and constant phone payments. Don’t compromise your time in working with broke contractors just to get a cheaper bid on rehab.
There are three types of contractors: low end, average and high end contractors. The low end guys are those who have fewer tools to work with and are typically not licensed or insured. Even if they do something wrong, you won’t be able to do much about that. It’s best to stay away from these contractors, and if they’re to be involved at all, they should be limited to basic jobs like putting up signs or drilling holes in the walls for putting up decorative fixtures.
The average contractors are usually licensed, insured and work for smaller companies. Their rates are reasonable. Pick one who has worked on flipping projects. They’re the best bet for these kinds of projects. They might not have all the tools they need right at their disposal, but they’ll be able to work on most project types. This is where our “bread and butter” type contractor comes into play. We have had two great crews on board for over 16 months now that have been doing most of our work. We also use the “low end” guys for quick fixes, maintenance and other smaller jobs.
High end contractors are those who work for bigger firms involving million dollar projects. They are sophisticated and charge a whopping sum even for a small job. It’s best to hire them for very high quality jobs with strict timelines. I suggest using these guys for A-class retail flips or $30,000+ rehabs.
Professional Attitude & Other Non-Verbal Cues
This is a big one that is often forgotten. Though credentials are important, it’s not all you should be looking at when choosing a contractor. Non-verbal cues that show professionalism are equally important, and you should not miss those cues. You’re going to spend a lot of time with your contractor. So, think whether you’re comfortable with his methods, his communication skills and his attitude. Some key things to look at:
- Punctuality: To begin with, after the first meeting or the phone call, when you ask the contractor to send you a proposal or a bidding, look out how active he is in sending you those details. Is he punctual in sending you the document within, say, two days, or is he waiting for your second and third reminder call? Prompt communication is key when problems arise, and trust me, they always do.
- The ability to listen: This is one of the most underrated qualities required in a contractor. Not every client is clear about what they want, so a contractor is expected to listen patiently to them and articulate those requirements for an efficient work flow. Make sure that communication is clear between you and your contractor and that he’s willing to spend time understanding your requirements. If a contractor rushes through and presents you a proposal that lacks some important details, you have to think twice before hiring him. Also, make sure to have every little detail on paper. If you don’t, you might get into a “he said, she said” war later on with your contractor. Get your MontBlanc pen out and right the bloody thing down.
- Flexibility: Ensure your contractor incorporates some flexibility in case of unexpected contingencies. Even if there’s a timeline agreed to in the contract, you don’t want him to paint your gate when it’s raining outside. Look out for contractors who take flexibility into account when they’re talking to you and extend it into their written contract. If you can find someone who doesn’t nickel and dime you for every little overage that occurs, I think you might be on to a winner.
- Project management skills: A contractor is often required to do a number of jobs at the same time, from tile setting to painting to plumbing. He’ll have a team of workers who do the work according to his instructions. Make sure that he’s good at handling several tasks at one go. The best way to find out is by asking him a lot of questions about his previous projects, what hiccups he faced, his most challenging project and so on. Contractors in general like to talk a lot, and once they get started, understand what type of work they do, what type of clients they handle and how much time they require to flip a house similar to yours. While showing him the property to be repaired, get an estimate from him about the budget and the time requirements. You can compare these with the other prospective contractors.
If he’s unable to tell you about multiple experiences he had, it simply means he hasn’t handled many projects. That’s a red flag right there. Also, if possible, request your contractor to take you to one of his ongoing projects. This will give you a good idea of the quality of his work.
A Detailed Contract
One of the most crucial things that a contractor gives you before you both agree on terms and conditions is a detailed contract. A contract is a document that outlines the details of your project. Once you and your contractor agree on the terms, it becomes a legal document. Every project should have a contract. Ensure that your legal document includes the following:
- You and your contractor’s particulars
- A clear starting and finishing date of the project
- Final price and allowances
- Scope of work in detail
- Payment schedule
- A change order clause keeping room for flexibility
- A clause about dispute resolution
Taking into account all the previous concerns, if a contractor prepares a detailed contract that contains all this, there’s no reason to delay further in signing the dotted line and seeing your house getting renovated to your satisfaction.
Flipping properties often requires a lot of repair work before you can sell for a profit. Quality and speed are the two most important considerations when flipping. Get a contractor who understands the value of these two and has a professional attitude. Do this, and you’ll have fewer surprises and higher profits.
Investors: What are your best tips for finding top-notch contractors?
Be sure to let me know with a comment!