Creating a design guide for contractors?

Question

BP! Here is the situation:

I am a first time investor and and am looking to purchase a foreclosure to rehab and resell. I have been really working on creating my systems to ease the process of a flip, as well as set up my business in a way that it can scale. I have decided for my first flip I will be using a GC because I feel I would be overwhelmed when estimating rehab costs for subcontractors. To ensure I do not go underwater on my first deal I have decided to just eat the extra cost of a GC, but make sure I get my money's worth by learning from him and his guys as they work. I fully intend to have myself and my eventual team manage rehabs completely, but for now I will be mitigating risk and maximizing my learning.

For my rehabs I am thinking of making a laminated packet that consists of a very in depth breakdown of how I want the rehab to look. I want it to include which materials to use, their product numbers, what each room needs to have in it, etc, all with pictures and descriptions making it basically fool proof. In BP Podcast 232, Nathan Brooks mentions that he does something similar and by constantly pounding how he wants his properties to look in his contractor's heads, the process becomes easier, quicker, and done better. I would have the GC and his guys pick up the materials on their own, but it would be the items I specify in my design packet. My hope is to have all my houses in a certain area be pretty much identical so the rehab process works like a machine once we've done a few flips with the same exact design scheme. The vision I have with this is me, my partners, agents, lenders, and contractors all know what our houses require material and labor wise every time (because they're all based off of the same design sheet) so everything is done fast and of great quality.

Is this system of doing things effective? Is this something that other investors are doing? I would love some insight on this and also on processes you have automated into your own business!

Thanks!

Jeffrey Stasz · Answer

@Hunter Harms i'm going to pick on you just a bit. But I think you've surfaced an attitude that is both prevalent and pernicious. This is going to be harsh but it's not personal and hopefully it will give you some insight into the business side of contracting from an actual contractor.

First to answer your question: Yes it's a good idea to know what you're going to build before you build it. However, without more construction experience it is highly unlikely that you will be able to develop a comprehensive materials guide. There are a ton of ancillary products that you don't even know you don't know about. Things like subfloor adhesive, joist hangers, tie downs etc. Also, you're probably sourcing your materials from big box and the real pros usually don't go to big box. We have commercial credit accounts with local suppliers and often have pricing that's specific to us. So you could you provide me with a list of SKUs from Lowes or HD and I am going to politely smile and turn down your business. I don't have time to deal with poor quality product and unprofessional service common to big box.

Next make sure that your state even allows you to act as a GC without a license. In SC for example a GC has to sign off on any work over a certain dollar amount. There is a homeowner exemption but it prevents you from selling for a period of 5 years. This is WAY more common then you think so just cover your bases.

Now, the core of your question relies on the assumption that your contractor is out to take advantage of you. Do you assume your attorney is going to take advantage of you? How about your accountant? Your realtor? How many accountants, realtors, or wholesalers were killed last year due to work related injuries?

Contractors run sophisticated, highly regulated businesses. If we make mistakes or take shortcuts our employees can get seriously hurt or killed and we are exposed to criminal and civil penalties. We are also subject to annual audits from a host of institutional players from insurance companies to state and federal agencies. In most cases your GC is the most scrutinized and tightly regulated member of your team. There is also a very good chance that their capitalization is 2-10X yours and that is assuming you're using mom and pop operators like myself. If you go to mid market or regional players then your entire portfolio is likely a rounding error on their balance sheet.

I bring up capitalization because new investors all too often get carried away with being the boss. We get it, you took a big risk and you don't want to lose your shirt. But treating us like the "help" when we're actually running a multimillion dollar operation is a good way to alienate the best people, leaving you to select among people who will rip you off.

My advice: rather then spend time generating an incomplete materials list that really good contractors will very probably ignore; find a really good GC that's at the same life and business stage as yourself and has similar business goals. Work with them to develop partnerships and splits that align your interests so successful projects yield above average results for everyone.

For example. Your contractor does the work at cost in exchange for profit share when the project is complete and sold. Or you offer to work alongside her crew on your project so you get an understanding of how this stuff actually gets built.

And please please please remember this: Without a GC your flip is just down a run down house.

Good luck and welcome to the biz.

Christopher B. · Answer

You have the mindset. As Jeffrey pointed out there are a lot of things you wont know. However, I wouldn't encourage you to learn all of these items. You don't need to care what subfloor adhesive they are using, type of nails, brand of OSB, etc. That is, and should be irrelevant to you. Now over time you will learn what these costs are and can figure them in your budget. Even if you are managing the job yourself let your subs determine what they need with rough materials, focus your time on picking the finish materials. You can easily determine these materials and quantities for the most part. There are some specifics you will learn but that is what your subs are there for.

Lastly, I am going to 100% disagree with Jeffrey here on one thing. Most contractors DO NOT run sophisticated and highly organized businesses. In fact, it is laughable that someone is implying that they do. There are some that do, and I hope you find one in the beginning to help you work through some items but over time you will likely find that you are in fact much more organized and detail oriented then 98% of the contractors and subs you encounter are.

