Welcome to part two of a rehab estimation masterclass with real estate mogul James Dainard! As mentioned in part one, James has created a multi-level brokerage where he has been involved in 3,000 transactions. His excess experience has allowed him to create an almost scientific process for his flips. In today’s podcast, James builds off part one and gives you a step-by-step guide on how to emulate the process that has given him his success.
James goes over what and who to bring when visiting a property, closing on a property, writing a contractor contract, and finalizing a project to perfection. Each process includes tedious details that may seem daunting at first, but as the saying goes, the devil is in the details. While the initial steps may seem meticulous, once you begin making the process repeatable and do it continuously, it’s second nature. James perfected his flipping and renovation processes through trial and error, and if you listen closely you can avoid commonly made mistakes and have an advantage over most new investors . To be the best you have to learn from the best—so listen closely!
Ashley: This is Real Estate Rookie, episode 166.
James: Yeah. There’s all these signs that you can do as you’re working with your team members. If a contractor is trying to charge you for that or they won’t give you pricing breakdown, probably not your guys. That’s a sign, stay clear from that person. You need to work off facts.
Ashley: My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson
Tony: Welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the stories, the motivation, the inspiration to get you started as a real estate investor, or keep you going if you feel like stopping. Ash, what is going on today?
Ashley: Today, we are doing part two of rehab and construction cost series with James Dainard. If you guys haven’t listened to that, go and listen to that episode released on Wednesday. We are here now for part two. Tony, do you want to recap what part one was about?
Tony: Yeah. Part one was one of my favorite episodes we’ve done so far. We’ve had some amazing guests, but James really gave a master class on estimating your rehab costs, on building your team, how to find contractors, how to find general contractors, how to vet them, how to put your scope of work together, how to give pricing estimates. Just everything you need to know about the first step of getting your rehab done. There’s actually three phases that we’re going to talk about. Phase one was everything you do before you get to the property, so that’s like the prep work that we just talked about. In today’s episode, we’re going to talk about steps two and three, which is what you do when you’re doing your first initial walkthrough, and then what happens after you actually close on the deal.
Ashley: James, welcome back to the show.
James: Thanks again for having me. I’m surprised I got invited back.
Ashley: We tried to get somebody else to fill in to cover the second part of the series, but no one would do it.
James: That’s usually my role. I’m the backup plan.
Ashley: Yeah. Okay, well, let’s jump right into it. What are the things that … You’re going to a property. You had said in the previous episode, you want to be 99% sure that this is a property you would like to put an offer in. What do you bring? Who do you bring with you when you’re going to look at a property?
James: Yeah. Especially right now with the market as hot as it is, you have to be prepared and be able to write a very strong offer to secure that good deal. Anytime that we’re going to these initial walkthroughs, we want to make sure we’re prepared. We can write a no inspection offer and then really get aggressive to lock it down. The things that we bring to every walkthrough that I go to is, the first thing is a camera. Document what you’re seeing because that’s going to really … You can go through a house, and as you look through photos, you can revisit your floor plans you might need to fix. You can notate, as you’re doing your budget, what materials you can keep and what you need to get rid of for plans. We always bring a camera. We bring a walkthrough sheet that we created internally for our company and for our project managers, and that just really lists out, itemize every little piece that needs to be done in that project. It starts with roof, windows, front door, interior, so it’s all documented out. The reason I still, even to this day, use that sheet is because it’s really easy to miss something as you’re walking through a house. Even when we did our walkthrough, Ashley, I went through this whole house with you. I went right by something and then luckily, you go, “Hey, “What’s inside the closet?” Oh my god. I didn’t check. I open the closet and sure enough, there was ducting and it was going to cost us two grand more in moving things. By having that sheet, if I would have gone through my sheet properly, I can say, “HVAC and layout. Do I need to change any of my HVAC route?” and lay it down. We have a walkthrough sheet that takes you from A to Z. We get to count out how many windows, how much square footage we need to replace, and it gives us a template to give that a good format. In addition to, by writing in all these items, like