Discovering Contractors, Renovation Crimson Flags, and Estimating Rehab Prices

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 along with your workforce members. If a contractor is making an attempt to cost you for that or they received’t provide you with pricing breakdown, most likely not your guys. That’s an indication, keep clear from that individual. You want to work off information.

Ashley:
My title 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 deliver you the tales, the motivation, the inspiration to get you began as an actual property investor, or preserve you going when you really feel like stopping. Ash, what’s going on at the moment?

Ashley:
In the present day, we’re doing half two of rehab and building value collection with James Dainard. In the event 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 every of my favourite episodes we’ve performed thus far. We’ve had some wonderful company, however James actually gave a grasp class on estimating your rehab prices, on constructing your workforce, discover contractors, discover common contractors, vet them, put your scope of labor collectively, give pricing estimates. Simply all the things you could learn about step one of getting your rehab performed.
There’s truly three phases that we’re going to speak about. Part one was all the things 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 the moment’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 truly shut on the deal.

Ashley:
James, welcome again to the present.

James:
Thanks once more for having me. I’m stunned I acquired invited again.

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

James:
That’s often my position. I’m the backup plan.

Ashley:
Yeah. Okay, properly, 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 deliver? Who do you deliver 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 to write a really sturdy provide to safe that whole lot. Anytime that we’re going to those preliminary walkthroughs, we need to be sure that we’re ready. We will write a no inspection provide after which actually get aggressive to lock it down.
The issues that we deliver to each walkthrough that I am going to is, the very first thing is a digital camera. Doc what you’re seeing as a result of that’s going to essentially … You’ll be able to undergo a home, and as you look by way of photographs, you may revisit your ground plans you would possibly want to repair. You’ll be able to notate, as you’re doing all your funds, what supplies you may preserve and what you could do away with for plans. We all the time deliver a digital camera. We deliver a walkthrough sheet that we created internally for our firm and for our mission managers, and that simply actually lists out, itemize each little piece that must be performed in that mission. It begins with roof, home windows, entrance door, inside, so it’s all documented out.
The rationale I nonetheless, even to at the present time, use that sheet is as a result of it’s very easy to overlook one thing as you’re strolling by way of a home. Even after we did our walkthrough, Ashley, I went by way of 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 verify. I open the closet and positive sufficient, there was ducting and it was going to value us two grand extra in transferring issues.
By having that sheet, if I’d have gone by way of my sheet correctly, I can say, “HVAC and format. Do I would like to alter any of my HVAC route?” and lay it down. We now have 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 change, and it provides us a template to present {that a} good format. Along with, by writing in all these things, 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 could possibly 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 more durable to do this if I am going, “Wait. Did I’ve 10 home windows or 14 home windows? I can’t bear in mind.” A whole lot of occasions, the contractor’s not going to notate that, so it provides me a great blueprint, as I’m not solely simply creating my funds, however double-checking the contractor’s bids down the highway.
I additionally deliver a flashlight all over the place as a result of you could stick your head in areas which might be darkish. You want to verify your crawlspaces. You want to verify your attics. I wish to deliver a tape measure as properly as a result of when 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 area to see if it truly even matches, so all these stuff you need to deliver with you.
In the event you’re a more recent investor, and that is your first buy, and also you haven’t performed this earlier than, what I used to do after I was model new within the enterprise is I’d deliver a house inspector with me simply to notate. You don’t must pay for a full inspection report. Principally, it’s like a walkthrough inspection the place it’s only a bullet record somewhat than a full report as a result of they’re going that can assist you catch different issues that you could be miss.
What I believe it’s best to all the time deliver with you is your dealer, who’s going to be promoting the home for you down the highway, to allow them to provide you with suggestions on what makes it extra marketable and likewise, a common contractor to come back by way of to get your estimate on the home. When you’ve been doing this for some time … Once more, we’ve performed like over 3,000 properties, we will stroll by way of, and notate, and know our prices fairly properly, so we don’t deliver 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 will’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 stable, no BS provide at that time.

Tony:
James, I need to dig in just a little bit. You stated you may 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, when you can provide us extra perception?

