Finding Contractors, Renovation Red Flags, and Estimating Rehab Costs

Ashley:
That is Actual Property Rookie, episode 166.

James:
Yeah. There’s all these indicators that you are able to do as you’re working together with your staff members. If a contractor is attempting to cost you for that or they gained’t offer you pricing breakdown, most likely not your guys. That’s an indication, keep clear from that particular person. It is advisable work off information.

Ashley:
My identify is Ashley Kehr, and I’m right here with my co-host, Tony Robinson

Tony:
Welcome to the Actual Property Rookie Podcast, the place each week, twice every week, we convey you the tales, the motivation, the inspiration to get you began as an actual property investor, or hold you going in case you really feel like stopping. Ash, what’s going on at present?

Ashley:
Right this moment, we’re doing half two of rehab and development price sequence with James Dainard. Should you guys haven’t listened to that, go and take heed to that episode launched on Wednesday. We’re right here now for half two. Tony, do you need to recap what half one was about?

Tony:
Yeah. Half one was one in all my favourite episodes we’ve executed up to now. We’ve had some superb friends, however James actually gave a grasp class on estimating your rehab prices, on constructing your staff, learn how to discover contractors, learn how to discover common contractors, learn how to vet them, learn how to put your scope of labor collectively, learn how to give pricing estimates. Simply the whole lot that you must learn about step one of getting your rehab executed.
There’s really three phases that we’re going to speak about. Section one was the whole lot you do earlier than you get to the property, in order that’s just like the prep work that we simply talked about. In at present’s episode, we’re going to speak about steps two and three, which is what you do while you’re doing all your first preliminary walkthrough, after which what occurs after you really shut on the deal.

Ashley:
James, welcome again to the present.

James:
Thanks once more for having me. I’m shocked I bought invited again.

Ashley:
We tried to get any individual else to fill in to cowl the second a part of the sequence, however nobody would do it.

James:
That’s normally my function. I’m the backup plan.

Ashley:
Yeah. Okay, effectively, let’s leap proper into it. What are the issues that … You’re going to a property. You had stated within the earlier episode, you need to be 99% positive that this can be a property you want to put a proposal in. What do you convey? Who do you convey with you while you’re going to take a look at a property?

James:
Yeah. Particularly proper now with the market as scorching as it’s, you must be ready and be capable of write a really sturdy supply to safe that whole lot. Anytime that we’re going to those preliminary walkthroughs, we need to be sure we’re ready. We will write a no inspection supply after which actually get aggressive to lock it down.
The issues that we convey to each walkthrough that I’m going to is, the very first thing is a digicam. Doc what you’re seeing as a result of that’s going to essentially … You may undergo a home, and as you look by photographs, you’ll be able to revisit your ground plans you may want to repair. You may notate, as you’re doing all your price range, what supplies you’ll be able to hold and what that you must do away with for plans. We all the time convey a digicam. We convey a walkthrough sheet that we created internally for our firm and for our venture managers, and that simply actually lists out, itemize each little piece that must be executed in that venture. It begins with roof, home windows, entrance door, inside, so it’s all documented out.
The explanation I nonetheless, even to this present day, use that sheet is as a result of it’s very easy to overlook one thing as you’re strolling by a home. Even once we did our walkthrough, Ashley, I went by this entire home with you. I went proper by one thing after which fortunately, you go, “Hey, “What’s contained in the closet?” Oh my god. I didn’t examine. I open the closet and positive sufficient, there was ducting and it was going to price us two grand extra in shifting issues.
By having that sheet, if I might have gone by my sheet correctly, I can say, “HVAC and structure. Do I want to alter any of my HVAC route?” and lay it down. We’ve got a walkthrough sheet that takes you from A to Z. We get to rely out what number of home windows, how a lot sq. footage we have to substitute, and it offers us a template to present {that a} good format. Along with, by writing in all this stuff, like if I’m writing down 14 home windows, exterior door, a entrance door, and a slider, I do know what these prices are.
As I’m getting my bids again from the contractor, I might be very particular with him, saying, “Hey, you quoted these home windows at this,” and I can break down the value per window as a result of I do know precisely what the rely is. It’s tougher to do this if I’m going, “Wait. Did I’ve 10 home windows or 14 home windows? I can’t keep in mind.” Numerous occasions, the contractor’s not going to notate that, so it offers me a great blueprint, as I’m not solely simply creating my price range, however double-checking the contractor’s bids down the highway.
I additionally convey a flashlight all over the place as a result of that you must stick your head in areas which are darkish. It is advisable examine your crawlspaces. It is advisable examine your attics. I prefer to convey a tape measure as effectively as a result of in case you do must create worth and reconfigure plans, you don’t need to simply say, “Properly, I’m going to stay a toilet right here,” and probably not take a step again and take a look at the house to see if it really even suits, so all these stuff you need to convey with you.
Should you’re a more moderen investor, and that is your first buy, and also you haven’t executed this earlier than, what I used to do once I was model new within the enterprise is I might convey a house inspector with me simply to notate. You don’t must pay for a full inspection report. Mainly, it’s like a walkthrough inspection the place it’s only a bullet listing relatively than a full report as a result of they’re going that will help you catch different issues that you could be miss.
What I believe you need to all the time convey with you is your dealer, who’s going to be promoting the home for you down the highway, to allow them to offer you suggestions on what makes it extra marketable and likewise, a common contractor to come back by to get your estimate on the home. When you’ve been doing this for some time … Once more, we’ve executed like over 3,000 properties, we are able to stroll by, and notate, and know our prices fairly effectively, so we don’t convey a common each time.
My first most likely 30 properties I purchased, I all the time introduced my common with me to get a quote as a result of he was educating me as I’m doing my walkthrough going, “Hey, we are able to’t take this wall out.” Or, “We will take this wall out, and right here’s why,” so be ready in your walkthroughs as a result of the best way the market’s ripping, you must give them a strong, no BS supply at that time.

