“The Truth About Rehab Projects & Budgets”
By Justin M. Bullock, Real Estate Developer & Investor
Where there are numerous components to real estate investing, one of the most common struggles (with both new and even with the most experienced of investors alike), properly administering construction projects and controlling rehab budgets seem to be among the most immense challenges many investors face.
From the amount of online social media and blog posts I come across, to the calls I receive on a weekly basis from investors who are in need of assistance, to the hardships I have directly experienced and sometimes still even do in our real estate businesses and on a rather consistent basis in the category of construction management, there is a concrete truth which is the reality that your rehab budget is always subject to change. The fact is though is that we do have a great deal of control to help mitigate these costs.
This article is designed to help give you some insights regarding these realities and are items to consider when assessing your rehab budgets along with some solutions that we have found to work in our operations which may help mitigate costs and potential issues when budgeting and managing your renovation projects.
The Overlooked Aspects of the Scope of Work:
I have personally seen all too many contractors walk a property and blatantly miss items which should have been glaringly obvious. Even if you walk a property with a general contractor, not all of them are always thorough, or always even have the knowledge surprisingly, and the majority will not climb into attics, onto roofs, or into crawl spaces, where oftentimes high ticket items can be looming.
Solution:
Find and partner with a licensed home inspector who is both experienced and reputable and work out a volume based discount for them to inspect all of the homes you purchase. Ensure they also perform a WDO inspection for you as well as those are items you will need repaired if you choose to sell to a buyer using FHA or VA loans. Even if you plan to keep the home as a rental, you should always ensure the structural integrity of the home by addressing and repairing those items.
Use these reports to help keep track of all the items you need completed and to build detailed scopes of the items you need repaired. If there are additional items the inspector states requires a more expert opinion, be sure to contact those professionals and have them help assess your best options.
Another pro-tip, you can also use this knowledge and information to help negotiate a better deal during the acquisitions processes, especially when working with other realtors, because the seller is then required to disclose whatever latent defects they are aware of.
Mitigating Questions & Change Orders:
Some of the most sound business advice out there is to not ever do business without a contract. In the construction management world, that advice holds ever so relevant and true. You need contracts with each contractor and subcontractor that you choose to hire. If you want to get hit with unnecessary change orders or only get half of the expected job done, or have it not done right at all, by all means, skip this step.
Solution:
Build detailed scopes which even go into detail explaining everything you expect to be done and how you expect it to be done. You want something in writing and signed by all parties to support exactly how you anticipate each line item to go from start to finish which dictates in detail the proper prep procedures, color schemes to be used down to exact colors, the exact types of materials to be used, the exact numbers of how much in materials are needed, and what the exact costs are for each individual item and for the labor for it.
Who is choosing, providing, and delivering the materials? What are the costs associated? Who is providing and paying for permits or inspections? The more detailed, the better. You need all of this information to help hold your contractors accountable.
The Unforeseen Items:
The reality is, sometimes, it is no one individual’s fault that there are repair items which could not be foreseen; especially in the remodeling world. From unexposed mold behind drywall, to unexposed wiring, plumbing, HVAC issues, etc. which could cause problems, or other issues that could not be seen upfront ranging from theft to problems with the city or utility providers or even neighbors which could be unanticipated, one thing seems to always be true; unexpected losses are to always be expected.
Solution:
Always budget for unforeseen issues. It is recommended to include an added cushion to your budget ranging as high as 10% - 20% or even more based on the size of your project to account for these issues.
Permits, Shmermits, Insurance, Insmurmance:
Want to know one of the best ways to lose money fast and to cause problems for yourself when you go to sell a property? Do not pull permits and work with unlicensed, uninsured subs. I have walked away from numerous potential investments as a cash buyer due to permits not being pulled and as a realtor, I have steered a great deal of customers away from homes where work was performed without required permits.
I also receive frequent calls with people who get “Stop Work Orders” on their projects. The city shuts down their project, costing them valuable time and money, and requires us to come in to pull permits to help out. From there, we have to manage the processes since we are carrying the liability (which costs money) and the city watches everything like a hawk and can make it that much more challenging for all of us. It costs these investors more time and money oftentimes than it would have if they just did things the right way from the jump.
The city will sometimes require us to get architectural drawings or structural engineers for items which we may not have needed from the beginning. That can cost thousands of additional dollars and weeks or even months of added time.
Solution:
Pull all of the necessary permits upfront! Hold contractors accountable by ensuring the work was performed correctly. If there are going to be architectural drawings or engineered plans, know and budget for that from the beginning. Also, make sure the people you are working with are licensed and insured and have the full ability to do what they are supposed to do from a legal standpoint. Work with an unlicensed sub who causes a flood or a fire and watch how fast your profits will go to the ground.
Summary:
As an investor, you make your money when you purchase your investment properties. If you are an investor, it’s unfair to beat your contractors over the head and to expect them to take a loss just because you missed certain items and are potentially facing one yourself.
It’s unfair to the buyer or the renter to own or rent a home that is going to cause them issues because corners were cut and not measured and quality and needed repairs were sacrificed. It’s also unfair to you as well due to the fact you can be sued or have to pay for certain repairs all over again.
Don’t be a fool or a jerk. Don’t sacrifice quality because you do not understand how to properly budget and manage your renovation project. I can humbly say I have been that guy and it’s not a good position to be in. It’s rather shameful and embarrassing.
This is why moving forward in our operations we use robust inspection templates, detailed scope templates, and other contracts with provisions which protect our best interests, our profits and surplus, our strategic partners, and all of our customers who are ultimately depending on us.
You have a great responsibility in this industry if you are working as a developer, as you are providing homes, jobs, and are making a more broad economic reach than you may even realize or understand.
The ultimate point here is; make sure you are being responsible.
My hope is that this information helps and adds value to your operations. Thank you for all of your time reading this article.