James:
That’s an incredible query. Our funds sheet, how we created it, it’s on Excel format to the place we have now to enter. We now have it damaged down, like we talked about within the final episode, by labor and materials prices, and so we will slim our funds method down. The walkthrough sheet, as a result of if we’re doing our walkthrough with, let’s say it’s an off-market deal, non-public sale and I’m strolling round with my laptop computer making an attempt to fill this entire factor in, it could actually take some time and it will get just a little 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, after we get it again to the workplace, I can enter it into my funds sheet and refine all the things. Additionally, what I love to do is it provides me a common … It’s mainly my bullet level record with several types of gadgets we have to do. As I’m making an attempt to make the deal work or invent that return by placing the precise plan in play, I’ve the counts, I’ve the photographs. I’ve all my particulars of what I have to do, possibly how outdated the furnace is, what number of doorways I have to put in. Then I can go to my comps after I’m at my workplace and use that sheet to reference what the supplies are within the comps, after which begin taking part in round with that plan.
The aim of the walkthrough sheet is to be environment friendly. You could be fast. It helps you not miss something and likewise, it provides you the bodily counts of all the things. We’re writing down door counts, window counts, giant kitchen, small kitchen. We’re making all these notes on that sheet.

Ashley:
Yeah. I truly simply ran and disappeared for a minute to really get the sheet that I’ve from after I did the walkthrough of James’ and I flip. On it, it goes, I’ll provide you with 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 way of 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 1,000,000 notes on to right here, on to this sheet, however there have been some issues that you just knew from studying and doing totally different walkthroughs that helped you truly go and do the walkthrough precisely and assist along 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 just don’t have to be an electrician to know, however there’s issues you may study on YouTube or from contractors that may provide help to even fine-tune your funds 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’ll be able to visually see these just a little bit extra within the video, however yeah, there’s all these little tips and ideas that we’ve realized over time. Then a part of how we’ve realized them is by me shedding cash. I realized plenty of these things early. Our purpose is to ensure that individuals don’t undergo those self same laborious classes as us. I’m simply type 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 way of a home, I’d pop a plate off an outlet if it’s a home in-built a sure period. That’s additionally why I deliver the tax file to the walkthrough. I even have my tax file as a result of it’s telling me sq. footage, it’s telling me 12 months constructed. Primarily based on the 12 months 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 funds. If it’s within the Pacific Northwest, the properties of the Nineteen 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, meaning it’s usually not grounded, which goes to additionally usually imply we want 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 method for them to self-ground or get the reverse polarity out of there. That’s often 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 would be able to see that may let you know whether or not your mechanicals are outdated, or when you go to your plumbing. You probably have three valves, plenty 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 type of set up. There’s all these little hints and indicators that you would be able to notate.
That’s additionally why you need to deliver your digital camera. As a result of as you’re taking pictures digital camera photos, you may go, “Wait. Did I would like 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 often the wiring’s going to be of latest code.
If I am going right into a kitchen and there’s no retailers within the kitchen backsplash, meaning it was in-built outdated code, at that time. It’s not grounded, there’s no GFCI. As you do your record, 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. Meaning your HVAC and ducting system’s most likely going to have to be up to date when you’re not changing or altering out to grease. There’s all this stuff that you would be able to search for.