if I’m writing down 14 windows, exterior door, a front door, and a slider, I know what those costs are. As I’m getting my bids back from the contractor, I could be very specific with him, saying, “Hey, you quoted these windows at this,” and I can break down the price per window because I know exactly what the count is. It’s harder to do that if I go, “Wait. Did I have 10 windows or 14 windows? I can’t remember.” A lot of times, the contractor’s not going to notate that, so it gives me a good blueprint, as I’m not only just creating my budget, but double-checking the contractor’s bids down the road. I also bring a flashlight everywhere because you need to stick your head in areas that are dark. You need to check your crawlspaces. You need to check your attics. I like to bring a tape measure as well because if you do have to create value and reconfigure plans, you don’t want to just say, “Well, I’m going to stick a bathroom here,” and not really take a step back and look at the space to see if it actually even fits, so all these things you want to bring with you. If you’re a newer investor, and this is your first purchase, and you haven’t done this before, what I used to do when I was brand new in the business is I would bring a home inspector with me just to notate. You don’t have to pay for a full inspection report. Basically, it’s like a walkthrough inspection where it’s just a bullet list rather than a full report because they’re going to help you catch other things that you may miss. What I think you should always bring with you is your broker, who’s going to be selling the house for you down the road, so they can give you feedback on what makes it more marketable and also, a general contractor to come through to get your estimate on the house. Once you’ve been doing this for a while … Again, we’ve done like over 3,000 homes, we can walk through, and notate, and know our costs pretty well, so we don’t bring a general every time. My first probably 30 homes I bought, I always brought my general with me to get a quote because he was educating me as I’m doing my walkthrough going, “Hey, we can’t take this wall out.” Or, “We can take this wall out, and here’s why,” so be prepared on your walkthroughs because the way the market’s ripping, you have to give them a solid, no BS offer at that point.
Tony: James, I want to dig in a little bit. You said you have this walkthrough sheet. Is the walkthrough sheet separate from your scope of work or are those two documents one and the same? If they are different, what exactly is that walkthrough sheet, if you can give us more insight?
James: That’s a great question. Our budget sheet, how we created it, it’s on Excel format to where we have to input. We have it broken down, like we talked about in the last episode, by labor and material costs, and so we can narrow our budget way down. The walkthrough sheet, because if we are doing our walkthrough with, let’s say it’s an off-market deal, private sale and I’m walking around with my laptop trying to fill this whole thing in, it can take a while and it gets a little awkward. Plus, your deal finder might not like it because you’re in the house too long. What the purpose of the walkthrough sheet, is actually just to take your notes so then, when we get it back to the office, I can input it into my budget sheet and refine everything. Also, what I like to do is it gives me a general … It’s basically my bullet point list with different types of items we need to do. As I’m trying to make the deal work or invent that return by putting the right plan in play, I have the counts, I have the photos. I have all my details of what I need to do, maybe how old the furnace is, how many doors I need to put in. Then I can go to my comps when I’m at my office and use that sheet to reference what the materials are in the comps, and then start playing around with that plan. The purpose of the walkthrough sheet is to be efficient. You can be quick. It helps you not miss anything and also, it gives you the physical counts of everything. We’re writing down door counts, window counts, large kitchen, small kitchen. We’re making all these notes on that sheet.
Ashley: Yeah. I actually just ran and disappeared for a minute to actually get the sheet that I have from when I did the walkthrough of James’ and I flip. On it, it goes, I’ll give you guys an example. For windows, how many? Are they vinyl, metal, wood? What is the estimated age of the windows? Then, what condition are they? You just circle one, two, three, four, or five. That goes through the whole thing. It goes for the plumbing. Is it galvanized, copper, PEX, approximate age? Then, condition of that too. James, while we’re talking about this, I have like a million notes on to here, on to this sheet, but there were some things that you knew from learning and doing different walkthroughs that helped you actually go and do the walkthrough accurately and help with your budgeting. For example, one of those things was telling if the electrical outlets were grounded or not. Just like this little thing that you don’t need to be an electrician to know, but there’s things you can learn on YouTube or from contractors that will help you even fine-tune your budget more.
