Rehab company dilemma...Is it me...or them?

Question

Hi folks,

I am super excited of finally being brave enough and pull the trigger on my first rehab deal. It is in Orlando FL and I am in Miami (about 4 hrs away). Closing of the purchase  could happen as soon as this week so I am anxious to get started and move on to the next one.

My dilemma comes from the "turn key" company that helped me buy the house (it is an REO, so they provided the realtor) and they also are supposed to manage the rehab and the sale.

When I first interviewed(phone) with one of the owners everything looked great and communication didn't seem to be an issue. The realtor did a great job and the owner gave me a rehab estimate within 2 days of the offer being accepted. All good until here. I even did lots of research on the company and it has very good reputation, so I felt good about them

The estimate I was given was a lump sum with all the items listed, no broken down list. I met with the guy in person the weekend after and asked him to give me a more detailed estimate (at least the high ticket items). He seemed a bit thrown off but said he would.

We are a over a week after and I'm still waiting for the new estimate. Left a VM 2 hrs ago with no response yet.

As I am a newbie I am now questioning a few things. Is it customary to get rehab cost from these kind of companies as lump sums? Did I make a rookie mistake by asking for a detailed breakdown of the costs that could have cost me "reputation points"?

I haven't given up on them yet but this is not giving me a good feeling. It makes me believe like this guy was nailing me and it'd be exposed if he breaks down the costs.

Thank you in advance for your thoughts!

Zach Mitchell · Answer

@Allende Hernandez What company is it? I'm in Orlando and know a pretty good amount of the investment companies around here but never heard of this turn key type flip company. I would absolutely want an itemized list though. In two months when they come back and tell you the cabinets  were $1,000 more than expected I would want to know what the initial estimate was and you will be shooting in the dark if it's not itemized. You could lose control of expenses very quickly if you don't know where each dollar is supposed to go from the beginning.

The lump sum he provided sounds more like an estimate and not an actual bid. He probably just added everything up in a very summarized format and then came to the lump sum number, same way we would estimate expenses when analyzing a deal but I would expect a lot more detail from a contractor. Are they actually doing to work or was this from a "project manager"? Also, if you want to direct message me the address I can give you an opinion on the purchase price and ARV, might be helpful.

Btw, you're never going to lose any reputation points from asking questions and wanting information. If anything, you're only gaining a reputation for being detailed and they know they can't get by with minimal effort. Don't ever be afraid of offending someone by asking for something you feel is important. You have to throw that thought out the window very quickly or it will cost you in this business.

Bill Hinshaw · Answer

If you don't mind sharing, I'm curious as to how the deal is defined and what the numbers are. It almost sounds like you are a passive investor in the deal with very little control. Are there other investors? Does the turnkey company have any money in the deal?

If they expect you to fund the deal and have very little control of the budget, finish, timeline, etc... that seems like a lot to ask unless it is well defined up front that that is how they work.

Your request for a more detailed budget is not out of line at all. I would expect that and more if it were my funds on the line.

Matthew Olszak · Answer

The cost provided to you was probably a per square foot number to estimate the cost as close as possible. With an estimate like that, expect to be change-ordered every step of the way, or if not expect to have way overpaid. Get a quote based, at the very least, on each trade. All of the electrical work, what's included, what's the price. All of the kitchen finishes, what's included, what's the price, etc. That way if a change order comes up, you both are on the same page as to how valid it is and how much should have been included in the original quote.

I would agree to a per ft2 number only if they agree in the contract to finish it at that price - no surprises, no change orders, they eat anything missed. Nobody should ever look down on you reputation-wise for asking questions - either their process is honest and they can explain why it works this way (like we 100% know we can do the job @ x$/ft2) or they can give you what you want as far as details. Anything else and you'll be taken for a ride once your cash is tied up and you are past the point of no-return. Ask: "Will you turn this home over to me in the condition I expect for your estimated price of $x?".

If the contractor (or in this case the turnkey company) provides a complete breakdown, what harm does it do them? Its not like you'll be able to do the plumbing separate, it should be all or nothing. Not providing detail only benefits them.