Tony:
James, your wealth of information on the subject of what to search for … I can inform that you just’ve performed this. I imply, you do something as a result of talked about within the first episode that you just’ve been concerned in 3,000 totally different transactions. Once you do something 3,000 occasions, you’re going to understand 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 all the things 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, plenty of this information he gained was by way of trial and error. It’s not essentially that you’ve got to have the ability to take a look at piping and know whether or not it’s galvanized, another materials. What James is making an attempt 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 when you don’t have the identical degree of information and knowledge James has.
I simply need to recap, identical to actually rapidly, James, a few of the stuff you stated to deliver with you. You stated a digital camera, your walkthrough sheet, flashlight, tape measure. Then from a individuals facet, when you can, possibly deliver 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. Had been you paying that GC for his time? Or what sort of agreements did you guys have for her or him to observe 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 making an attempt to get the work.
If some man requested me for $200 to go stroll it, A, I’d take a look at what’s happening in my very own enterprise practices, or am I driving individuals nuts at that time? Then possibly I would like to repair that. Or B, that man’s going to nickel and dime me over all the things. 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 precise individual that might match inside my demographic.
Everyone on my workforce, 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 mission performed, however I undoubtedly wouldn’t pay. A whole lot of causes I do know plenty of these things, once more, is I did plenty of issues incorrect in my early 20s. I’d exit and discover the deal first, purchase it, after which attempt to determine it out, and by being very, very inefficient … Really, one of the best factor I ever realized in building was shedding some huge cash on a home. As a result of I used to be there rather a lot and I acquired to see.
On the very finish, I used to be like, “Okay. Properly, that was a really costly faculty for flipping properties.” I did all the things incorrect on that home that I might have probably performed incorrect, and I needed to create my system off of that. Like, “Okay. Don’t do it this fashion. Don’t do it this fashion. Don’t do it this fashion,” and that’s the way you study. In the event you don’t know this stuff, simply rent the precise workforce members. Rent the precise contractor, work with the precise dealer that basically understands what you are promoting. They can assist you facilitate your plan, after which that’s the place you may really feel much more comfy at your walkthroughs.

Ashley:
James, going again to the piece about paying a contractor to come back out for a walkthrough, do you suppose 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 could 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 suppose it’s a unique state of affairs then that they need to offer or could possibly be providing to pay a contractor?

James:
If one in every of my purchasers asks if they need to try this, I’d inform them a tough no on that. I simply is likely to be going on the market to make 200 bucks for an hour or $300. I believe you’re speaking to the incorrect individuals 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 acquired a great margin building job I can do,” at that time.
They need to need to come on the market. Like, “Oh, you want plenty of assist? That’s okay. I can assist you.” I’d suppose 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’re additionally offering earnings for individuals. It’s not simply in regards to the contractor. In the event you’re working with a dealer … Because of this it’s best to all the time pay your brokers. Don’t attempt to get one of the best deal in your fee. Pay them what they’re imagined to receives a commission, however set expectations for them that can assist you. As a part of our brokerage, we are going to deliver them out generals in the event that they want it as a result of we need to ensure that they’re doing properly, and that’s offered in our service.
You probably have the precise workforce behind you, you’re not going to want to pay that man. Anyone that’s creating income off of what you are promoting, make them work, make them provide help to, and so they’ll deliver out further individuals. If one in every of my purchasers 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 residence inspectors. Or he says, “I actually need this deal, however I don’t have a common,” we’re going to refer on individuals to exit, and so they’ll get an estimate, and so they’re not going to cost.
You don’t have to pay the contractor, however the individuals that you’re paying or which might be getting cash off you, put them to work. They’ll have the opportunity that can assist you get the individuals on the market as properly. That’s an issue that the dealer, plenty of occasions, has to unravel. The shopper needs to purchase this, however they don’t know do it, to allow them to assist them do it. You’ll be able to earn your fee at that time. Use your workforce, after which it’s best to be capable to get them out. Don’t let individuals cost you for that stuff.
I’d say, as a substitute of paying a contractor to come back out and go to your job, quit your time and go provide to intern for a developer, or a builder, or a flipper to the place you may assist them by simply going to the location and seeing what’s happening. You’ll find yourself studying far more that method, 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 rather a lot on right here about how, if you’re a brand new investor, you may’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 precise contractor in the event that they’re not going to come back out and take a look at tasks for you at no cost.

James:
Yeah. There’s all these indicators that you are able to do as you’re working along with your workforce members. If a contractor is making an attempt to cost you for that or they received’t provide you with pricing breakdown, most likely not your guys. That’s an indication, keep clear from that individual. You want to work off information. If a dealer can’t let you know the place the value-add is, most likely not the precise dealer. It doesn’t imply they’re a foul dealer, however they’re not an investor dealer. As you’re interviewing your workforce, search for these indicators to verify they match in your bench. If it doesn’t, transfer on to the subsequent individual. Preserve calling, preserve checking for these individuals.

