for both material and labor estimates (also known as “bids”) when creating the project budget. Astute rehabbers add in a surprise or “fudge factor” line item, worth maybe 10 percent, to account for unforeseen or miscellaneous line items in an effort to remain conservative in the budgeting process. 5 HIRE SLOW AND FIRE FAST You’ve closed on the property and developed a project scope, estimate and budget. Now it’s time to begin the contractor hiring process. Contractor relationships, much like other rela- tionships, must be a good “fit” for long-term success. For this reason, our philosophy is “hire slow, fire fast.” Experienced real estate investors understand that building a solid contractor team takes time and the players will likely change over the years. It’s common to be anxious to begin the project, especially with your personal investment capital on the line, and feel the need to forego the necessary due diligence when interviewing each contractor. Take the time to thoroughly discuss the requirements and expectations of the project with the contractor. The more project detail the investor provides during the inter- view process, the better. If, during the life of the project, it’s evident that a contractor relationship has reached a breaking point, it’s often best to move quickly and decisively to find a replacement. Doing so will save the investor time (schedule) and money (budget). 6 MAINTAIN A SCHEDULE Successful rehab projects will follow a strict and prede- termined schedule or workflow. Contractors often prefer to perform their work in a certain order as some trades cannot begin until others finish their respective scope of the project. A negligent contractor can easily derail a rehab effort, causing delays to other contractors, which may subsequently impact the real estate investor’s rehab profit.
For the newbie investor, setting and maintaining the project schedule is one of the greatest challenges. Consistent commu- nication and coordination with the contractor team is key. 7 IT’S A CONTRACT FOR A REASON “If it’s not in writing, it didn’t happen.” This popular adage holds true in most business transactions, but is especially critical in the rehab and construction environment. It’s difficult to hold a contractor accountable to the specific trade’s scope of work, bud- get and schedule if these items aren’t referenced and mutually agreed upon within some type of formal written agreement. Our company uses an independent contractor agreement that states, among other things, that the contractor is work- ing independently of our company and, as such, is not an employee. The agreement outlines the relationship between the investor and contractor in detail. The agreement also defines other administrative requirements such as proof of the contractor’s commercial general liability insurance and workmen’s comp insurance (COI). Additional critical items that should be referenced in the agreement are the project start and end dates, payment schedules, change order process, financial penalties, permits and inspections, working hours and other jobsite policies and expectations aimed toward ensuring a winning rehab project. The choice to purchase and rehab properties can be a daunting decision, but it doesn’t have to be. Judicious inves- tors should utilize these seven habits to ensure success in their next renovation project. •
Kelly Edwards and Chris Edwards have been active real estate investors in Raleigh, North Carolina, since 2002. They are Managing Principals of Edwards Capital Partners, a real estate investment firm with a focus on
Private Capital Trust Deed investments. Contact them by visiting www.EdwardsCapitalPartners.com, or www.TheEdwardsCompanies.com.
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