With all the talk of border security these days, there’s been a lot of talk about hiring undocumented workers. I’m not going to get into the moral considerations or whether or not undocumented workers “take jobs away” from legal residents—citizens or not. I’m not going into all that because by “undocumented” I mean anyone who can’t or won’t complete a W9, the form by which you would file a 1099 at the end of the year. Instead, I’m referring to what we used to call the “underground economy”—cash workers. What I will do is give you a simple formula to make your own decision.
As you know, renovating houses is a big part of our business. You can’t renovate multiple properties at once all by yourself (plus very few of us investors have all the skills it takes to turn sad houses into happy ones), so you need to bring in help. That’s where contractors come in, both general contractors (GCs) and subcontractors.
It’s convenient to use a GC on a project, because then they are responsible for finding and scheduling all the subs. However, they do charge for this, which can cut into your potential profit on a project. For this reason, many of our mentor organizations suggest hiring your own subcontractors, so that you have more control. This works when you are a small company, but by the time you get a bit bigger, you will need project managers or general contractors if you want to get any of your other work done!
So, while we have acted as our own GC on a few of our projects (such as when original the GC flaked out) and can do a good job, we are coming to rely more on GCs.
Estimating the cost of repairs is one of the most difficult parts of this business. You just have to learn this part of the business yourself if you want to redevelop houses.
There are systems available to help with estimating repairs, but your contractor is probably the most unreliable one. Here are a few reasons why you shouldn’t rely on your contractor for your repair estimate.
- It’s not your contractor’s money; it’s yours.
My experience with contractors tells me they are very good at fixing things, but they are not necessarily good at running a business. They rely on cash flow—specifically your cash flow—and seldom plan more than one job ahead of today. (As Suna mentioned the other day, we’ve even had one contractor go homeless in the middle of a project and squat in our renovation.) And they have a responsibility to their families and employees that trumps their responsibility to you. That said, as a rule, contractors want to do a good job and see themselves as hardworking, honest people.
- They really want the work and know you want to save money where possible.
This situation leads to two conflicts of interest.
- They may underbid the project to get the work.
I recently had a contractor submit a very low bid for a job. When I went over the statement of work with him, he had left more than half of the items out of the bid. It may have been a simple oversight, but he may have intended to charge a fee per “change order” to get the rest of the work done, too.
- They may assume you want to use the cheapest materials and methods available.
Contractors, even the ones who claim to specialize in “high-end renovations,” will cut corners on methods and materials when they can. You have to know what you need and what you’re paying for. Then you have to make sure you still make money at the end of the project. Saving a nickel on cheaper materials can cost you a dollar in resale value. Just remember that the opposite is not necessarily true. It’s very easy to over improve if you don’t know the market.
- They may underbid the project to get the work.
It takes time to learn to do a valid repair estimate. But what will save your bacon is to have a detailed scope of work (SoW) for the project. It should list every task you want to have done as a separate line item:
- Paint the exterior walls and soffits Muslin (SW6031)
- Paint the exterior facia and window trim Craft Paper (SW6125)
- Replace the front door with a JELD-WEN 34 in. x 80 in. Craftsman 6-Lite Painted Premium Steel Prehung Front Door with Brickmould (Home Depot Model #THDJW182500036, Internet #204317376)
Notice that I provided paint codes and model numbers. There can be no room for confusion when you are this detailed, and you should provide this level of detail for everything you want done. If you do, you’re in charge of your project, not your contractor.
As you go through the project, you know when each line item is done and ready for payment. You also know if your contractor substituted materials or changed pricing without your approval.
But there are times when the bid is an estimate, and you have to recognize those times and be somewhat flexible. For example, we’re having custom cabinets built for one of our projects. My contractor gave me an “updated” SoW to reflect the pricing he got from the cabinet maker. That pricing came in at almost double the GC’s bid, and he had “helpfully” changed the bid price to reflect the sub’s bid. We had a long discussion about helping. We decided to use custom cabinetry only in the kitchen and master bath and to use prefab cabinetry of a similar design from Lowe’s in the other rooms. We are still over budget (I kept the original numbers so we could track the actual overage), but we are much closer to the original bid than we would have been putting custom cabinets throughout the project. More importantly, I know how much and why we are over budget, because I didn’t use the “helpful” updated numbers.
Isn’t it funny? He didn’t think it would be helpful to change the original bid in places where he actually came in under budget.