Tony:
James, you’ve given us some wonderful info by way of 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 truly strolling by way of the property. The final and ultimate section right here is, what occurs after you do your evaluation, you stroll the property, all the things appears to be like good? Now you bought it beneath 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 truly going to deliver 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. After I got here out,

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

Ashley:
What you’re slowly doing … After I got here out and we appeared on the first property, we acquired the property beneath contract. What occurs from there? That’s the piece that you just 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 way of that course of?

James:
After we safe the deal and we prepare for closing, the subsequent steps that we all the time take is we’re doing one final ultimate revision of our funds 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 funds. 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 incorrect foot.
The second factor that’s necessary about ensuring your funds’s revised appropriately is, no less than after I do it and I do know plenty of traders do, is that they’re getting the development mortgage with their laborious cash or tender cash lenders. In case your funds’s incorrect, it could actually trigger liquidity issues. In the event you’re 20% off in your funds and also you had that rolled into your mortgage, meaning you’re going to must give you that further capital out-of-pocket, which may mess up your returns down the highway, so that you need to be sure that funds is finalized and ready that method.
Then from there, we all the time find yourself getting no less than two quotes from generals. We safe the deal. We now have our finalized funds. We now have our finalized specs then chosen as a result of within the ultimate budgeting, we’re going by way of 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 ensure 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 verify 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 that their standing is lively and able to go. We be sure that 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 downside with L&I within the metropolis later. Then from there, we then have the contractor signal a building contract, or the subcontractor as properly. That may be very essentially necessary for any investor to do this. I realized that the laborious method, once more. Most of these things that I preach is as a result of I misplaced cash doing it the opposite method.
A contractor estimate is an estimate. You’ll be able to signal that and sure, it’s a contract, however what it doesn’t do is define common insurance policies, procedures, and the way issues have to be accomplished, and inside timeframes, which is that’s, the development contract must be connected to your building quote. The reason is is as a result of when you simply signal that building 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 performed. The contract is about as much as the way you facilitate that.
Inside your building contract when we have now 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 then you definately get hit for the 1,800.
In our building contract, it says, “It’s important 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 towards a 3rd occasion 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, when you get this performed on this timeframe, we’re going to shut you out inside 24 hours, and that you just’ll be paid in full.” It clearly defines all the things, and it permits in your mission, when it’s going ahead, to not get spun uncontrolled.
We estimate it two to a few occasions. We then evaluation our bid. We establish which gadgets are heavy, or not heavy, or which might be possibly outdoors of our funds. We then discuss to the contractor, see what gadgets we will 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.
Usually, 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 now have them signal a building contract, after which we put the plan in play at that time.

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

James:
Properly, A, the very first thing is I misplaced all my cash after 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 rather a lot, however I misplaced all my cash. It was the costliest faculty I ever went to. There’s nothing incorrect with hiring a talented laborer, however the expert laborer or carpenter ought to nonetheless be licensed. They have to be licensed and bonded.
The rationale that I’d don’t rent non-licensed and bonded individuals is as a result of that’s the foundations and rules in our state. I’ve had individuals … When L&I drops by a job web site, and in the event that they verify their license and so they’re not licensed, not solely is the contractor going to get a high quality, however you’re going to get a high quality in addition to the constructing proprietor, so you could verify along with your native state and rules at that time to determine what the method is.
The opposite purpose is I wish to know my value. If I’m doing time and supplies for a talented laborer, if he’s having a foul day or a gradual day, or let’s say he stored working out of supplies and he’s acquired to drive to Dwelling Depot 10 occasions, that could possibly be an issue. I’m going to must pay for that on my hourly charge and it could actually trigger me probably not to know my numbers. As traders, it’s our duty to hedge towards the funding, and the one method for me to do this is off mounted pricing, saying, “Hey, you’re agreeing to do it for this quantity.” Then I can put it in my funds and I can transfer issues round, so we like to repair prices.
There’s nothing else incorrect with having a handyman come out or a carpenter to come back do some further gadgets too. You’ll be able to truly save some huge cash that method, somewhat than doing it the piecemeal. I personally solely use mounted bids. I don’t like time and supplies, nevertheless it additionally does come right down to what sort of mission 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, plenty of ones, we’re taking this stuff all the best way right down to studs and I can’t have one to 2 guys placing that entire home collectively. It’ll take perpetually and my debt prices will get uncontrolled.

