Through my Sunglasses – Hot Tips for the Savvy Real Estate Investor

By Michael Mazzella

Here are some quick tips for dealing with contractors. When rehabbing an ugly house for resale, remember to keep your expectations reasonable. You don’t need to build the Taj Mahal, nor make your fixer-upper house into the most beautiful house on the block. One of the most common mistakes investors make is to ‘over rehab.’ I like to make the most impact, in terms of positive improvement, for the least amount of money.

Working effectively with contractors can be a ‘sore point’ for investors. Investors can sometimes feel like they are completely at the mercy of their contractors. Remember that ‘suffering is optional’ in our business. Here are a few things you can do to minimize the problems that tend to surface.

Always plan for unforeseen delays in your timeline. Try not to stress over this, just accept that delays are going to happen.

I have seen, time and again, investors inflict pain & suffering upon themselves by not heeding the following…

• Get several competitive bids, especially for larger jobs. Have the contractor break out the bids as follows so you are comparing apples to apples:
  
  • Cost of materials. Some contractors are professionals who prefer to use higher quality materials, which can substantially increase the cost, compared to the other bids. I will sometimes choose the materials myself to even the playing field.
    
    
  • Cost of labor
    
    
  • Time / hours required to do the job
    
    
  • When s/he can start & finish. Your first choice may not be able to start for 3 weeks, so you may end up going with your 2nd choice, who can start on Monday.

Get a written agreement to this effect. In your agreement, make sure you have clearly identified the scope of the work to be performed.

• Price should not always be the primary consideration. Quality work and reliability counts for a lot! I know investors who have had to pay a second contractor to come in and fix the shoddy work of the first contractor. It’s best to get referrals from another investor who has previously used this contractor. You can even verify their licenses online.
  
  
• Initial payment should typically be only what the contractor needs to buy materials, and pay their workers for a couple of days. Never pay more than half up front. If you set up a draw schedule, always with-hold a large enough portion of funds until the job is completed. The biggest mistake you can make is to pay for the full job up front; and perhaps the 2nd biggest mistake you can make is to pay off the job before it is fully completed. In doing so, you forfeit all of your leverage, and you remove the single biggest incentive for the contractor to return and finish your job.

Restoring the luster of an ugly house is fun and profitable. Applying these basic tips in dealing with contractors will help to keep it that way!

Michael Mazzella is a full-time Real Estate Investor. He also trains RE Investors. For more info, visit HonoluluMentor.com