James: Yeah. There’s all sorts of little cheap, and tricks you can do. Actually I did a video for BiggerPockets called Red Flags for Flips. It’s on the YouTube channel, and I talk about … You can visually see those a little bit more in the video, but yeah, there’s all these little tricks and tips that we’ve learned over the years. Then part of how we’ve learned them is by me losing money. I learned a lot of this stuff early. Our goal is to make sure that people don’t go through those same hard lessons as us. I’m just kind of thickheaded though. “Yeah, I’m going to go buy that,” and then I learn later. By having it on that sheet, going, checking electrical, that reminds me to go, “Hey, what kind of outlets do I have in there?” There’s different things you can do. As we’re walking through a house, I might pop a plate off an outlet if it’s a house built in a certain era. That’s also why I bring the tax record to the walkthrough. I also have my tax record because it’s telling me square footage, it’s telling me year built. Based on the year built, that’s going to tell me what the mechanicals are in the house, which are going to tell me a big part of my budget. If it’s in the Pacific Northwest, the homes of the 1960s are in the middle, so they can have old wiring or good wiring, so trips that we’re doing is we’re looking at the outlets. If there’s only two prongs in there, that means it’s typically not grounded, which is going to also typically mean we need a full rewire. We’re looking for, does it have two prongs or three prongs? Are the outlets upside down? If they’re upside down, that’s a way for them to self-ground or get the reverse polarity out of there. That’s usually a sign going, “Hey, we’re probably going to have to rewire this house.” We’re going to look at the panel to see if there’s a shutoff. There’s all these little things that you can see that will tell you whether your mechanicals are old, or if you go to your plumbing. If you have three valves, a lot of times in your plumbing, that’s the setup for an old galvanized system. Whereas, if I have one that’s typically going to be copper or PEX from there on, because that’s a new type of plumbing kind of install. There’s all these little hints and signs that you can notate. That’s also why you want to bring your camera. Because as you’re shooting camera pictures, you can go, “Wait. Did I need a full replumb? Let me go back and look at that valve. Let me go back and look at where that toilet location is, or where that electrical switch is.” If I’m walking into a house, and typically the outlets are every eight inches off the ground, or all my switches are normal, then usually the wiring’s going to be of new code. If I go into a kitchen and there’s no outlets in the kitchen backsplash, that means it was built in old code, at that point. It’s not grounded, there’s no GFCI. As you do your list, it reminds you to look at those things. Then as you’re looking at them, you want to look for those little signs of … Not signs of neglect, but signs of datedness in mechanicals. See if there’s an oil tank on the property. That means your HVAC and ducting system’s probably going to need to be updated if you’re not converting or changing out to oil. There’s all these things that you can look for.
Tony: James, your wealth of knowledge when it comes to what to look for … I can tell that you’ve done this. I mean, you do anything because mentioned in the first episode that you’ve been involved in 3,000 different transactions. When you do anything 3,000 times, you’re going to know it like the back of your hand. I want to remind everyone that’s listening that just because you’re not as well-versed as James in everything that he just outlined, that doesn’t mean you still can’t go out there and make some things happen. Like he said, a lot of this knowledge he gained was through trial and error. It’s not necessarily that you have to be able to look at piping and know whether it’s galvanized, some other material. What James is trying to communicate to the listeners, to all of you, is that there are just certain things to look out for, but don’t feel overwhelmed if you don’t have the same level of knowledge and information James has. I just want to recap, just like really quickly, James, some of the things you said to bring with you. You said a camera, your walkthrough sheet, flashlight, tape measure. Then from a people side, if you can, maybe bring a home inspector, a broker, and then a GC. One last question on the GC piece, James. You said you had a GC come along for your first 30 flips or so. Were you paying that GC for his time? Or what kind of agreements did you guys have for him or her to follow along with you on those first few flips?