Tony:
Yeah. Properly thanks for including that clarification, James. I really like the caveat you set on the finish that it will depend on the scope of the job that you just’re doing as a result of that undoubtedly does play a significant position.
One different follow-up query for me is, so you may 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 a number of months in the past, the place I discovered this contractor that I favored. I gave him the contract and in there, there was one line that stated if he missed the deadline greater than two weeks, I’d 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? If that’s the case, how do you deal with these type of conditions?

James:
Properly, I’d say you dodged a bullet as a result of if the man was … Meaning 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 have now, hey, that you will … We cost much more. It’s 150 to $200 a day as a result of our mortgage … I imply, it will depend on the scale of the mission 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 might have 4 months to do that mission, and $200 a day when you’re late,” but when they get it performed early, daily they’re performed early, they get the $200 bonus too.
I usually wish to arrange my each day charge cost is what my per diem mortgage foundation is as a result of then I’m simply giving … It’s no further value to me. I’m saving on the laborious cash as a result of it’s debt value. 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 have now 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 problem, they get no days credited towards them. We now have a bullet level of issues that say, “These is not going to 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 ensure that your contract is written very clearly. Usually, from my expertise, contractors don’t actually learn it, so I wish 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, when you discover a good common contractor and so they’re doing a great job and so they’re just a little bit late however they did all the things proper and so they had been working their tails off the entire time, don’t cost them that late charge. Maintain these individuals.
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 exhibiting up in any respect and when you’ve got 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 truly a technique 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 may 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 really like that you’ve got issues that they’re not liable for, these what ifs. If there’s a allow problem, you’re not going to cost them, in order that there’s not a difficulty going ahead, issues like that.
As soon as the mission is full, do you do a ultimate walkthrough with the contractors? Do you undergo and blue tape? What does that appear like?

James:
Yeah. After we’ve scheduled all the things out and we undergo, we get the mission performed, the steps that we all the time take is … We’re actually massive on this as a result of, particularly on a flip, the very last thing you need to do is spend time engaged on this mission for 3, 4, or 5 months, after which rush the top 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 plenty 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 performed, 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 way of. Then as soon as it will get to nearly the completion date, we have now a building clear performed as a result of when 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 now have a building workforce performed 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 top. It makes it very, very simple 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 received’t discover it later.” We take a photograph. It goes into this report on this app, after which you may write what must be performed 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 performed. Preliminary it while you’re performed,” after which we have now a clear report. We do our walkthrough, undergo that report and ensure all the things’s been performed.
Concurrently that’s happening, we all the time do pre-inspections earlier than we go to promote or lease. The rationale 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 laborious to schedule and get again there, and so it’s simply not very environment friendly. The pre-inspection, we do our personal punch record, 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 problem ultimate cost till all are performed and all permits are signed off.

Ashley:
Who’s doing that pre-inspection? Are you truly hiring a licensed inspector, or is that someone in-house, or is that you just that’s going by way of and doing that?

James:
No. You all the time need to rent a 3rd occasion for that as a result of, particularly when 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 occasion are available in, as a result of particularly when you’re promoting too, plenty of patrons are going to suppose, “Properly, you flipped it, so all the things’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 unique plan.
Having a 3rd occasion’s going to cut back your legal responsibility. It’s additionally going to place a brand new, contemporary pair of eyes on it. Then additionally, you may present that to your subsequent purchaser or tenant, say, “Hey, we did have a 3rd occasion examine this property.” It reveals that you just, as an investor, has taken time and care and that you just truly care about your mission, somewhat than simply winging it. Not solely does it provide you with a very good punch record, 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 may return to them and have them repair that earlier than you truly record it.

James:
Yeah. That’s an incredible level as a result of a contractor’s relationship’s like several relationship. In the event you’re courting someone otherwise you’re married to someone, you could possibly inform that individual, all day lengthy, the identical factor and simply due to how lengthy you’ve been collectively, you’re like, “No. No, you’re incorrect. You’re incorrect.”
Then this random individual goes, “Oh, right here’s this reality. Look. See, that is proper.” It locations a mediator between you and your contractor. After a while, you may inform them till you’re blue within the face, and so they’ll argue with you and do all this stuff, however then when you may have the third occasion are available in, they’re like, “Okay, high quality. I’ll repair it,” so it helps issues transfer ahead too. They’re type of like a counselor for the connection along with your contractor as properly.