Tony:
James, I need to dig in a little bit bit. You stated you will have this walkthrough sheet. Is the walkthrough sheet separate out of your scope of labor or are these two paperwork one and the identical? If they’re totally different, what precisely is that walkthrough sheet, in case you can provide us extra perception?

James:
That’s a fantastic query. Our price range sheet, how we created it, it’s on Excel format to the place we’ve got to enter. We’ve got it damaged down, like we talked about within the final episode, by labor and materials prices, and so we are able to slender our price range manner down. The walkthrough sheet, as a result of if we’re doing our walkthrough with, let’s say it’s an off-market deal, personal sale and I’m strolling round with my laptop computer attempting to fill this entire factor in, it will probably take some time and it will get a little bit awkward. Plus, your deal finder may not prefer it since you’re in the home too lengthy.
What the aim of the walkthrough sheet, is definitely simply to take your notes so then, once we get it again to the workplace, I can enter it into my price range sheet and refine the whole lot. Additionally, what I love to do is it offers me a common … It’s mainly my bullet level listing with several types of gadgets we have to do. As I’m attempting to make the deal work or invent that return by placing the correct plan in play, I’ve the counts, I’ve the photographs. I’ve all my particulars of what I must do, possibly how outdated the furnace is, what number of doorways I must put in. Then I can go to my comps once I’m at my workplace and use that sheet to reference what the supplies are within the comps, after which begin enjoying round with that plan.
The aim of the walkthrough sheet is to be environment friendly. You might be fast. It helps you not miss something and likewise, it offers you the bodily counts of the whole lot. We’re writing down door counts, window counts, giant kitchen, small kitchen. We’re making all these notes on that sheet.

Ashley:
Yeah. I really simply ran and disappeared for a minute to really get the sheet that I’ve from once I did the walkthrough of James’ and I flip. On it, it goes, I’ll offer you guys an instance. For home windows, what number of? Are they vinyl, metallic, wooden? What’s the estimated age of the home windows? Then, what situation are they? You simply circle one, two, three, 4, or 5. That goes by the entire thing. It goes for the plumbing. Is it galvanized, copper, PEX, approximate age? Then, situation of that too.
James, whereas we’re speaking about this, I’ve like one million notes on to right here, on to this sheet, however there have been some issues that you simply knew from studying and doing totally different walkthroughs that helped you really go and do the walkthrough precisely and assist together with your budgeting. For instance, a type of issues was telling if {the electrical} retailers had been grounded or not. Similar to this little factor that you simply don’t must be an electrician to know, however there’s issues you’ll be able to study on YouTube or from contractors that can show you how to even fine-tune your price range extra.