Nicole Pettis · Answer

@Hunter Harms Welcome to BP! Fantastic idea of coming up with systems, every successful real estate investor has them. But along with systems, don't forget about process. You need to have solid processes in place that allow your systems to flow. For example, what will be your hiring process for contractors? What is your process for the rehab? What is your process for payment? Contracts? Final punchlist? Communication? Hiring a GC is wise, I highly suggest it, however if they know you don't know anything about rehabbing and cost of rehabbing they will take advantage of you. So you need to educate yourself, not so much on how to be a contractor, but to understand the process and cost of a rehab. While you are pulling sku's for materials that you would like to use, you also need to figure out how much per hour or per sq foot something will cost to install or do. For example:You choose some nice luxury vinyl tile to use in it. The cost for the tile is: $2.79 a sq ft. So how much is a contractor going to charge you to install? $2 a sq foot? $3? You need to know these numbers as well to have a good understanding of your rehab cost. Same with paint. How much per sq foot does it cost for a sub to paint? I pay my guys $1.50 a sq ft. But it differs from area to area. My point to all of this is that while, yes, its a great idea to get that binder together for final looks, you also NEED to understand contractor prices in your area as well and get processes in place as well. How can you learn this? Call around. Call painters, drywaller's, roofers and so on. Ask them how much they charge per sq ft? Or in the case of drywall it will be per piece. But you have to know these numbers to have a successful flip. Hope this helps!

Account Closed · Answer

@Hunter Harms, I've worked in architecture offices doing everything from high rises to single apartments, and I've walked a few miles on job sites, so here's my opinion.I have to reinforce much of what @Jeffrey Stasz was saying, but I also have a few tips on how to save cash while using a GC, with a few caveats. It depends on the size of your project and the types of people you're hiring, but I think his point of trusting your GC is huge. Find a good, reputable GC who is licensed, bonded, and insured and they will not do you wrong. A GC who is lic/bond/ins can lose their entire business and livelihood if they mess something up or are caught defrauding you, so start building your trust with that knowledge, and then find out more about their business and reputation. Ask to walk through previous jobs they've completed, ask to talk to previous clients, and work towards trust.What you're describing is really what architects are hired to do, so look at it from that perspective. When we design big office towers we'll create a standards guidebook. Our client can use that guideline for future construction that might be done by a local design office. It might have everything from what font is used on signage to what carpet is used in the hallways, etc. What it also has is a spec book, which can be as vague or as specific as we want it to be (Jeff might laugh at that), and comes down to how much we trust our client's contractor to do a good job. The spec book specifies finish colors and products, but also has the details of what fasteners to use, what ASTM codes have to be followed, etc. Honestly, in residential construction we usually defer to the contractor on this stuff (even though we're the "pros"). They just know better.All of that said, below I'll list method's I've used to save clients money in firms I've worked in, which maybe you can use as a model for your "systems". Keep in mind, you'll have to have a GC that understands how you want to work this system and who trusts you to coordinate this stuff. It's a HUGE pain in the ass for them if you get it wrong, so... something to keep in mind. Also this really only pertains to your jobs if you have high volume or a long working time for each project, which are two things that most flippers just don't have. I'll elaborate later.1.) If you can get a trade discount (GC's, sometimes architects, tradesmen get it) buy your own finishes. The trade discount can save you 5 - 15% usually, plus GC markup for management.2.) If you can get a trade discount buy your own appliances. Same as above.3.) For finish work: hire your own subs, or do the work yourself. See Jeff's point about permitting for work. Depending on your jurisdiction, you may need to be lic/bond/ins just to lay a floor. You'll have to manage subs and inspect their work, or you'll have to get your hands dirty. Do you know what to inspect for and is your time worth those dollars? Those are the questions to ask yourself here.With all of those points, besides a wealth of specialized knowledge, coordination is the biggest offering that a GC provides. If you order your own tile and it gets to the site on the wrong day, you're either in someone's way or slowing that project down and you're gonna pay for it. If you order a 24" wide range with 240V power and forgot to give your GC the cut sheet, you'll pay for that change order. If your GC already had the electrician install a 120V line and now he has to come back, every trade that follows him will have to come back too to redo the work he has to undo. Assumption of liability is the third thing that contractors offer that can actually save you money in the end. If you are flipping dozens of houses a year, it might work to store thousands of sf of laminate floor and give your project manager the key to the warehouse. Likewise, if you are doing a high-end renovation and can foot the holding costs of a longer construction process, it might work to custom order all your materials per project and deal w/ scheduling coordination hiccups. Otherwise, I suggest it might be better to let your GC take the overhead cost. You might find the best use of your efforts is to make a "soft" standards guide showing the palette you want, but allowing the GC some wiggle room. I.E. as long as it's gloss white 3x6 porcelain subway tile with dark grout, you don't care if they buy it from Laticrete or Mapei. Be as specific as you want, but be open to recommendations from your GC - maybe they can get you a discount on fireclay tile instead of porcelain, or they think an epoxy grout will be more durable than a sanded, or whatever.Of course, if you're just painting and gluing down floor, and you know a good electrician to put in a couple of new outlets, do it yourself as long as your permitting office allows.