Ashley:
Or when you’re like somebody like Tony that doesn’t know something about building, you don’t even know verify if issues are performed proper or incorrect, then you may have the inspector are available in.

Tony:
Severely. Yeah.

Ashley:
Properly, James, is there anything 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 one of the best 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 recent investor and persons are telling you all this stuff. You’re like, “Okay. I’m going to do all these processes.” They’re actually good steps to implement in, however nonetheless not understanding, the unknown’s the scary half. Actually, what I want I’d have performed, it could have saved me some huge cash, is actually go discover that investor in your market that you would be able to shadow, that you would be able to work with. Provide them providers.
I’ve individuals attain out to me on a regular basis, say, “Hey …” I had someone that labored for me for a 12 months and so they had been actually good at making CAD and as-builts. They’re like, “Hey, we need to study building. We need to purchase our first rental property. We need to study condo buildings.” We made a deal to the place she acquired to go verify 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 transferring round.
She did this at no cost for us, so long as we gave her entry to info, and now she owns like … She doesn’t do that at no cost anymore for us. She now has it figured it out. We truly employed her now to do them. She provided service and he or she acquired to study a lot. It’s one factor, like you could possibly learn a ebook and go, “Okay. That’s an incredible idea,” nevertheless it’s about doing, and placing that movement in play.
In the event you’re actually new and you actually need to study, I’d 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 get issues performed, or the price of implementing the precise plan. Like we talked about in that final present, is inventing that margin. When the market’s laborious and it’s not simple to discover a deal, you’ve acquired to place the precise plan in there to make a return. By understanding these prices, the extra you recognize, the extra you may dictate, the extra you may management, and the higher plan you may put in play.

Ashley:
James, I believe after I was on the market within the fall, you had someone that had been performing some digital give you the results you want at no cost. They had been truly transferring 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 discover ways to wholesale. I simply began doing it. I’ll make cellphone requires you when you educate us.” Then he ended up transferring out to Washington and yesterday, we inked his first deal.

Ashley:
That’s superior.

James:
His first deal acquired performed.

Tony:
That’s wonderful.

Ashley:
Yeah. I used to be truly apprehensive about bringing it up. You had been going to be like, “Oh, truly, 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, provide 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?” Individuals are busy. There’s entrepreneurs … The individuals you need to observe will probably be busy as a result of they’re doing work. Provide them one thing that helps alleviate stress factors for them, and they’re going to give it proper again. They acquired to choose and select who they’ll spend time with, and when you’re on a workforce, you may study plenty of info at no cost when you’re working with the precise traders.
Additionally, watch BiggerPockets. There’s plenty of actually good info on there. The extra you watch, the extra you hear, the extra repetition, the extra you hear individuals implementing, after which not solely simply listening to about how they’re doing it proper, however learn how they’re doing it incorrect. 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 plenty of time down the highway.

Tony:
James, possibly we’ll deliver you again for a 3rd time and simply have you ever discuss all of the issues which have gone incorrect 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, properly, 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 varieties of tasks, which implies far more issues and far more individuals. I’ve seen the weirdest, craziest stuff. I’ve employed contractors that had faux identities and faux companies, like official faux individuals and so they disappear along with your cash. Watch out. It’s a loopy enterprise.

Tony:
Properly, James, thanks a lot for bringing a lot worth at the moment, brother. This was, actually, one in every of my most favourite episodes. Partially since you clearly offered a ton of worth, however secondarily, as a result of I’m making an attempt to discover ways to flip extra effectively myself, so I very selfishly requested plenty of questions that I’ve been pondering of. James, if individuals 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 building, 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 building that can assist you guys out and preserve your plans going ahead.

Ashley:
Properly, James, thanks a lot for approaching. You guys, observe James and I on Instagram, and take a look at his YouTube channel to observe 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 performed with James Dainard. Take a look at what’s new on biggerpockets.com.