James: No. I never paid the general because that’s part of business. If someone asked me, I’d be like, “Well, are you a home inspector?” Because as a broker, if a client wants to go look at a property and I take them and they don’t like it, we leave, I’m not going to bill them for my time. That’s just a potential for me to earn a sale at that. Same with the general. You’re going to have to estimate because you’re trying to get the work. If some guy asked me for $200 to go walk it, A, I would look at what’s going on in my own business practices, or am I driving people nuts at that point? Then maybe I need to fix that. Or B, that guy’s going to nickel and dime me over everything. If he wants $200 to do a walkthrough, what’s he going to want when he has to move a door an inch because he didn’t really calculate it right? He’s just not the right person that would fit inside my demographic. Everybody on my team, I want us to all be together with the same mindset, that we’re all here to help each other and the angle was to get the project done, but I definitely wouldn’t pay. A lot of reasons I know a lot of this stuff, again, is I did a lot of things wrong in my early 20s. I would go out and find the deal first, buy it, and then try to figure it out, and by being very, very inefficient … Actually, the best thing I ever learned in construction was losing a lot of money on a house. Because I was there a lot and I got to see. At the very end, I was like, “Okay. Well, that was a very expensive college for flipping homes.” I did everything wrong on that house that I could have possibly done wrong, and I had to create my system off of that. Like, “Okay. Don’t do it this way. Don’t do it this way. Don’t do it this way,” and that’s how you learn. If you don’t know these things, just hire the right team members. Hire the right contractor, work with the right broker that really understands your business. They can help you facilitate your plan, and then that’s where you can feel a lot more comfortable at your walkthroughs.
Ashley: James, going back to the piece about paying a contractor to come out for a walkthrough, do you think because you are experienced and you have that credibility that you are going there 99% sure you’re going to make an offer on this property, that it may be different for a rookie investor who’s never purchased a property and is maybe going out and looking at their first few houses and they don’t have that experience? Do you think it’s a different scenario then that they should be offering or could be offering to pay a contractor?
James: If one of my clients asks if they should do that, I would tell them a hard no on that. I just might be going out there to make 200 bucks for an hour or $300. I think you’re talking to the wrong people if they’re asking for that. You don’t need pull to have someone come out. Honestly, if I put myself in the contractor’s shoes and someone called me and says, “Hey, I don’t know what I’m doing. Will you come look at this house for me?” I’m going to go, “Okay. I got a good margin construction job I can do,” at that point. They should want to come out there. Like, “Oh, you need a lot of help? That’s okay. I can help you.” I would think that’s a good for the contractor. If they’re working for someone that doesn’t know what they’re doing, they have a lot more opportunity to create margins there. Most guys should want to come do the scope of work. Again, as an investor, you are also providing income for people. It’s not just about the contractor. If you’re working with a broker … This is why you should always pay your brokers. Don’t try to get the best deal on your commission. Pay them what they’re supposed to get paid, but set expectations for them to help you. As part of our brokerage, we will bring them out generals if they need it because we want to make sure that they’re doing well, and that’s provided in our service. If you have the right team behind you, you’re not going to need to pay that guy. Anybody that’s creating revenue off of your business, make them work, make them help you, and they’ll bring out additional people. If one of my clients called me and says, “I know this is no inspection, but I want to do an inspection for buyer purposes only,” I’m going to refer him three to four home inspectors. Or he says, “I really want this deal, but I don’t have a general,” we’re going to refer on people to go out, and they’ll get an estimate, and they’re not going to charge. You don’t need to pay the contractor, but the people that you are paying or that are making money off you, put them to work. They’ll be able to help you get the people out there as well. That’s a problem that the broker, a lot of times, has to solve. The client wants to buy this, but they don’t know how to do it, so they can help them do it. You can earn your commission at that point. Use your team, and then you should be able to get them out. Don’t let people charge you for that stuff. I would say, instead of paying a contractor to come out and go to your job, give up your time and go offer to intern for a developer, or a builder, or a flipper to where you can help them by just going to the site and seeing what’s going on. You’ll end up learning way more that way, not spending your money, and actually getting hands-on experience than giving some guy money to go look at a house.
Ashley: Thank you for sharing your viewpoint on that. Because we do talk a lot on here about how, if you are a new investor, you can’t get a contractor to come out because you’re going to look at so many different properties, to offer them some money and incentive, but I think you give a very valid point that maybe they’re not the right contractor if they’re not going to come out and look at projects for you for free.
