The Rule of Three – Obtain a Minimum of Three Bids

One of the most crucial factors contributing to the success of a real estate investor is how well she puts together her “team”. This team consists of all the external parties that help you accomplish your real estate goals. While your investing team certainly includes your attorney, real estate agent, accountant, etc, for the purpose of this post, we will focus on your subcontractors.

As you move through rehab projects and renovations on rental properties, you will begin to establish relationships with various vendors and subcontractors to complete different aspects of project scope. You will get to to know an electrician, a plumber, a roofer and what may seem like countless painters. Its important to start cultivating these relationships as early as possible.Having subcontractors who understand how you work and go out of their way to accommodate your needs are invaluable.

Its exciting to find a tradesman with whom you feel comfortable. One successful project with one of your subs can make you feel like you need to hold on tight and never let go. However, a common pitfall to be aware of is the tendency to become toocomfortable with your contractors. While it is a great feeling to have subcontractors with whom you feel comfortable giving work, make it a habit to stay objective in your search for subs on future projects.

As you become more and more comfortable hiring specific contractors, they may have the tendency to get used to charging you more and more for projects. Your subs understand how difficult it is to meet with new contractors and solicit new bids. They are banking on the chance that you will be lazy when it comes to exploring new options. The “Rule of Three” is a great way to keep you subs honest to ensure you consistently get a fair price for the work.

Company Policy – Obtain a Minimum of Three Bids for each Major Budget Item

We suggest you make it a personal and/ or company policy to obtain no less than three legitimate bids from sub contractors on each major aspect of your project scope. These major scope items include but are not limited to: roof, siding, painting, paving, electric, plumbing, HVAC, carpentry, drywall, flooring, etc. The “Rule of Three” is not taken out of thin air. In fact, most fortune 500 corporations employ rules that require their procurement department to receive at least three bids before making major purchase decisions. The main rationale behind the rule of three is that the more bids you get, the better the chances that you minimize the overall cost of each budget item.

When it comes to certain aspects of the project, you may be better served to get even more than three bids. For example, our experience has shown that bids given by interior painters can vary greatly. We tend to receive about five bids for each interior painting job. Painting is not complex. Therefore, its a bit easier to bring subs in to assess the job and give a quick quote. Use your judgement when it comes getting more than three bids. You don’t want to overdo it and waste all your time meeting with countless contractors for more and more quotes.

Keeping your Subcontractors Honest

Be up front with your subs regarding your rule of obtaining three bids on each project. Tell them that its company policy. Make sure you are consistent in enforcing this rule. If your subs understand that you will consistently obtain at least two bids in addition to their own, they are bound to be tighter with their numbers. Make sure they know that although you are comfortable working with them, you are consistently meeting with other subs to ensure you are receiving a fair price. Most contractors expect that you will get multiple bids. In fact, contractors are used to getting turned down on projects. Your subs should not take this personally. Simply be honest with them about your intent to perform your due diligence to minimize project cost. After all, your real estate business is your life blood. Your success is simply too important to put in the hands of a handful of trusted contractors.

Stay Organized

As you begin to bid out certain aspects of your rehab project, its important to have a strong filing system for keeping track of all your bids. Ask your subs to email you their bids so that you can easily save them and file them to the specific project folder. As many subs are slow to adopt newer technology, it is likely that many of your bids will come in paper form. Be diligent in quickly scanning these items so that you can save the digital copy in your project folder. If you don’t have a printer/ scanner, you can download an app like “scannable” to scan items from your phone or tablet. Keeping your bids well organized is not only beneficial for the current project, but your filing system will come in handy when it comes to future projects as well. You will have the ability to look back on past bids to understand how subs compared when it came to scope and pricing.

Your relationship with your subcontractors is crucial to your long term success with rehab projects and rental renovations. You should constantly be on the lookout for new subs to add to your team. Healthy competition is a huge benefit when it comes to bidding major projects with big budget implications. Employ consistent business policies and processes to ensure that you are obtaining a fair price for your projects.