James:
Yeah. There’s all kinds of little low-cost, and tips you are able to do. Really I did a video for BiggerPockets referred to as Crimson Flags for Flips. It’s on the YouTube channel, and I discuss … You may visually see these a little bit bit extra within the video, however yeah, there’s all these little tips and suggestions that we’ve realized through the years. Then a part of how we’ve realized them is by me dropping cash. I realized lots of these things early. Our objective is to be sure that folks don’t undergo those self same onerous classes as us. I’m simply form of thickheaded although. “Yeah, I’m going to go purchase that,” after which I study later. By having it on that sheet, going, checking electrical, that jogs my memory to go, “Hey, what sort of retailers do I’ve in there?”
There’s various things you are able to do. As we’re strolling by a home, I’d pop a plate off an outlet if it’s a home inbuilt a sure period. That’s additionally why I convey the tax report to the walkthrough. I even have my tax report as a result of it’s telling me sq. footage, it’s telling me yr constructed. Based mostly on the yr constructed, that’s going to inform me what the mechanicals are in the home, that are going to inform me a giant a part of my price range. If it’s within the Pacific Northwest, the properties of the Sixties are within the center, to allow them to have outdated wiring or good wiring, so journeys that we’re doing is we’re wanting on the retailers. If there’s solely two prongs in there, which means it’s usually not grounded, which goes to additionally usually imply we’d like a full rewire.
We’re on the lookout for, does it have two prongs or three prongs? Are the retailers the other way up? In the event that they’re the other way up, that’s a manner for them to self-ground or get the reverse polarity out of there. That’s normally an indication going, “Hey, we’re most likely going to must rewire this home.” We’re going to take a look at the panel to see if there’s a shutoff. There’s all these little issues that you may see that can let you know whether or not your mechanicals are outdated, or in case you go to your plumbing. When you’ve got three valves, lots of occasions in your plumbing, that’s the setup for an outdated galvanized system. Whereas, if I’ve one which’s usually going to be copper or PEX from there on, as a result of that’s a brand new sort of plumbing form of set up. There’s all these little hints and indicators that you may notate.
That’s additionally why you need to convey your digicam. As a result of as you’re taking pictures digicam footage, you’ll be able to go, “Wait. Did I want a full replumb? Let me return and take a look at that valve. Let me return and take a look at the place that rest room location is, or the place {that electrical} swap is.” If I’m strolling right into a home, and usually the retailers are each eight inches off the bottom, or all my switches are regular, then normally the wiring’s going to be of recent code.
If I’m going right into a kitchen and there’s no retailers within the kitchen backsplash, which means it was inbuilt outdated code, at that time. It’s not grounded, there’s no GFCI. As you do your listing, it reminds you to take a look at these issues. Then as you’re taking a look at them, you need to search for these little indicators of … Not indicators of neglect, however indicators of datedness in mechanicals. See if there’s an oil tank on the property. Which means your HVAC and ducting system’s most likely going to must be up to date in case you’re not changing or altering out to grease. There’s all these items that you may search for.

Tony:
James, your wealth of information with regards to what to search for … I can inform that you simply’ve executed this. I imply, you do something as a result of talked about within the first episode that you simply’ve been concerned in 3,000 totally different transactions. Whenever you do something 3,000 occasions, you’re going to realize it just like the again of your hand. I need to remind everybody that’s listening that simply since you’re not as well-versed as James in the whole lot that he simply outlined, that doesn’t imply you continue to can’t go on the market and make some issues occur.
Like he stated, lots of this information he gained was by trial and error. It’s not essentially that you’ve to have the ability to take a look at piping and know whether or not it’s galvanized, another materials. What James is attempting to speak to the listeners, to all of you, is that there are simply sure issues to look out for, however don’t really feel overwhelmed in case you don’t have the identical stage of information and data James has.
I simply need to recap, similar to actually rapidly, James, a few of the stuff you stated to convey with you. You stated a digicam, your walkthrough sheet, flashlight, tape measure. Then from a folks facet, in case you can, possibly convey a house inspector, a dealer, after which a GC. One final query on the GC piece, James. You stated you had a GC come alongside in your first 30 flips or so. Have been you paying that GC for his time? Or what sort of agreements did you guys have for her or him to comply with together with you on these first few flips?

James:
No. I by no means paid the final as a result of that’s a part of enterprise. If somebody requested me, I’d be like, “Properly, are you a house inspector?” As a result of as a dealer, if a shopper needs to go take a look at a property and I take them and so they don’t prefer it, we go away, I’m not going to invoice them for my time. That’s only a potential for me to earn a sale at that. Similar with the final. You’re going to must estimate since you’re attempting to get the work.
If some man requested me for $200 to go stroll it, A, I might take a look at what’s happening in my very own enterprise practices, or am I driving folks nuts at that time? Then possibly I want to repair that. Or B, that man’s going to nickel and dime me over the whole lot. If he needs $200 to do a walkthrough, what’s he going to need when he has to maneuver a door an inch as a result of he didn’t actually calculate it proper? He’s simply not the correct particular person that might match inside my demographic.
Everyone on my staff, I need us to all be along with the identical mindset, that we’re all right here to assist one another and the angle was to get the venture executed, however I undoubtedly wouldn’t pay. Numerous causes I do know lots of these things, once more, is I did lots of issues unsuitable in my early 20s. I might exit and discover the deal first, purchase it, after which attempt to determine it out, and by being very, very inefficient … Really, the perfect factor I ever realized in development was dropping some huge cash on a home. As a result of I used to be there lots and I bought to see.
On the very finish, I used to be like, “Okay. Properly, that was a really costly school for flipping properties.” I did the whole lot unsuitable on that home that I might have probably executed unsuitable, and I needed to create my system off of that. Like, “Okay. Don’t do it this manner. Don’t do it this manner. Don’t do it this manner,” and that’s the way you study. Should you don’t know these items, simply rent the correct staff members. Rent the correct contractor, work with the correct dealer that basically understands your enterprise. They might help you facilitate your plan, after which that’s the place you’ll be able to really feel much more snug at your walkthroughs.

Ashley:
James, going again to the piece about paying a contractor to come back out for a walkthrough, do you assume since you are skilled and you’ve got that credibility that you’re going there 99% positive you’re going to make a proposal on this property, that it might be totally different for a rookie investor who’s by no means bought a property and is possibly going out and taking a look at their first few homes and so they don’t have that have? Do you assume it’s a distinct state of affairs then that they need to offer or might be providing to pay a contractor?