James: Yeah. There’s all these signs that you can do as you’re working with your team members. If a contractor is trying to charge you for that or they won’t give you pricing breakdown, probably not your guys. That’s a sign, stay clear from that person. You need to work off facts. If a broker can’t tell you where the value-add is, probably not the right broker. It doesn’t mean they’re a bad broker, but they’re not an investor broker. As you’re interviewing your team, look for these signs to make sure they fit on your bench. If it doesn’t, move on to the next person. Keep calling, keep checking for those people.
Tony: James, you’ve given us some amazing information through these first two phases. Again, the first phase is what to do when you’re initially looking at the property before you get onsite. We just talked about what to do when you’re actually walking through the property. The last and final phase here is, what happens after you do your analysis, you walk the property, everything looks good? Now you got it under contract. Now it’s yours. Now you own this property. I’m curious what your thoughts are, but Ashley, I want to hear your reaction to that piece first.
Ashley: Well, first I just wanted to say, James we’re out of time, so we’re actually going to bring you back for a third episode. No, I’m just kidding. I’m joking
Tony: Two episodes back for every guest.
Ashley: Yeah. Let’s go into getting the deal. When I came out,
James: I feel like I’m slowly becoming your intern.
Ashley: What you’re slowly doing … When I came out and we looked at the first property, we got the property under contract. What happens from there? That’s the piece that you and I are working on right now for our flip is okay, scheduling the contractors, putting together the contracts, the final scope of work. Can you walk us through that process?
James: After we secure the deal and we get ready for closing, the next steps that we always take is we’re doing one last final revision of our budget before estimating, because the first thing is we don’t want to have a contractor go out there with an unprepared budget. That’s how they beat us up on our numbers, and then we’re going to have a bunch of change orders, and we’re starting on the wrong foot. The second thing that’s important about making sure your budget’s revised correctly is, at least when I do it and I know a lot of investors do, is they’re getting the construction loan with their hard money or soft money lenders. If your budget’s incorrect, it can cause liquidity problems. If you’re 20% off on your budget and you had that rolled into your loan, that means you’re going to have to come up with that additional capital out-of-pocket, which can mess up your returns down the road, so you want to make sure budget is finalized and prepared that way. Then from there, we always end up getting at least two quotes from generals. We secure the deal. We have our finalized budget. We have our finalized specs then selected because inside of the final budgeting, we’re going through the comps, figuring out what kind of allowances we need to put in to get the maximum value. Then we start bringing out contractors to estimate and confirm our budgeting. If we get the numbers we like, and before we hire them, we end up checking their license and bond again, because you want to check that every time you hire a general. It’s not just the first time. Those things can expire, so before we hire them again, we always make sure their status is active and ready to go. We make sure they have a bond because if they don’t and we don’t investigate that, that’s going to be our problem with LI in the city later. Then from there, we then have the contractor sign a construction contract, or the subcontractor as well. That is very fundamentally important for any investor to do that. I learned that the hard way, again. Most of this stuff that I preach is because I lost money doing it the other way. A contractor estimate is an estimate. You can sign that and yes, it is a contract, but what it doesn’t do is outline general policies, procedures, and how things need to be completed, and inside timeframes, which is that’s, the construction contract needs to be attached to your construction quote. The reason being is because if you just sign that construction contract or quote, you’re locked into that guy, so he can lien you for properties. You’ve bought out that job with them, so the bid is to outline costs for what’s being done. The contract is set up to how you facilitate that. Inside your construction contract when we have him them sign that, and we do not flex on that, they have to sign it. It talks about start dates, completion dates. It talks about change orders, how the change orders are handled. For example, you cannot do verbal change orders with us because that always goes bad. A contractor will say, “Hey, we opened this wall. It’s going to be about 1,000 bucks to fix the framing inside.” You get the bill, it’s 1,800 and they’re going, “Well, I said it was about 1,000,” and then you get hit for the 1,800. In our construction contract, it says, “You have to email it with a broken down bid. It has to be signed by us,” and give it back to them. The contract really protects you and your investment against a third party that can mess it up at that point. Also, it tells them how they’re going to get paid, so it’s not all just to protect you. It also protects them. Like, “Hey, if you get this done in this timeframe, we’re going to close you out within 24 hours, and that you’ll be paid in full.” It clearly defines everything, and it allows for your project, when it’s going forward, not to get spun out of control. We estimate it two to three times. We then review our bid. We identify which items are heavy, or not heavy, or that are maybe outside of our budget. We then talk to the contractor, see what items we can pull out for our bundle method. Then we agree to the price, we sign the construction contract from there, and then we give them their deposit. Typically, we’re giving the general contractor different payment schedules to where … It’s referenced on the construction contract too. We’re going to give them 10% at first, 25% after demo, and then 25% from here on, and it lists out their draw schedule from there. That’s really our core process. You buy it, or you contract it, you estimate it. You go through the estimates. You figure out what you’re over on and what you’re not on. We then plug in our own bundle guys. We have them sign a construction contract, and then we put the plan in play at that point.
