This is a guest post by my good friend, Mike LaCava from HouseFlippingSchool.com.
In today’s real estate market, there exist countless strategies for flipping houses for profit. This is especially true when it comes to the rehab part of house flipping.
Some people who flip houses prefer to rehab on their own, some like to use project managers while others prefer general contractors. But I’ve found that one of the best ways to lock in profits as well as get your house flip completed on time is to “perfect the art” of house flipping for profit with your contractor.
Contractor relations can get strained at times. After all, there’s a lot on the line with budgets to adhere to, schedules to organize and deadlines to meet.
So what’s the key to managing these guys without it ending in disaster? We offer a four step strategy here that will both help you keep your flips on time and at or under budget but also make the entire process far less stressful and most importantly, far more profitable.
Many contractors possess a reputation of being hard to deal with at times, and this reputation is all too often true. However, when you use general contractors to manage your rehabs, you can leverage your most important asset: time. This is why I use general contractors almost exclusively in all my house flips and rehab projects. This is because once you are able to effectively manage your time and focus it on high impact activities that drive your business, instead of just running your business, and then long-term real estate investing success is that much more possible.
So to do that you need to use the expertise of others to help you achieve your goals. And when you’re rehabbing properties, contractors allow you to do this. There are a few things you can do to ensure that your relationship with your GC and other contractors remains healthy and productive.
The four-step formula below should help you greatly in your house flipping career:
Whether you are just starting out or are experienced, this vitally important step cannot be stressed enough. Develop a definitive timeline for completion. No questions asked.
The US real estate market is bouncing back a bit, so many contractors are becoming very busy – very quickly. There are not as many “hungry for work” contractors – willing to do whatever it takes to make the job successful, like there were a few years ago.
The shape of the housing market does not matter though. You have to have a definitive timeline, regardless of how busy they are. If you don’t set a time line and hold the contractors accountable, your house flips will continue to simply drag on as procrastination sets in.
If you miss the timeline by a day, don’t get stressed out. Odds are that you will have delays. Miss a deadline or two and you have to push something back. This is expected and normal.
The important concept to grasp is that you must set dates so you have some sort of benchmark to measure progress against. You will hear all sorts of excuses, so be sure to stick to the deadlines as much as possible.
Nobody enjoys firing people…but that doesn’t mean to not fire someone when you have to. If your contractor repeatedly misses deadlines and makes errors, then your house flipping dreams will never be realized.
The contractor you choose can make or break your profit on any one deal, so it’s important that you view your contractors and their subcontractors as extensions of yourself. Having said that, if a person in your house flipping team is not doing their job, then it is up to you to take action.
If after multiple warnings a contractor is still missing deadlines, performing shoddy work etc. then it is time to cut him or her loose.
Try to not get discouraged with regards to firing someone. If you are flipping houses, chances are pretty good that you’ll go through plenty of different people until you establish a winning house flipping team. This will happen more than once and it takes time before you get all the right people on your team and a general contractor is no different.
In fact a good friend of mine who flips houses as a general contractor and is a fabulously successful real estate investor and builder, fires at least one subcontractor a week. It’s nothing personal, it’s just that if they can’t produce under stressful conditions, they should go elsewhere. This isn’t ruthless, it’s just rigorous. The job needs to get done, so you need to make sure you have the best team possible in place.
Paying good contractors on time is necessary in order to keep them with you in the long term.
A general contractor has other contractors to pay. If you pay your GC on time, then his guys/gals get paid on time too. So when you pay your GC on time, the whole house flip goes that much smoother.
Don’t pay them too soon, but pay them on time. Nothing bruises a relationship with a general contractor more than not paying them on time.
For most of my general contractors, they pay all their subs on Friday afternoons, which means I pay my GC by Friday morning at the latest.
Often times this means I pay a third upfront, a third half way through and a third at the end.
No matter how you decide to do it, be sure to maintain fairness and timeliness in order to keep all parties happy.
Approaching people with respect and dignity is a good move no matter what business you are in. Working with contractors is no different.
Sure, most of them are bit on the gruff side, but it doesn’t matter, everyone including contractors prefers to be treated well and with some respect.
Surprise your house flipping team with coffee in the morning or a beer or two around quitting time. Explicitly show them that you appreciate them, their work and their time. Small things like bringing in a dozen donuts or a tray of coffees early in the afternoon can have a major positive impact. Bring a case of beer at quitting time on Friday – it won’t cost much but it will go a long way in getting them to put in extra effort for you and help you to achieve your goals.
Show them you value their work. Tell them you appreciate how they always show up on time. Commend them on a job well done.
And when you do all these things outlined, you’re well on your way to managing what many real estate investors believe is the most challenging part of any real estate investment deal – the rehab. And if you have good contractors and sub-contractors working for you, your chances of realizing serious profits from your flip are that much greater.
Make sure to check out Mike’s website at http://www.houseflippingschool.com. He’s got a great blog.
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This was a very informative blog. I have been doing wholesaling for awhile now and I am ready to start a new adventure into rehabbing houses. Thanks a lot
Some really good information here. I’m a GC and have worked with subs for years. Vetting them can be a prolonged and painful process but, as you stated, once you have a team in place, magic happens.
I like the coffee and donuts idea first thing in the morning, or a Subway sandwich and chips at noon. It’s a good time for a “tool box” training or general discussion about the project or simply a, “How ’bout them Yankees” BS session.
I think I’d run the “case of beer on Friday afternoon” scenario past my liability insurance carrier first. I believe in Murphy’s Law…
I also think it would be a good idea to skip the beer.