James:
If one in all my shoppers asks if they need to try this, I might inform them a tough no on that. I simply may be going on the market to make 200 bucks for an hour or $300. I believe you’re speaking to the unsuitable folks in the event that they’re asking for that. You don’t want pull to have somebody come out. Truthfully, if I put myself within the contractor’s footwear and somebody referred to as me and says, “Hey, I don’t know what I’m doing. Will you come take a look at this home for me?” I’m going to go, “Okay. I bought a great margin development job I can do,” at that time.
They need to need to come on the market. Like, “Oh, you want lots of assist? That’s okay. I might help you.” I might assume that’s a great for the contractor. In the event that they’re working for somebody that doesn’t know what they’re doing, they’ve much more alternative to create margins there. Most guys ought to need to come do the scope of labor.
Once more, as an investor, you might be additionally offering revenue for folks. It’s not simply in regards to the contractor. Should you’re working with a dealer … Because of this you need to all the time pay your brokers. Don’t attempt to get the perfect deal in your fee. Pay them what they’re purported to receives a commission, however set expectations for them that will help you. As a part of our brokerage, we’ll convey them out generals in the event that they want it as a result of we need to be sure that they’re doing effectively, and that’s offered in our service.
When you’ve got the correct staff behind you, you’re not going to want to pay that man. Anyone that’s creating income off of your enterprise, make them work, make them show you how to, and so they’ll convey out extra folks. If one in all my shoppers referred to as me and says, “I do know that is no inspection, however I need to do an inspection for purchaser functions solely,” I’m going to refer him three to 4 dwelling inspectors. Or he says, “I really need this deal, however I don’t have a common,” we’re going to refer on folks to exit, and so they’ll get an estimate, and so they’re not going to cost.
You don’t must pay the contractor, however the folks that you’re paying or which are being profitable off you, put them to work. They’ll find a way that will help you get the folks on the market as effectively. That’s an issue that the dealer, lots of occasions, has to resolve. The shopper needs to purchase this, however they don’t know learn how to do it, to allow them to assist them do it. You may earn your fee at that time. Use your staff, after which you need to be capable of get them out. Don’t let folks cost you for that stuff.
I might say, as a substitute of paying a contractor to come back out and go to your job, hand over your time and go supply to intern for a developer, or a builder, or a flipper to the place you’ll be able to assist them by simply going to the location and seeing what’s happening. You’ll find yourself studying far more that manner, not spending your cash, and really getting hands-on expertise than giving some man cash to go take a look at a home.

Ashley:
Thanks for sharing your viewpoint on that. As a result of we do discuss lots on right here about how, in case you are a brand new investor, you’ll be able to’t get a contractor to come back out since you’re going to take a look at so many various properties, to supply them some cash and incentive, however I believe you give a really legitimate level that possibly they’re not the correct contractor in the event that they’re not going to come back out and take a look at tasks for you totally free.

James:
Yeah. There’s all these indicators that you are able to do as you’re working together with your staff members. If a contractor is attempting to cost you for that or they gained’t offer you pricing breakdown, most likely not your guys. That’s an indication, keep clear from that particular person. It is advisable work off information. If a dealer can’t let you know the place the value-add is, most likely not the correct dealer. It doesn’t imply they’re a nasty dealer, however they’re not an investor dealer. As you’re interviewing your staff, search for these indicators to verify they match in your bench. If it doesn’t, transfer on to the following particular person. Maintain calling, hold checking for these folks.

Tony:
James, you’ve given us some superb info by these first two phases. Once more, the primary section is what to do while you’re initially wanting on the property earlier than you get onsite. We simply talked about what to do while you’re really strolling by the property. The final and closing section right here is, what occurs after you do your evaluation, you stroll the property, the whole lot appears good? Now you bought it below contract. Now it’s yours. Now you personal this property. I’m curious what your ideas are, however Ashley, I need to hear your response to that piece first.

Ashley:
Properly, first I simply wished to say, James we’re out of time, so we’re really going to convey you again for a 3rd episode. No, I’m simply kidding. I’m joking

Tony:
Two episodes again for each visitor.

Ashley:
Yeah. Let’s go into getting the deal. Once I got here out,

James:
I really feel like I’m slowly turning into your intern.

Ashley:
What you’re slowly doing … Once I got here out and we seemed on the first property, we bought the property below contract. What occurs from there? That’s the piece that you simply and I are engaged on proper now for our flip is okay, scheduling the contractors, placing collectively the contracts, the ultimate scope of labor. Are you able to stroll us by that course of?

