Renovations Part 3: Contracting Renovation Work
Now that you know what work needs to be done, who should do it and you’ve received your bids, it’s time to select the business to do your renovation.
Whether it’s a handyman, a general contractor or an individual trade (electrician, plumber, etc), the most important thing you can do is set expectations.
- Scope
- Schedule (including any incentives for early completion or if the schedule is exceeded)
- What documentation is required for payment and final payment of completed work
Scope
Part 2 of this series dived into this category so we won’t touch on it here. The main point is that you need to make sure what you expect to be done and what the contractor plans to do are in alignment. As discussed in the previous post: generalize. quantify. specify.
Schedule
Time is money as the adage goes and that is true for both you and your contractor. Any kind of agreement you make needs to include the start and end dates so you can hold the contractor accountable and you can queue up your property manager (or yourself if you self-manage) to plan showings to rent out your property.
You can use several strategies to establish the timeline:
- Find out what the contractor believes is feasible
- Set a date for when you want work completed
If the completion date you’d like and the contractor provided schedule are vastly different, you can ask questions to find out if a quicker turnaround is possible. This may mean you could pay more for a contractor to dedicate more man power to your job. For smaller jobs, it may not be feasible or cost-effective since you can only fit so many people in a space. You can provide a financial incentive in the form of a bonus for every day the work is completed ahead of schedule. David Greene talks a lot about this in his books about Long Distance Real Estate Investing (specifically in Chapter 8) and his BRRRR book.
Conversely, it’s common practice to also set up a penalty for any time the contractor exceeds over the agreed upon schedule. With the contractor I worked with most recently, for example, our agreement included $50 a day for late completion. My rents are usually around $700 to 950 per unit so while I would rather have my place rented than have a credit for lateness, the liquidated damages for not being able to rent out my place while the renovation continues works out in my favor.
The more you can do to build trust and respect, the better your relationship with your general contractor and those trades that work beneath him will be. No one will be lining up to do work for you if you develop a reputation for paying late or not meeting your promises. Of course, the same goes for your contractor.
Documentation and Payment
If your property is local, the obvious thing to do is visit the place as different components of the renovations are completed. Billing for contracted work is generally by the week so your contract should include something about how you plan to confirm completed work by coming to the job site every Thursday and get a quick walk through from your contractor.
If your property is far away, you need to designate someone you trust locally to perform this task or require documentation as a condition of payment. This could mean a video chat tour with your contractor once a week or photos of work completed that are required before any payments can be released. I asked my contractor to send me photos labeled by our Scope of Work line items so I can confirm that all the tasks are completed accordingly.
Cash flow is key for contractors who have as much risk contracting with you as you do with them. Some may ask for a percentage of the renovation cost upfront so they can buy materials and pay trades. For smaller jobs, a plumber may expect to receive payment before he leaves the job site. If you are paying a general contractor, that cost will come out of his pocket if he has to wait until the end of the week to get your payment.
You can protect yourself by paying only one week’s advance payment and/or for the cost of materials (say drywall needed for the job, tile, flooring) or for some of the early work. This should be part of your agreement so it’s clearly laid out for both parties and you’ll have some recourse if you make a payment and the contractor does walk away from your money.
If you get photos or visit the job site and you are not satisfied with the work, make sure the contractor understands what you need to consider the work complete and set a deadline. This will keep everyone on track and not have unfinished items at the end of the job. You should return to the job site on the day of the deadline or when the contractor informs you the work is corrected to verify. Or for long-distance investing, your contractor should know that no payment will be made until you see photos or do a video chat to confirm the work is completed as agreed.
The other consideration is that if your contractor sends you the invoice and backup documentation, review it in 24 hours whether you have questions or if you’re ready to make a payment. Wire payments can take between three and five days to process for long distance investors. If you are bringing a check on site, it is in your court to honor the agreement and pay on the day of the week as planned. Paid contractors are happy contractors. The more you can do to build trust and respect, the better your relationship with your general contractor and those trades that work beneath him will be. No one will be lining up to do work for you if you develop a reputation for paying late or not meeting your promises. Of course, the same goes for your contractor.
Lien Waivers
Another way to protect yourself is to require the general contractor to provide lien waivers from his or her trades. A lien waiver is a signed legal document that confirms that the contractor and any plumber, electrician, roofer, etc have been paid as promised. I will not make the final payment to my contractor for completed work until I get these documents.
You must have this documentation requirement in your contract so there are no surprises. A final unconditional lien waiver affirms that the trade partner/subcontractor has been paid and is owed nothing further for completing this work. This prevents the possibility of a contractor or his subcontractor from making claims that he or she has not been paid and putting a lien on your property for payment. Liens can be expensive and time-consuming to remove. This simple piece of paper can save a lot of time and money. You can find examples here.
Renovations are by far the most difficult part of real estate investing. Aside from diving right in, use your network, investor communities, Facebook groups, online courses, educational books and other resources to get as much information as you can. Hiring a contractor recommended by previous clients also reduces risk of hiring a bad apple. The first rehab is the hardest but it will provide further framework, context and the ability to complete the next one with fewer missteps and more confidence.
GET CONTRACTING SMART
- David Greene’s Long Distance Real Estate Investing and his BRRRR book.
- Episode 399: Solving the Investor/Contractor Relationship, BiggerPockets Real Estate Podcast
- Form Templates: Free Lien Waivers