If you have a real estate home business you are likely procuring distressed investment properties. The expression “distressed” refers to the situation of the seller that has created an opportunity for you to acquire a lower-than-average purchase price. Inevitably, though, in these situations we encounter “distressed” conditions in the physical sense as well. This means that some form of rehabilitation must occur before it is ready to place back on the retail market.
Assuming you don’t personally wear the tool belt, you will have to hire construction professionals to get the needed work done. There are some essential elements to the process that as a real estate mentor I always advise be checked off your list. As far as any skilled work that is performed, you will want to see the proof of a State Contractor License, Liability Insurance, Workman’s Compensation Insurance (if they have employees) and references. Of course, once you have these documents on file it won’t be necessary to go through this again except to update them as necessary.
There are other considerations, too. For example, what if there is a disagreement between you and your Contractor? The following document will greatly help to avoid that down the road and leave you with a clear title so you can quickly sell your property with ease. First, before you hand them their fist check, get an IRS W-9 form filled out and signed. The information contained therein is important at the end of the year. If you don’t get it now, you may never get it. Trust me!
Second, you must have a contract. Anyone who thinks they can operate without one is simply being naïve. Carefully spell out the scope of work to be performed, terms of compensation, precisely who provides all tools and materials, penalties for failure to meet deadlines, obligations for insurance and liability, and agreement on how changes (change orders) are made. In my REI mentorship program I stress covering these issues well in advance of commencement of work. Contractors are notorious for overlooking these types of details. Don’t leave any matters about the scope of work and payment terms to chance! These topics will all be addressed in a good contractor agreement.
Third, avoid complications at escrow by getting a signed final lien release from your Contractor before he/she gets final payment. In fact, the typical procedure is to get progress releases as (actually before) each progress payment is made. This means that the Contractor is waiving their rights to put a mechanic’s lien on your investment properties on account of some conflict.
In most cases, with single family residences, rehabs don’t often require such involved projects. In fact, I teach my students that rehab should rarely be more involved than simple repairs and cosmetics. That is simply basic “real estate investing for beginners.” In a future article I will address the differences between “rehab” and “remodel.”
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