Major Construction Problem
A major construction problem found on a job site is the same as looking at a pile of cash caught on fire. Construction is an area of flipping that is massively important to your profit margins. Good construction teams can make your life very easy and a bad one can take a great deal and turn it upside down. Choosing the right contractors can be quite difficult because many times you don't have much to go on besides an interview. Once you decide to hire the person, you find out pretty quickly if they are what they say they are. The problem with this discovery period is that it can cost you significant money if you don't see the problems early enough.
There are few ways to prepare and remedy these situations when you catch yourself in a bind. The first thing to do is vet your contractors properly. Looking at prior work they have done is good, but a referral from a respected friend is usually the best place to start. If you can't get a referral , be sure to scale in with the contractor. Don't give someone the reigns to a $100,000 project when you just met them a day prior. Have them start with small jobs and prove that they are capable of more responsibility. Another way to prepare yourself for an mishaps is by building in a buffer. Make the assumption that something will go wrong, plan for it and then you will find yourself prepared for it. To plan for it, build in a margin of error or buffer. I see many investors build in a 15-20% construction buffer. If their numbers still work to make a profit, then they are comfortable entering the deal.
Construction is a tricky part of the business when first starting out. Most people end up with a great team after they have gone through several not great teams. The problem with that is that it can be very costly to end up where you want to be. Do the right things ahead of time to avoid your pocket becoming too light. If you go over $10,000 on your construction project on a $50,000 acquisition and $50,000 construction loan (total $100,000), you might as well have paid $60,000 for the property. It is the exact same thing as making a higher offer. Don't let your fantastic deal finding efforts be put to waste by allowing construction to go over budget.
Ian Walsh
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