There are many real estate investors who want to own a positive cash flow rental property, but they end up purchasing it tenant-ready or occupied. Perhaps they have no desire to work with contractors or accept the extra risk of the renovation process. And, there is room for all investment strategies. However, if you’ve considered the renovation to retail process, it’s all about the team and your due diligence in selecting the members.
When it comes to repair and renovation contractors, the risk is in poor selection or failure to control the process. First, selection by low bid is rarely the best approach. That is unless you have done a considerable amount of research, checked references thoroughly, and looked at recent previous work. It also depends on how well you have outlined the scope of the work, timelines and material quality specifications. Otherwise, two bids may be very far apart in what the contractors expect to deliver and when.
If you have a local active real estate investment club, joining might cut your research effort significantly. The members who are active in real estate investment and renovation will have proven contractors. If you can get them to share this information with you, it increases your confidence in the bids you’ll receive. Also, you want recommendations for contractors who stick with their bids, as they take all factors into account, thus not resulting in multiple change orders and associated cost increases.
If you’re signing their contracts, be thorough in reading and understanding the terms, perhaps letting your attorney do the same. Even if you are using their contract documents, you can provide a set of specifications that can be incorporated by reference. These specifications should be explicit and detailed about the type of materials to be used, as well as the start and ending dates for the project. They should also address what a “crew” is. Meaning, you don’t want to find two workers there every day when you were expecting six.
Outline how payment will be made, and the inspections that will be done before money is released. Specify job milestones that will result in a request for payment. Detail how you will inspect to be sure that the money draw is valid, and be very careful to get lien releases from subcontractors in every phase. Release no draw payments without lien releases for the work included.
The renovation process is no different from many other multi-phase projects. It will flow much better if you have adequate communication and a clear understanding of what is expected by all parties.