Looking for Advice on Flip Gone Wrong

[Scott Jones]

Hello everyone! Firstly, I am a new investor that started my rehab project April of last year and so far it has been an absolute nightmare! Yes we are still going, nearly out of money and the project is about 70-75% completed. We have made our fair share of mistakes along the way and definitely have a list of lessons learned. I am making this post in hopes to receive some advice from experienced investors and contractors alike. If you're new to flipping like myself, then I'll try to make it a point to call out my mistakes in hopes that it will help others.

Quick backstory, last year we purchased a property to flip and went with a contractor who's work we were already familiar with. The scope of work for this project included tearing down all walls and framing out a 3/3 (previously 3/2) with a more open floor plan. We were also looking to level out floors and do some minor exterior work. The house also had an addon in which the previous owner never pulled permits for (should've researched this more since the addon was not done correctly), and we wanted to ensure that ceiling height were consistent throughout. 

The project started out okay, or at least we thought. For the initial phase our contractor (we'll call them contractor #1) was supposed to pull our permits, and demo the property. We paid our contractor their first draw so that they could begin work. This initial draw payment included initiated the permit process with the city of Atlanta, ordering dumpsters, and demo. Our contractor ordered the dumpsters and demoed. When I ask for some proof of our application being submitted for the permits it was explained to us that the process would take a few weeks and in order to not delay the project, or GC recommended just get started. Months went by, and during this time, our contractor "leveled the floors", reframed, leveled the ceilings, ran new electrical (new box), and new plumbing throughout. This contractor proceeded to remove all the HVAC from home (HVAC was not in scope) and told us that their plumber mentioned that it wouldn't pass inspection. We asked the contractor when will inspections begin since we had started in April, and we were now in July and still haven't seen any permits or inspection reports. We called the city to see if any paperwork for our house had been submitted and they told us "no". We could also login to the counties portal and see that there was never any paperwork submitted. We brought this back to the contractor, and he reassured us that he submitted the paperwork. We waited another week or so, then the contractor came back and suggested that we pull our own permit. At this point we were very upset (at ourselves and the contractor), because the only reason why HVAC was pulled from the home AND new electrical was ran throughout was because we were told "it wouldnt pass" but with no evidence that it ever failed to pass any inspection. Also it was clear at this point that the contractor never submitted for permits. We started in April, and at this point we were in August and had no inspections nor any walls up. We let contractor #1 go. 

Fast forward to the end of summer, and we were able to hire a new contractor (contractor #2). The new contractor was willing to step in and help and immediately started correcting the work from the previous contractor (i.e. the floors were never leveled, the framing was off, and the electrical panel was misplaced). Working with contractor #2 was great until they started doing work that was not in scope. We would ask this contractor for numbers upfront and he would never give them to us until he was ready to be paid. For example, recently he told us that our house wouldnt receive a CO unless we installed handrails on our front porch. There's one riser, and drop off no more than 10 inches. From my research in the city of ATL it states that 30" or more requires a barrier. The handrails have been installed and painted, but he still hasn't given us numbers as to how much this change order work would cost. He also did some other work around the house that is not in scope, but has already been completed again, with no numbers. We have also been asking this contractor for a remaining balance on his end, so that we can align it with ours (granted he offered this information before we asked), and it has been 3 weeks and still no numbers. 

I'm making this post to understand what is the best way to proceed with contractor #2. We have already had to request extensions from our lender twice, and we are running out of money. We have told our contractor #2 to NOT work on out of scope work WITHOUT our approval, yet he still went ahead and completed the work anyway. How can we protect ourselves, given that he has already completed out of scope work without ever providing us numbers? We can't approve something when we don't even know how much it costs. To the seasoned investors, contractors what advice could you provide to avoid situations like this in the future. I want to be successful in this business and open to any and all feedback. Let me know if more details are needed. 

[Marty Boardman]

For contractor #2 - work up a document that states he's not to proceed with any more repairs without your written consent and have him sign it. It may not hold up in court, but at least you have something in writing. Not sure what the laws are in GA, but in many states contractors are required to provide you with a written estimate of repairs and labor with a completion date. If you didn't get this from him then, ask for it now.

To avoid this in the future stop hiring general contractors. Sure, there are good ones but I've found most of them don't have the ability to handle a whole-house remodel. They are more into speciality projects like kitchens/bathrooms, but get in over their head with doing it all. Project manage yourself (or hire someone to do it for you), pay for the materials yourself and pay the sub-contractors directly. This gives you TOTAL control over the project.

I hope this doesn't sour you on doing more flips in the future Scott! I've hired/fired more than a dozen GC's before I finally figured out doing my own PM, or hiring out, is the better way to go.