Being your own contractor using a commercial line of credit

[Chris Shockley]

I have a question about being your own general contractor on an investment property. I am not a licensed contractor FYI.

I've secure a commercial line of credit with a local small bank, which is great, but the loan officer is impossible to get in touch with to answer questions and frankly is not that knowledgeable anyway. I have not found another local bank willing to provide the same financing so I guess I'm stuck with this guy.

So the plan is to buy a 2,3, or 4 unit physically distressed property with the credit, and use the credit to fiance the repairs, then refinance at the end of the repairs to a traditional loan and hold it for cash flow. If the after repair loan to value is 80% or less, then he is telling me that I do not have to put any cash down on the traditional loan, which is great. They are requiring me to have the 20% deposited in their bank before the commercial financing deal (because its my first one) so in the event it does not go as planned, they are protected. But if all goes well, I can have my 20% back to sink into the next one. There are quite a few opportunities in my area for this find, fix, and hold strategy.

I'm hoping someone has done this type of financing strategy before and can help me out with a few questions I have.

I would like to act as my own contractor and sub out the work. I have a great plumber, a/c guy, electrician, and roofer that I've worked with before on my personal property.

#1 What type of insurance is required? My loan officer said I will need general liability and builders risk. Is that all and/or correct?

#2 Am I even able to get builder risk without being a contractor myself?

#3 Is the added cost of insurance worth the saving on not using a general contractor?

Any advice or help would be appreciated. If I have not explained this fully or something sounds like its not possible, that would be nice to know as well.

Thanks in advance for any advice. I'm looking forward to moving from a talker to a doer when it come to REI and this place has been amazing for my education.

- Chris

[Hal E.]

Originally posted by Hal Elarbee:

Wayne is right. Some other things I might add to that is if you act as your own general contractor the liability insurance of the workers on your jobsite is probably one of the most important aspects of your job as a general contractor. Do not let anyone on your site without insurance. I would be very reluctant to allow someone on my property without proper insurance. So if a subcontractor or individual provide you with a exemption from Worker's Compensation he's telling you didn't have insurance but the state is allowing him to become exempt. He needs to have some other private insurance that covers him and certifies you in the policy

Next. Prior to any subcontractor starting work on your jobsite discuss payment methods percentage of payments (draws) and release of liens. This is very important know the percentage of work completed by subs in order to pay them the correct amount when they ask for a draw. I usually take that amount and subtract 10 to 20% from it and negotiate the payment of the draw from there. Rarely do you ever want to pay them up to the amount of work they have completed. You always want to have done more work than you have paid them for so they will keep coming back to finish the job. Negotiate that upfront with them in your preconstruction discussion before they start work on the job.

If it's a larger crew working on the site have a designated contact person such as a foreman or superintendent, or lead carpenter that is the responsible party that will answer to you on your job site. I.e. You don't want to be expecting to pay for a lead carpenter and get a labor instead working on your job with little experience or no experience.

Establish a credit line at a local building supply house that delivers. You pay a little more for this because they deliver usually for free but it's very valuable to have this service. You'll be going to Home Depot and Lowe's plenty enough without having to lug a bunch of lumber back-and-forth on the top your car. They're outside salesman is also a valuable resource for new products and cost-saving supplies for your job. Another thing the salesman can help you with, since your newbie, is the sequence of operations i.e. Critical path method for your job. He will help you if you don't know. So you won't have the cart in front of the horse.

Okay I didn't mean for this to go on so far but there's a lot to know. I'm going to touch base on one more thing. A good suggestion is to get QuickBooks or QuickBooks Pro is what I use as an accounting software and when you pay a subcontractor or vendor for the final time there is a release of lien that can be printed to the paystub so that it prints out with your last payment and when you hand that check to the subcontractor you just get him to sign the release right there and done.

I hope this helps good luck.