James:
After we safe the deal and we prepare for closing, the following steps that we all the time take is we’re doing one final closing revision of our price range earlier than estimating, as a result of the very first thing is we don’t need to have a contractor go on the market with an unprepared price range. That’s how they beat us up on our numbers, after which we’re going to have a bunch of change orders, and we’re beginning on the unsuitable foot.
The second factor that’s essential about ensuring your price range’s revised appropriately is, at the least once I do it and I do know lots of traders do, is that they’re getting the development mortgage with their onerous cash or gentle cash lenders. In case your price range’s incorrect, it will probably trigger liquidity issues. Should you’re 20% off in your price range and also you had that rolled into your mortgage, which means you’re going to must provide you with that extra capital out-of-pocket, which may mess up your returns down the highway, so that you need to be sure price range is finalized and ready that manner.
Then from there, we all the time find yourself getting at the least two quotes from generals. We safe the deal. We’ve got our finalized price range. We’ve got our finalized specs then chosen as a result of inside the ultimate budgeting, we’re going by the comps, determining what sort of allowances we have to put in to get the utmost worth. Then we begin bringing out contractors to estimate and make sure our budgeting.
If we get the numbers we like, and earlier than we rent them, we find yourself checking their license and bond once more, since you need to examine that each time you rent a common. It’s not simply the primary time. These issues can expire, so earlier than we rent them once more, we all the time be sure their standing is lively and able to go. We be sure they’ve a bond as a result of in the event that they don’t and we don’t examine that, that’s going to be our drawback with L&I within the metropolis later. Then from there, we then have the contractor signal a development contract, or the subcontractor as effectively. That could be very basically essential for any investor to do this. I realized that the onerous manner, once more. Most of these items that I preach is as a result of I misplaced cash doing it the opposite manner.
A contractor estimate is an estimate. You may signal that and sure, it’s a contract, however what it doesn’t do is define common insurance policies, procedures, and the way issues must be accomplished, and inside timeframes, which is that’s, the development contract must be hooked up to your development quote. The reason is is as a result of in case you simply signal that development contract or quote, you’re locked into that man, so he can lien you for properties. You’ve purchased out that job with them, so the bid is to stipulate prices for what’s being executed. The contract is ready as much as the way you facilitate that.
Inside your development contract when we’ve got him them signal that, and we don’t flex on that, they must signal it. It talks about begin dates, completion dates. It talks about change orders, how the change orders are dealt with. For instance, you can not do verbal change orders with us as a result of that all the time goes dangerous. A contractor will say, “Hey, we opened this wall. It’s going to be about 1,000 bucks to repair the framing inside.” You get the invoice, it’s 1,800 and so they’re going, “Properly, I stated it was about 1,000,” and you then get hit for the 1,800.
In our development contract, it says, “It’s a must to electronic mail it with a damaged down bid. It needs to be signed by us,” and provides it again to them. The contract actually protects you and your funding in opposition to a 3rd get together that may mess it up at that time. Additionally, it tells them how they’re going to receives a commission, so it’s not all simply to guard you. It additionally protects them. Like, “Hey, in case you get this executed on this timeframe, we’re going to shut you out inside 24 hours, and that you simply’ll be paid in full.” It clearly defines the whole lot, and it permits in your venture, when it’s going ahead, to not get spun uncontrolled.
We estimate it two to 3 occasions. We then evaluate our bid. We establish which gadgets are heavy, or not heavy, or which are possibly outdoors of our price range. We then discuss to the contractor, see what gadgets we are able to pull out for our bundle methodology. Then we comply with the value, we signal the development contract from there, after which we give them their deposit.
Sometimes, we’re giving the final contractor totally different cost schedules to the place … It’s referenced on the development contract too. We’re going to present them 10% at first, 25% after demo, after which 25% from right here on, and it lists out their draw schedule from there. That’s actually our core course of. You purchase it, otherwise you contract it, you estimate it. You undergo the estimates. You determine what you’re over on and what you’re not on. We then plug in our personal bundle guys. We’ve got them signal a development contract, after which we put the plan in play at that time.

Tony:
You’ve bought this factor all the way down to, it’s like a science, James. I need to circle again to at least one factor that you simply talked about as a result of we didn’t contact on this within the first episode both. Why is it that you simply favor licensed contractors over possibly similar to a very expert handyman? I do know some flippers the place they virtually solely use handymen and issues like that to run all of their tasks and keep away from common contractors. What’s your tackle why one may be higher than the opposite?

James:
Properly, A, the very first thing is I misplaced all my cash once I was 24 years outdated as a result of I did a flip on time and supplies that turned … It went triple over and people had been expert labor guys. I realized lots, however I misplaced all my cash. It was the most costly school I ever went to. There’s nothing unsuitable with hiring a talented laborer, however the expert laborer or carpenter ought to nonetheless be licensed. They must be licensed and bonded.
The explanation that I’d don’t rent non-licensed and bonded folks is as a result of that’s the principles and laws in our state. I’ve had folks … When L&I drops by a job website, and in the event that they examine their license and so they’re not licensed, not solely is the contractor going to get a tremendous, however you’re going to get a tremendous in addition to the constructing proprietor, so that you must examine together with your native state and laws at that time to determine what the method is.
The opposite purpose is I prefer to know my price. If I’m doing time and supplies for a talented laborer, if he’s having a nasty day or a gradual day, or let’s say he saved operating out of supplies and he’s bought to drive to Dwelling Depot 10 occasions, that might be an issue. I’m going to must pay for that on my hourly fee and it will probably trigger me probably not to know my numbers. As traders, it’s our accountability to hedge in opposition to the funding, and the one manner for me to do this is off fastened pricing, saying, “Hey, you’re agreeing to do it for this quantity.” Then I can put it in my price range and I can transfer issues round, so we like to repair prices.
There’s nothing else unsuitable with having a handyman come out or a carpenter to come back do some extra gadgets too. You may really save some huge cash that manner, relatively than doing it the piecemeal. I personally solely use fastened bids. I don’t like time and supplies, nevertheless it additionally does come all the way down to what sort of venture you’re additionally doing. If it’s a rental property and also you’re simply doing a beauty the place you’re altering out door handles, lighting fixtures, plumbing fixtures, possibly performing some trim restore, that’s a handyman sort of job. Whereas, lots of ones, we’re taking these items all the best way all the way down to studs and I can’t have one to 2 guys placing that entire home collectively. It would take eternally and my debt prices will get uncontrolled.

