In a seller’s market, you might have to buy a property that needs renovation to secure a good deal. If you’ve never renovated a property before, this can seem like a daunting task. Most investors have heard horror stories of the $10,000 renovation that ended up costing $100,000, and if you don’t go in with a plan, a great team, and a solid contract, this nightmare could happen to you.
The easiest way to make sure a renovation goes smoothly is to have bids for the full scope of your renovation before you ever purchase the property. This allows you to have a good idea of expected costs that you can use in a financial model to decide if purchasing the building is a good idea before you begin.
Before you begin a new project, you should bring in at least 3 contractors to bid out each portion of the job. This will ensure that you have an accurate estimate to use in your model.
Finding quality contractors isn’t easy, but there are a couple good resources that can help:
- If you’re working with a real estate agent that’s experienced with investors, they will be able to recommend several good contractors.
- You can also ask your property manager for referrals for large jobs they can’t handle in house
- Joining local Facebook or email groups with other investors that will share their recommendations
- You can look for other houses in your neighborhood that are being worked on, and interview the contractors doing the work.
Pro tip: Let contractors know you’re interviewing more than one person for the job, so they bid competitively.
Once you’ve found a contractor and received a scope you’re satisfied with, you’re almost ready to get started. The last thing you need is a great contract to protect you.
Without a good contract, you’re at risk for lien waivers, legal fees, and no enforceable deadlines. It’s important that you create a standard contract that you use for all contractors, that specifies the following:
- When payments are due (ideally never before work is performed)
- What happens in terms of disputes
- Who pays for legal fees if there is a dispute (my personal contract has the losing party paying)
- The procedure a contractor must follow to file a lien
- Requirements for licensing.
Now that you have a great contractor, a good scope (plan), and a detailed contract, you’re ready to get started. Before you begin your renovation it’s important to look at other properties in the area, how they were renovated, and what they’re renting or selling for. It’s important to understand comparable properties, so you don’t do too much of a renovation, or complete a renovation that doesn’t let you hit the rent or sale price you’re looking for.
Pro tip: If this is your first renovation, you might want to schedule showings of similar properties so you can see first hand what a completed renovation looks like, and take inspiration for your own project.
This article should serve as a great starting point for your first renovation. I recommend that you research each specific repair, and the age of the building that you’re renovating before you start so you can be aware of specific problems to look out for and ask your contractors about.