Aaron McGinnis · Answer

A detailed breakdown is a good thing. Not saying you need to know if it is 99 studs or 100 studs, but roof... plumbing... electric... fixture budgets... etc. I'd pretty much normal.

For example, one of my typical whole house rehab budget sheets will be in the 5 to 6 page range, with SKY level detail to follow the rough fixture budgets. Granted, we are pretty tight and detailed but I personally feel that's the only way to do it right.

Allende Hernandez · Answer

Hi @Patrick Liska, thank you for your response!

Well, I want to have an idea of how much the individual items are costing me. I told him I am not looking for the cost of the door handlers or the cleaning, I am looking for kitchen and bath counter tops, painting, flooring..items in the 1000's.  If I continue doing business with them I need to know how much they charge me for these things.

Again, I am new to this and coming from the outside it seems like a very normal thing to to ask. Not so sure if it is once you are  in the big leagues but I assume most people want to have a bit of visibility on the cost....am I wrong?

Valerie Hiscoe · Answer

Allende, your situation seems all too familiar.  I was in a similar position buying a property in Phoenix from Vancouver.  They used my inexperience as a means to intimidate me by being condescending and the fact that I was female made it all that much easier for them.  I went through tens of thousands of dollars and the work wasn't even DONE, never mind charged for correctly.

In the hope that you are not already contractually obligated to use this company, I would ask for bids from other contractors.  Even if you are obligated, I would get bids for an independent breakdown of pricing.  If you end up, for whatever reason, going with the company you have, then it is probably in your best interest to hire someone knowledgeable to check on your property weekly to see if progress is actually being made or just talked about.  I would absolutely follow up with @Zach Mitchell as well who so kindly offered to look at your property and who might have a referral or two to suggest.

The fact that they brought out the "we have doctors and lawyers..." line is a huge red flag to me. And that they even questioned you asking about a breakdown of YOUR money.  Who would even do that?  Not a trustworthy professional if you ask me.

Brian Pulaski · Answer

@Allende Hernandez I agree on not wanting to fee taken advantage of and I hope you are not.

It sounds like you wouldn't be able to switch contractors at this stage right? Your just funding this company and their flip (if they found it, are fixing it and are selling it)? I hope things work out for you in the end.

Allende Hernandez · Answer

@Brian Pulaski I'm not sure I'd be happy to find I paid 10K for 5K cabinets even when I made a considerable profit off the deal. I am not talking about them not making a profit, in fact they have their very well defined fee. I am talking about if I pay their fees, why I need to let them charge me 10K for a 5K item?...that doesn't seem right.

Again, I don't know it is the case. It is just that not knowing the breakdown, that feeling of being taken advantage of will always linger.

Thanks!

Brian Pulaski · Answer

What is the reason you want a broken down list? Is it to see if you are "overpaying" for certain scopes? if you get a break down and it shows you are paying $10,000 for cabinets, yet you know you can get cabinets for $5000, would you go back and ask for them to credit back and use the cheaper ones? If the companies numbers work, although a breakdown is nice, and expected, I wouldn't use it to negotiate anything.

The company sounds like they prefer investors when simply give them money and let them run. It probably throws them off to have a guy who wants to be involved.

Allende Hernandez · Answer

@Bill Hinshaw this is my first deal and I am about 4hrs away from that house. I don't have a partner in town so I was relieved I found this company. I don't like to consider myself a "passive" investor (its a mental thing). I like to be as much involved as I can given the circumstances and that is what differences me from other investors this person is used to work with. He mentioned he has doctors, lawyers etc that want nothing to do with the house, so me wanting to know the exact work and cost seemed something he was not used to.

@Zach Mitchell Though this is my first deal, I've been working towards it for many months. I did work with the realtor in the ARV and also did my own independent homework. Numbers check out, I have no concern about that.

In my first interview they said they charged between 10-15% of the rehab cost to manage it. But again, with the lump sum estimate...go figure.

Rehab company dilemma...Is it me...or them?

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