Rehabbing Houses Part 1 of 5 – Creating a Detailed Scope of Work

First off, when we talk about “rehabbing houses”, we’re not talking about small maintenance or repair jobs. We’re not talking about hiring someone to come in and stop a faucet from leaking.

We’re not talking about something that can be handled in a 1-2 hour service call. We’re talking about a situation where probably $3,000 to $20,000, or more, could be required in repairs.

What if I told you there was a foolproof way to NEVER be ripped off by a rehab contractor for another lousy cent? Well if I told you that I’d be lying, which is definitely against my moral code.

The good news is, that I can share with you some policies and procedures that I have implemented in my own investment business, to avoid being ripped off, and minimize risk and potential losses when dealing with contractors.

If this is of interest to you, then reading the rest of this series of articles could save you tens of thousands of dollars, and years of heartache…

NEVER start a project with a contractor without a WRITTEN, DETAILED scope of work. While I’m sure you’ve heard this before it MUST be said because even experienced investors violate this.

The emphasis here is on both written AND detailed. You MUST spell out everything you can think of that could even possibly be a point of future confusion. The best way to diffuse conflicts with your contractor is to try to prevent them from happening in the first place. Most of the time, while you may not feel contractor problems are your fault, you can usually think of a way to avoid the same thing happening in the future.

Your Scope of Work will be your detailed instructions covering exactly… well almost exactly… what you want your rehab contractor to do. I say “almost exactly” because you don’t need to be a construction engineer to do this.

You do have to be a good communicator, both written and verbally. You have to be able to write clear instructions and descriptions on what you want done, and your spoken words should match with what is written.

Writing out what work you want done at the property, as clearly as possible, will help clarify things both for you and your contractor. It forces you to think about what you’re doing, and what you’re trying to accomplish. It avoids misunderstandings later.

Many real estate investors want to “wing it” and skip this step, thinking that they have a “verbal understanding” with the contractor. DO NOT fall into this trap. What may be a “verbal understanding” in the beginning can turn into a huge disagreement later based on “You said this… No, I said that”. Too much money is at stake in repair costs, and potential profits.

Example #1: You can’t just say “paint the interior of the house off-white.” Does that mean flat paint, satin paint, eggshell, or semi-gloss? Latex or oil base? Antique white, or Navajo White?

Maybe the contractor thinks he is doing you a favor and saving you costs, by bringing over an amalgam of left over paint colors from his last job that, when combined, look peach-colored (which is the same thing as off-white, right?).

Example #2: Let’s assume you have a house that needs a total rehab. The way most people handle rehabs is, they have 3 contractors come in and bid on the job. The 1st guy bids $10,000. The 2nd guy bids $15,000 and the 3rd guy bids $20,000.

Each contractor points out different things they will do that the others won’t do. Each guy points out different problems with the property that you didn’t know about, or maybe they aren’t problems and he just thinks they are.

Inherent Problem: Even though you started out with a written scope of work, as suggested earlier in this article, each contractor has NOW verbally modified it in a different way, and their bids will not be an apples-to-apples comparison! Now you can’t logically compare the bids without taking the time to go through and decipher each one while trying to remember what the first guy said differently than the last guy.

Solution: Provide as much detail as possible, and even when the contractor points out something extra, have him list that as an ADDITIONAL cost along with the BASE LABOR quote for the list you have already written for him to bid on.

Conclusion

Having a detailed scope of work is like a having a roadmap or GPS for you and your contractor to follow. If either of you gets off track, then that is your starting point to clear up any misunderstanding.

The more clear your scope of work is, and your verbal communication, the easier it will be to control your schedule, control your costs, and profit from your rehab project through whatever exit strategy you’ve chosen.