Tony:
Yeah. Properly thanks for including that clarification, James. I like the caveat you place on the finish that it is determined by the scope of the job that you simply’re doing as a result of that undoubtedly does play a serious function.
One different follow-up query for me is, so you will have this contract, do you ever discover, or have you ever ever had an expertise the place possibly a contractor refused to signal or possibly ghosted you after you gave him his contract? I ask this query as a result of it occurred to me just a few months in the past, the place I discovered this contractor that I appreciated. I gave him the contract and in there, there was one line that stated if he missed the deadline greater than two weeks, I might cost him, I don’t know, $50 a day or one thing like that. He was like, “Hey, I’m probably not positive about this,” and no matter we had been speaking. He simply stopped responding to me all collectively. Have you ever ever had that? In that case, how do you deal with these form of conditions?

James:
Properly, I might say you dodged a bullet as a result of if the man was … Which means he was already telling you he was going to be late.

Tony:
Yeah. Truthful sufficient.

James:
What I all the time do is I do have a penalty clause in there, after which we’ve got, hey, that you will … We cost much more. It’s 150 to $200 a day as a result of our mortgage … I imply, it is determined by the dimensions of the venture and the mortgage steadiness. What we additionally do is put a bonus in there for them. In the event that they’re accomplished early, they’re getting that very same credit score again. If I’m saying, “You will have 4 months to do that venture, and $200 a day in case you’re late,” but when they get it executed early, each day they’re executed early, they get the $200 bonus too.
I usually prefer to arrange my day by day fee cost is what my per diem mortgage foundation is as a result of then I’m simply giving … It’s no additional price to me. I’m saving on the onerous cash as a result of it’s debt price. It’s going to my contractor, which is nice. He’s getting a bonus. On the identical time, what’s truthful is truthful, and if I’m going to bonus him early, he must chip in from his penalties too.
Additionally in there, we’ve got a clause that does state what they’re not at fault for, and that’s essential. I clarify that paragraph to them. If it’s a allow subject, they get no days credited in opposition to them. We’ve got a bullet level of issues that say, “These won’t be counted within the days or delays.” We had so as to add in a pandemic half too. In the event that they’re out of supplies and so they present us with the receipt nevertheless it’s backordered two months, that’s not their fault. We’re not going to penalize them for it.
You simply must be sure that your contract is written very clearly. Sometimes, from my expertise, contractors don’t actually learn it, so I prefer to learn it again to them, saying, “Hey, that is what that is arrange for.” Majority of the time, by you providing that bonus, they’re so excited that they’re not going to care in regards to the delays both. Additionally too, you guys, in case you discover a good common contractor and so they’re doing a great job and so they’re a little bit bit late however they did the whole lot proper and so they had been working their tails off the entire time, don’t cost them that late price. Deal with these folks.
I don’t nickel and dime them on these late charges, however the place it does come into play is that if they’re not displaying up in any respect and if in case you have a battle, that turns into a invoice for them. You’re saying, “Hey, you’re 30 days late at $200 a day. That’s $6,000. What are we going to do about this?” It’s really a approach to separate from the contractor too. In the event that they’re pushing again on that … It’s a really affordable request. Don’t bend. Simply be logical and determine what’s a typical floor to get to an settlement to have that in there.

Ashley:
This jogs my memory of a rental lease, going by the lease settlement and what you will have in there and sticking to it, since you each signed the settlement, and utilizing that in order that there isn’t any controversy down the highway. Like your clause, I like that you’ve issues that they’re not answerable for, these what ifs. If there’s a allow subject, you’re not going to cost them, in order that there’s not a difficulty going ahead, issues like that.
As soon as the venture is full, do you do a closing walkthrough with the contractors? Do you undergo and blue tape? What does that appear to be?