After returning from Vegas and recovering my health a bit (I got food poisoning from one of the hotel cafes), I met with our Cameron-based contractor to check on the progress of the first of the N. Travis properties that the Hermit Haus parent companies bought as a package, primarily for their new Cameron office. There were four houses in the package—three on North Travis and one on Crockett— but we only need one for the office. I’m not sure what our exit strategy for the other four will be yet.
Of course, there was a little miscommunication. When you’re working with someone new, there almost invariably is. What we thought was a crystal clear instruction to paint the interior and exterior trim the same color, he thought applied only to the interior. As a result the exterior was painted a monochrome tan. Suna can tell you the actual color; to me, it’s tan. (The exterior is“Honeyed Pear” says Suna. Can’t remember the interior color, but it’s a lighter version of the same color.)
But the good news is that all of the exterior siding and broken windows have been repaired. The interior of the house has also been painted using both colors. The storage building has been cleaned out, and there was a big surprise. It was actually a laundry room. There’s a dryer vent and everything.
With the good news comes the bad. There’s an adage in this business, “You never know what you’ll find when you open up a wall.” The same holds true for removing nasty carpet. We knew there was old heart pine under the carpet, but unfortunately, it was too badly damaged in too many places to repair and refinish. We’ll have to cover it up again.
This time we will use a nice laminate. We were originally going with a vinyl plank, but the original floor boards were too badly cupped and had been repaired in too many places. Even with the underlayment, the vinyl would accentuate every seem and unlevel spot. So we’re back to a laminate, which will actually provide a little better insulation on the floor.
We found another spot in one of the bedrooms had rotted out. An old leak from the HVAC unit had caused some damage that had been repaired with “new wood” before being covered by the carpet. Unfortunately, the carpet hid damage beside the tub. Now we have to open that wall to determine if the leak is still active, which means I’ll have to get the utilities turned on ahead of schedule.
All-in-all, I think we’re going to have a good working relationship with our new contractor. And that’s welcome news!
You know how folks often tell you to “pick your battles” when it comes to dealing with children, coworkers, or postal workers (just an example—many of them are great)?
You also have to do that when it comes to the many different types of people you work with in the real estate redevelopment biz. Sometimes even when you’re right, it’s best to let things go and hope logical consequences will follow and make your point for you. Today’s examples:
That Darned House
Once again, the sale of our Blue Ridge house didn’t make it to closing. This time it was at the very last minute. The potential buyer had asked for some additional repairs, which we indeed took care of. We even pushed back the closing for the buyer’s convenience. However, today, one day before scheduled closing, the buyer backed out, stating that that more repairs weren’t needed might be needed. Blue Ridge is more than 30 years old. Yeah, at some point additional repairs will be needed. We fixed everything we knew about, but….
Sigh. I’ve bought houses that old before, knowing there were issues, but figuring, hey, it’s 30 years old. Apparently some buyers today think that when you fix up a house to sell, you know every single issue and fix them all…but some hidden things you just don’t know! So, good luck to this buyer in finding a house with zero current or future issues (including a brand new house—builders are human and do make errors). Those homeowner warranties you can buy are a good idea, just for these reasons. In fact, we always include one with every house we sell, just in case.
But, well, we’ll just choose not to battle on this and let that one go. We like the house so much that one of our team plans to buy it and live in it.
As for the buyer, there will most definitely be consequences from treating sellers this way–we certainly won’t work with them professionally again (and there was a chance we would have).
Coloring St. John’s House
St. John’s house is the one we are partnering with our friends with in San Antonio. We showed you what it looked like all scraped off a couple of weeks ago. It came time to paint the house. We sent the contractor a photo, numbers, and color name of the colors we wanted to use. The contractor came back with, “I have a lot of another color and I’d like to use that. Is it okay?” We said we would prefer the color we chose.
A few days later we got the message that our color was too light and showed all the flaws in the wood on the house. Also it was “brown” (actually it’s a brownish gray). That concerned us, since our choice was a pretty dark gray. We said it was fine to go with one of the even darker shades of that color, and to do that.
We got some pictures. They are the ones you see here. The house is indeed dark gray. A dark bluish gray. We’re pretty sure that was the leftover color the contractor wanted to use all along. The one we didn’t want to use because it was close to the color of another house on the street. Sure, it looks all right. It will do. We won’t argue and insist on the color we asked for in the first place. We need to finish the house and sell it.
If you are doing this kind of work, this is the kind of stuff that happens often. You just can’t sweat the small stuff and argue over every detail. But you can reward people who work with you, listen to you, and treat you with respect.