Are You Controlling Your Rehab Budget Or is it Controlling You?
The sound of the kitchen drawer closing was all it took.
My brother and I would race to our room and hide under our beds. And my Mom, she would follow close behind with the dreaded yellow plastic spoon.
Used primarily to stir up the chocolate cookie chip dough, this innocent little kitchen utensil quickly became a weapon of mass destruction whenever my brother and I misbehaved, argued or fought.
However, I can only recall her using it on our backsides once or twice.
Most of the time, just her reaching for it was enough to stop us in our tracks. The yellow plastic spoon was the ultimate bad behavior control device.
Taking Control of Your Rehab Budget
Many new fix and flip investors (and a lot of experienced ones) make the mistake of allowing their contractors to dictate terms and pricing. They get bids for each phase of the project, much like a retail homeowner.
While this may be a necessity when getting estimates from specialized trades (plumbers, electricians, HVAC techs), other contractors like demo crews, painters, flooring installers and landscapers will agree to set rates for every job.
For example, we pay:
Demo crews up to $1.00 per square foot
Painters $1.30 per square foot (paint included)
Tile flooring installers $3.50 a square foot (tile not included)
Hardwood flooring installers $4.50 a square foot (material included)
Rather than asking for a bid, we tell the contractor what we’re willing to pay. If they won’t do it for our price, we find another contractor that will.
We can do this because we’re the easiest kind of customer to deal with.
We don’t live in the house, so the trades don’t have to work around us. We use all the same materials in every property. And, we do a lot of deals. Best of all, we pay on time.
Therefore, we can dictate pricing.
The Problem With Price Creep
All that said, even we let the rehab budget occasionally control us.
When you’ve been working with a contractor for a while they can, and will, start raising their prices without telling you. We call this price creep. They count on you to skim over every invoice they submit and hope they don’t get caught.
For example, a few months ago I noticed an unusually high bill for hardwood flooring. We were paying almost $7 per square foot for the project (I had originally negotiated $4.50).
Needless to say, we got that corrected.
But, the mistake was my fault. I should have been reviewing this trade’s invoices more closely.
If you’re just starting out, you may feel like you don’t have any leverage to negotiate set pricing with contractors.
Quite the contrary…
You’re an investor with a vision and the cash to pay your bills on time. That qualifies you to dictate the labor costs.
Like my mom, you have the yellow plastic spoon!
Check out the walkthrough video we did at this single-family bungalow in West Allis, Wisconsin. We met our contractors here and went through the entire scope of work, as well as the budget.