James:
Yeah. After we’ve scheduled the whole lot out and we undergo, we get the venture executed, the steps that we all the time take is … We’re actually huge on this as a result of, particularly on a flip, the very last thing you need to do is spend time engaged on this venture for 3, 4, or 5 months, after which rush the tip to the place there’s a bunch of little, small element. You’ve already spent 99.9% of the cash, and since you didn’t spend that final 1 to 2%, the home isn’t that marketable or it simply has a bizarre feeling to it.
We spend lots of time on that final two weeks, punching out the home and checking for high quality gadgets. What we all the time do is, inside two weeks of being executed, we begin blue taping it. We do our first prelim blue tape, the place it’s simply getting on the larger issues that we’re seeing by. Then as soon as it will get to virtually the completion date, we’ve got a development clear executed as a result of in case you’re additionally blue taping when the home is soiled, it’s nonetheless not fairly pretty much as good. You’re lacking issues. It feels bizarre. We’ve got a development staff executed after which we do one other blue tape.
On the identical time, we use an app that’s tremendous useful on the Apple Retailer. It’s referred to as Punchlists with an S the tip. It makes it very, very straightforward that we undergo, and never solely blue taping it, as a result of contractors typically will simply straight take your blue tape off and throw it on the bottom. They’re like, “Properly, possibly they gained’t discover it later.” We take a photograph. It goes into this report on this app, after which you’ll be able to write what must be executed subsequent to it. Then it prints a PDF on the finish that we go away on the counter for our contractors saying, “Hey, right here’s all of the gadgets. Right here’s an image of it. That is what must be executed. Preliminary it while you’re executed,” after which we’ve got a clear report. We do our walkthrough, undergo that report and ensure the whole lot’s been executed.
Concurrently that’s happening, we all the time do pre-inspections earlier than we go to promote or lease. The explanation we additionally do it earlier than leasing is as soon as a tenant strikes in, if one thing breaks instantly that was possibly one thing simply fixable, it makes it actually onerous to schedule and get again there, and so it’s simply not very environment friendly. The pre-inspection, we do our personal punch listing, however then the pre-inspection then punches out much more gadgets to the place we can provide to the contractor. We need to have each these lists as a result of we don’t subject closing cost till all are executed and all permits are signed off.

Ashley:
Who’s doing that pre-inspection? Are you really hiring a licensed inspector, or is that any individual in-house, or is that you simply that’s going by and doing that?

James:
No. You all the time need to rent a 3rd get together for that as a result of, particularly in case you’re promoting a flip or any property, you bought to do a Kind 17, you bought to reveal. What I love to do is have, have a 3rd get together are available in, as a result of particularly in case you’re promoting too, lots of consumers are going to assume, “Properly, you flipped it, so the whole lot’s proper on the home.” That’s not true. Typically, you’re not doing issues sure methods on a flip as a result of that’s what you don’t want … You don’t technically have to do this to promote the home. You’re simply going with a distinct plan.
Having a 3rd get together’s going to cut back your legal responsibility. It’s additionally going to place a brand new, recent pair of eyes on it. Then additionally, you’ll be able to present that to your subsequent purchaser or tenant, say, “Hey, we did have a 3rd get together examine this property.” It reveals that you simply, as an investor, has taken time and care and that you simply really care about your venture, relatively than simply winging it. Not solely does it offer you a very good punch listing, it additionally makes your finish purchaser or tenant really feel higher about you as an individual too,

Ashley:
And holds your contractors accountable, so if there’s one thing that was within the scope of labor that possibly an outlet isn’t working or one thing even small like that, you’ll be able to return to them and have them repair that earlier than you really listing it.

James:
Yeah. That’s a fantastic level as a result of a contractor’s relationship’s like several relationship. Should you’re courting any individual otherwise you’re married to any individual, you could possibly inform that particular person, all day lengthy, the identical factor and simply due to how lengthy you’ve been collectively, you’re like, “No. No, you’re unsuitable. You’re unsuitable.”
Then this random particular person goes, “Oh, right here’s this truth. Look. See, that is proper.” It locations a mediator between you and your contractor. After a while, you’ll be able to inform them till you’re blue within the face, and so they’ll argue with you and do all these items, however then when you will have the third get together are available in, they’re like, “Okay, tremendous. I’ll repair it,” so it helps issues transfer ahead too. They’re form of like a counselor for the connection together with your contractor as effectively.

Ashley:
Or in case you’re like somebody like Tony that doesn’t know something about development, you don’t even know learn how to examine if issues are executed proper or unsuitable, then you will have the inspector are available in.

Tony:
Significantly. Yeah.

Ashley:
Properly, James, is there the rest you wished so as to add on to finalizing the walkthrough with the contractor and simply closing up the property with the rehab?

