As promised today I would like to discuss some strategies for new or even seasoned investors on how to dial in and control your construction costs when rehabbing homes.
I would like tell you a story about the first couple of properties that I flipped. It was over a decade ago, I was young and had the full intention of completing my first few rehab projects completely on my own. I rehabbed an 1100 sf condo in Mesa and it took FOREVER and there was a ton of trial and error! I installed the cabinets three times, relaid the tile at least twice, and had a hell of a time with the popcorn ceiling and drywall texture. I ended up holding it as a rental and then selling it for profit a couple of years later. I did the same with a Scottsdale property next and I learned a number of things from these experiences.
First, I learned this was definitely NOT the best use of my time. Second, I learned there are a lot of very skilled people out there that can do this kind of work much better and much faster than I can, and I truly appreciate their skill set now. Third, I learned about the time and effort it took as well as the true cost of the materials needed to complete a job. I learned the cost of thin set, the cost of appliances if you deal direct, the cost of tile if you shop for deals, the cost of the wood and drywall and the amount of time it takes to frame build a closet, etc… There are definitely some excellent managerial approaches that need to be implemented when flipping and renovating houses, but I advise others to start from scratch, get their hands dirty at least a couple of times so they can truly understand what it takes from not only a cost of material standpoint but also from a labor hours standpoint. This will allow you to be able to analyze a bid from another contractor with some precision. This will also help you identify areas on a contractor’s bid which are overestimated.
I believe it is fair to pay a licensed, bonded and insured General Contractor or sub around 20 to 25% mark up above the true cost for managing or completing a project. Again, this is not the best use of my time, so if they are good at what they do, it saves me a ton of time and headaches. The problem is that contractors, and the construction industry in general, are experts at skewing the line of what the true cost of a project is. Did you know that construction wholesale suppliers will give their General Contractors pricing that is sometimes upward of 50% less than what they sell to the general public. This means that if you are pricing out a Delta Faucet at Lowes, and it comes in at $189. A contractor can likely get that for around $100. Now most don’t pass than discount on to their clients and almost all of them will mark up the price 20 to 25% off of the $189, not their price of $100. So instead of making 25%, they are actually making around 100% mark up or more. What is even worse is that these wholesale vendors will actually provide an invoice with full retail pricing for the contractors to show their clients and mark them up.
Although it is very difficult to protect against this kind of thing, what you can do is always have your contractors provide bids that separate the material and labor and have them also separate their mark up as a separate line item. If they are charging $90/sf for granite you are getting screwed. If they say it will take 40 man hours to remove the existing tile flooring you are getting screwed. I can go on for hours with examples of this type of thing.
Always work on a cost plus basis! This means have your contractor provide a bid that separates the material and labor costs as line items and then add a fee for management based upon an agreed upon percentage. You will get some serious resistance from a majority of them and this resistance is due to their inability to skew the numbers to their benefit if you require them to do this. This approach can be applied to an individual sub such as a granite installer or it can be applied to a General Contractor doing a major addition.
It is also very important to stay on top of the current pricing and deals out there. Just last week I took almost an entire day, and drove around town with a brand new General Contractor we just started working with to price out and pick out selections for a remodel I am JV’ing with a partner and we just started. His initial bid was $32,000 for the project. My response was “let’s go price these out and pick out some selections”. It was funny to see his face when I drove us straight to a couple of direct wholesale suppliers in town rather than going to Lowes or Home Depot. It was even funnier when I demanded that we get, and they show me, his contractor pricing on everything. Needless to say the $32,000 bid was adjusted down to $20,055 as ofTuesday morning, and that includes a 20% mark up for management. My JV partner is obviously appreciative of my involvement in the deal.
Now it will obviously be more difficult to decipher through the line items of doing a 1500 sf addition but the more you do it and the more you research things the better you will get at being able to accurately estimate and negotiate your construction projects.
I hope you find this helpful. Make sure you are signed up for my wholesale buyers list by going to www.win-wintransactions.com
and sign up in the top right hand corner or PM me your email and I will have you added.
Thanks and make it a great Thursday!