OOS Investing: Due Diligence with Rehab & Contractors

[Andrew B.]

Hi BP! I'm a new BRRRR investor looking to get my system in order for an impending purchase. All steps of BRRRR are important, but I can see a mismanaged rehab making or breaking a deal. I am looking for advice on how to ensure an out of state rehab goes smoothly and a contractor follows through on the agreed upon work,cost and timeline. Here's what I have so far:

1) Network on BP or local REIA's to find qualified contractor referrals then further vet those referrals through websites like Yelp.

2) Interview 10-15 contractors through those referrals or websites.

3) Get 3-5 materials and labor separated bids with an expected worst case scenario time frame for your rehab prior to finalizing the deal.

4) Turn the bid into a binding contract where bonuses are in place for finishing on time/early and penalties are established for finishing late.

5) Supply the materials for each phase of the rehab and pay labor as phases are verified to be complete by other team members (Real Estate Agent/Property Manager).  These team members will provide videos and pictures of the completed phases.

My main question is regarding the payout of labor for phase one.  Is it common practice to only pay out labor once phase one is verified complete.  If so, it seems you could completely eliminate the risk of a contractor taking that initial payment and never starting work.  Any other ideas would be welcome in terms of how to eliminate risk, stay on budget, and finish on time.