Beware of Choosing your Rehab Contractor
I found an awesome neighborhood in Austin where there was a significant price difference between 3/2's and 2/1's. It's an older section, and quite a popular section of Austin where the land value is the main value in the house - but the neighbors treasure the historic charm of these small houses built in the 1950's.
The reason for such a pricing spread is simple: supply and demand - and the elasticity of price. OK, I'm getting this from my Economics 101 class, but here's the basis of the spread: Who wants to buy a 2/1 where there's an excellent school system and is close in town? (Austintraffic is horrible.) Thus the demand for 2/1’s are LOW, and the demand for 3/2’s are HIGH.
I found a real charmer in that area - a 2/1 and I wanted to convert it into a 3/2 to satisfy the demand - and higher price - in the neighborhood. We bought it and started looking for contractors. Our projected profits were about $50k-$70k going into this (Wahoooooo!)
My hard money lender actually recommended this guy. We came up with some drawings that were awesome. He said he could do it within my budget (Learning Experience #1 - don't tell the contractor your budget), and not only that, he would save me money on my hard money payments because he and his time works fast. He even said 45-60 days. That was the end of March. (Learning Experience #2 - get a detailed quote and project plan).
It's been more than six months and I have a new mantra: How do you know a rehab contractor is lying? His lips are moving.
We had delays with permits (Austin won't let you cut down trees), but the slab got poured, windows replaced, outside painted, walls erected and then nothing...and I waited...and waited…and waited...
The first notice of lien didn’t really bother me too much because I could tell he tended to be a little distracted from time to time. But when we talked he claimed he already paid someone else who was supposed to pay this guy. That was just one of his lies because in just a few weeks, more notices of lien filings.
Then I learned about a guy that knew a guy that knew a guy that would come into town and break someone’s knees for you – that’s one of the benefits of networking with other real estate investors. Tempting yes. Practical, no. I don’t think there will be any satisfaction from this experience, other than implementing my real estate investing learning’s correctly in the future. Now back to the story…
I was reluctant to go back to my previous contractor, even though he was good, he was pricey. He provided me with a quote of just over the rest of my budget which was fine. What I didn’t realize was the extra charge for the code enforcements (an extra $4k) and the separate cost of the kitchen (extra $7k) and the other Home Depot Charges ($3k). And I forgot how slow he was (extra $6k hard money payments). (Learning experience #3 – get a timeline on the calendar and build in fines for delays.)
It’s been over 6 months and we have a real beauty! I’m about to it on the market and there will still be a profit, even if most of it is eaten up from Learning Experience #2. You can see the finished product http://budurl.com/westpark.
We’ll keep you posted!
The reason for such a pricing spread is simple: supply and demand - and the elasticity of price. OK, I'm getting this from my Economics 101 class, but here's the basis of the spread: Who wants to buy a 2/1 where there's an excellent school system and is close in town? (Austintraffic is horrible.) Thus the demand for 2/1’s are LOW, and the demand for 3/2’s are HIGH.
I found a real charmer in that area - a 2/1 and I wanted to convert it into a 3/2 to satisfy the demand - and higher price - in the neighborhood. We bought it and started looking for contractors. Our projected profits were about $50k-$70k going into this (Wahoooooo!)
My hard money lender actually recommended this guy. We came up with some drawings that were awesome. He said he could do it within my budget (Learning Experience #1 - don't tell the contractor your budget), and not only that, he would save me money on my hard money payments because he and his time works fast. He even said 45-60 days. That was the end of March. (Learning Experience #2 - get a detailed quote and project plan).
It's been more than six months and I have a new mantra: How do you know a rehab contractor is lying? His lips are moving.
We had delays with permits (Austin won't let you cut down trees), but the slab got poured, windows replaced, outside painted, walls erected and then nothing...and I waited...and waited…and waited...
The first notice of lien didn’t really bother me too much because I could tell he tended to be a little distracted from time to time. But when we talked he claimed he already paid someone else who was supposed to pay this guy. That was just one of his lies because in just a few weeks, more notices of lien filings.
Then I learned about a guy that knew a guy that knew a guy that would come into town and break someone’s knees for you – that’s one of the benefits of networking with other real estate investors. Tempting yes. Practical, no. I don’t think there will be any satisfaction from this experience, other than implementing my real estate investing learning’s correctly in the future. Now back to the story…
I was reluctant to go back to my previous contractor, even though he was good, he was pricey. He provided me with a quote of just over the rest of my budget which was fine. What I didn’t realize was the extra charge for the code enforcements (an extra $4k) and the separate cost of the kitchen (extra $7k) and the other Home Depot Charges ($3k). And I forgot how slow he was (extra $6k hard money payments). (Learning experience #3 – get a timeline on the calendar and build in fines for delays.)
It’s been over 6 months and we have a real beauty! I’m about to it on the market and there will still be a profit, even if most of it is eaten up from Learning Experience #2. You can see the finished product http://budurl.com/westpark.
We’ll keep you posted!
Comments (1)
It's on the market now and I'm STILL getting notified of bills he didn't pay. Geez.
Jean Norton, about 14 years ago