James:
No. I believe it’s simply the perfect factor you are able to do … As a result of all these processes are nice in idea. It’s intimidating while you’re a more moderen investor and persons are telling you all these items. You’re like, “Okay. I’m going to do all these processes.” They’re actually good steps to implement in, however nonetheless not realizing, the unknown’s the scary half. Actually, what I want I might have executed, it might have saved me some huge cash, is de facto go discover that investor in your market that you may shadow, that you may work with. Supply them providers.
I’ve folks attain out to me on a regular basis, say, “Hey …” I had any individual that labored for me for a yr and so they had been actually good at making CAD and as-builts. They’re like, “Hey, we need to study development. We need to purchase our first rental property. We need to study residence buildings.” We made a deal to the place she bought to go examine on all of our websites. She would go round, take photographs of all of our tasks as soon as every week for us. She would get to study and see issues as she was doing that. Additionally, she would do as-builts for us so she might see about ground plans and issues shifting round.
She did this totally free for us, so long as we gave her entry to info, and now she owns like … She doesn’t do that totally free anymore for us. She now has it figured it out. We really employed her now to do them. She provided service and she or he bought to study a lot. It’s one factor, like you could possibly learn a e book and go, “Okay. That’s a fantastic idea,” nevertheless it’s about doing, and placing that movement in play.
Should you’re actually new and you actually need to study, I might say shadow an investor. Shadow a common contractor and actually study what they’re doing as a result of the extra you perceive, the much less you’re going to get taken benefit of. The extra you’re going to grasp your margins. You’re going to additionally perceive learn how to get issues executed, or the price of implementing the correct plan. Like we talked about in that final present, is inventing that margin. When the market’s onerous and it’s not straightforward to discover a deal, you’ve bought to place the correct plan in there to make a return. By realizing these prices, the extra you recognize, the extra you’ll be able to dictate, the extra you’ll be able to management, and the higher plan you’ll be able to put in play.

Ashley:
James, I believe once I was on the market within the fall, you had any individual that had been performing some digital give you the results you want totally free. They had been really shifting to Seattle to come back give you the results you want.

James:
Yeah. That was for wholesaling. He reached out to me. This man, I used to be hyper-impressed by him as a result of he not solely reached out to me 5 occasions on social media, and I didn’t reply, he then referred to as my workplace 4 occasions. Then he’s like, “I simply need to learn to wholesale. I simply began doing it. I’ll make cellphone requires you in case you educate us.” Then he ended up shifting out to Washington and yesterday, we inked his first deal.

Ashley:
That’s superior.

James:
His first deal bought executed.

Tony:
That’s superb.

Ashley:
Yeah. I used to be really nervous about bringing it up. You had been going to be like, “Oh, really, that didn’t work out,” so I’m glad it’s understanding. That’s good.

James:
His first deal. We simply signed and rented a home in Lynnwood, and it’s a great one too. It’s a very good purchase. Yeah, supply your self of service. Don’t underrate … Everybody needs to get espresso. Like, “Oh, can I purchase you a cup of espresso?” Or, “Can I take you to lunch?” Persons are busy. There’s entrepreneurs … The folks you need to comply with will probably be busy as a result of they’re doing work. Supply them one thing that helps alleviate stress factors for them, and they’re going to give it proper again. They bought to select and select who they’ll spend time with, and in case you’re on a staff, you’ll be able to study lots of info totally free in case you’re working with the correct traders.
Additionally, watch BiggerPockets. There’s lots of actually good info on there. The extra you watch, the extra you hear, the extra repetition, the extra you hear folks implementing, after which not solely simply listening to about how they’re doing it proper, however learn the way they’re doing it unsuitable. I’ve hundreds of nightmare transform tales. These are the tales you need to take heed to since you need to not step in that factor or try this factor, and it’ll prevent lots of time down the highway.

Tony:
James, possibly we’ll convey you again for a 3rd time and simply have you ever discuss all of the issues which have gone unsuitable for you. Which may make for a great episode.

James:
Oh, it’ll blow your minds on the stuff I’ve seen. Everyone thinks, they’re like, “Oh, effectively, you’re simply this investor that does all these tasks so you are able to do no matter you need. You get the pricing.” It’s the exact opposite. That simply means I’m uncovered to far more kinds of tasks, which suggests far more issues and far more folks. I’ve seen the weirdest, craziest stuff. I’ve employed contractors that had faux identities and pretend companies, like professional faux folks and so they disappear together with your cash. Watch out. It’s a loopy enterprise.

Tony:
Properly, James, thanks a lot for bringing a lot worth at present, brother. This was, actually, one in all my most favourite episodes. Partially since you clearly offered a ton of worth, however secondarily, as a result of I’m attempting to learn to flip extra effectively myself, so I very selfishly requested lots of questions that I’ve been considering of. James, if folks need to get in contact with you, they need to study extra about you and what’s happening, the place can they get in contact with you?

James:
Come discover us. My Instagram might be one of the best ways for you guys to seek out free development, see what we’re doing, see the loopy issues we do. That’s jdainflips. Then additionally, on our YouTube channel, ProjectRE, we launch a ton of actually deep dive, particular issues on development that will help you guys out and hold your plans going ahead.

Ashley:
Properly, James, thanks a lot for approaching. You guys, comply with James and I on Instagram, and take a look at his YouTube channel to comply with my first flip, as I’m flipping my first property in Seattle. Thanks guys a lot for listening. I’m Ashley @wealthfromrentals. He’s Tony @tonyjrobinson on Instagram. We’ll be again on Saturday with one other visitor. We’re all executed with James Dainard. Try what’s new on biggerpockets.com.