Christopher B. · Answer

Agree, GC's at the level you are mentioning are a different story. Considering the OP was asking questions for his first flip that level of GC is irrelevant to him. So when I give advice to him I don't consider the level of GC you are talking about because that isn't the reality that he is going to be facing.

I totally agree with you and understand GC's don't like working with flippers. You have outlined precisely why I have moved forward with plans to do the same. Makes a lot of sense.

On the design we can just agree to disagree. I've not met one GC that has any real skill at design. Now I meet a lot that think they do haha. Just bcause they are around houses doesn't make them good at designing them though. It ultimately has nothing to do with repititions in my opinion, some people just have a better sense of style and taste than others. I find 99% of GC's do not and that's probably because their focus is more on the mechanical aspect of building/remodeling.

NAHB is great if I am building a custom home for myself. Finding a GC for a rehab there isn't practical though. Rehabbing houses people can't afford the most expensive contractors in the city. Which supports your argument earlier, a vertically integrated GC that is doing rehabs themselves has a distinct advantage.

Christopher B. · Answer

There's many ways to skin the cat. It depends on your level of job. There is a big difference between managing and organizing a multistory project vs a $30K-$100k residential rehab. There are highly organized contractors, the type that work on those larger projects and the type that will work on a smaller residential rehab. How you work with them will be different.

I think you've gotten some sound advice in here. Eike is spot on and lays out a lot of what I was going to say so wont bother with the redundancy.

Yes, if you hire a GC to manage the entire rehab let him do his thing. After all that is what you are paying for. I do suggest you pick all finish materials yourself. I've yet to meet a contractor that can properly design a house. Talk to them, if they want to handle all materials they can point you in the direction of where to look at samples and you just picked the design and they take care of the quantities and related materials needed.

I will say this. If rehabbing were as easy as finding a GC and saying GO then everyone in America would be doing it. It seems everyone thinks it is that easy and are trying too but it is not. Finding a GC like they mention is very tough and a project that has the margin to afford them and you to make a good profit even harder. At least that is my experience and it obviously depends on what your target returns are. I think it is good to create a base, or standard design that you can work from. This will make projects easier on multiple levels and if you can more easily adjust your selections to fit each house and it's style vs creating a new selection sheet from scratch on each project. Just work through things as they come-up and in-time you'll find your strategy.

Hunter Harms · Answer

Account Closed This was the exact response I needed to read! Thank you! I fully intend to hire a GC and let him do his job, but after reading what you have laid out for me, I will just give a vague "look book" and let the contractor to as he pleases with that. I guess being a newbie has my guard up when it comes to contractors, but after reading all of these great responses there really is no reason to be so guarded. The licenses and regulations they have to abide by is enough for me to realize that they too are in deep when it comes to projects. Fantastic reply, thanks much again.

Jeffrey Stasz · Answer

@Christopher B. fair enough on the organization point. I think it really depends on the project. If it's a 30k rehab you're really hiring a series of skilled handymen rather then a true GC. When you get into ground up construction or commercial you start dealing with a different animal all together and that's the core of my business. So when I see folks on these forums assuming all GCs are crooks it just does not comport with the world I work in everyday. That's especially true when the investor is doing a 40k - 100k ARV flip and looking at GC's in states where the entire project won't even cover a GC's insurance bill.

I think for new investors the best advice is to look for a GC that is early in their career and focused on growing the portfolio and creating the next Gilbane. You will get a level of service and skill for a couple of years that are pretty hard to match.

The hard truth: flippers are almost always the least profitable and most difficult clients. And once a construction company gets to a certain size we are more likely to just take the entire investment in-house and compete directly.

I'd encourage everyone to look at JDS or Gilbane Development to get a picture of what I'm talking about. In my view there are only a couple of places to add economic value in real estate. Construction happens to be the largest opportunity and so it can be hard to compete against a vertically integrated developer.

As for finishes and design. I'm not sure it's right to assume the investor has a better sense of design or better tastes then the builder. The builder is often seeing way more product and designs then a typical new investor. So it comes down to a matter of reps.

I think one of the best ways to find good contractors is through the NAHB chapters.

Hunter Harms · Answer

@Christopher B. Thanks for the response man! So what I'm getting from you is that my finish materials I want to use such as paint, appliances, countertops, fixtures, etc are where I should be specific and maybe use a design guide. I intend to pay for these things myself to ensure I am not getting ripped off and to also get all of my credit rewards (I like to travel).

When working with my contractor would I just be able to discuss and show him these finish materials I am wanting to use and he would specify how much to buy? Also, would I be able to just have him pick up the adhesive, nails, etc?

If my understanding is correct, I would be able to make a complete list of finish materials with him and the amounts to purchase, then I could shop around to find the best deals for these items and have them shipped to the job site?

Creating a design guide for contractors?

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