Tony: You’ve got this thing down to, it’s like a science, James. I want to circle back to one thing that you mentioned because we didn’t touch on this in the first episode either. Why is it that you prefer licensed contractors over maybe just like a really skilled handyman? I know some flippers where they almost exclusively use handymen and things like that to run all of their projects and avoid general contractors. What’s your take on why one might be better than the other?
James: Well, A, the first thing is I lost all my money when I was 24 years old because I did a flip on time and materials that turned … It went triple over and those were skilled labor guys. I learned a lot, but I lost all my money. It was the most expensive college I ever went to. There’s nothing wrong with hiring a skilled laborer, but the skilled laborer or carpenter should still be licensed. They need to be licensed and bonded. The reason that I’d don’t hire non-licensed and bonded people is because that’s the rules and regulations in our state. I have had people … When LI drops by a job site, and if they check their license and they’re not licensed, not only is the contractor going to get a fine, but you’re going to get a fine as well as the building owner, so you need to check with your local state and regulations at that point to figure out what the process is. The other reason is I like to know my cost. If I’m doing time and materials for a skilled laborer, if he’s having a bad day or a slow day, or let’s say he kept running out of materials and he’s got to drive to Home Depot 10 times, that could be a problem. I’m going to have to pay for that on my hourly rate and it can cause me not really to know my numbers. As investors, it’s our responsibility to hedge against the investment, and the only way for me to do that is off fixed pricing, saying, “Hey, you’re agreeing to do it for this amount.” Then I can put it in my budget and I can move things around, so we like to fix costs. There’s nothing else wrong with having a handyman come out or a carpenter to come do some additional items too. You can actually save a lot of money that way, rather than doing it the piecemeal. I personally only use fixed bids. I don’t like time and materials, but it also does come down to what kind of project you’re also doing. If it’s a rental property and you’re just doing a cosmetic where you’re changing out door handles, light fixtures, plumbing fixtures, maybe doing some trim repair, that’s a handyman type of job. Whereas, a lot of ones, we’re taking these things all the way down to studs and I can’t have one to two guys putting that whole house together. It will take forever and my debt costs will get out of control.
Tony: Yeah. Well thank you for adding that clarification, James. I love the caveat you put at the end that it depends on the scope of the job that you’re doing because that definitely does play a major role. One other follow-up question for me is, so you have this contract, do you ever find, or have you ever had an experience where maybe a contractor refused to sign or maybe ghosted you after you gave him his contract? I ask this question because it happened to me a few months ago, where I found this contractor that I liked. I gave him the contract and in there, there was one line that said if he missed the deadline more than two weeks, I would charge him, I don’t know, $50 a day or something like that. He was like, “Hey, I’m not really sure about this,” and whatever we were talking. He just stopped responding to me all together. Have you ever had that? If so, how do you handle those kind of situations?
James: Well, I would say you dodged a bullet because if the guy was … That means he was already telling you he was going to be late.
Tony: Yeah. Fair enough.
James: What I always do is I do have a penalty clause in there, and then we have, hey, that you are going to … We charge a lot more. It’s 150 to $200 a day because our loan … I mean, it depends on the size of the project and the loan balance. What we also do is put a bonus in there for them. If they’re completed early, they’re getting that same credit back. If I’m saying, “You have four months to do this project, and $200 a day if you’re late,” but if they get it done early, every day they’re done early, they get the $200 bonus too. I typically like to set up my daily rate charge is what my per diem loan basis is because then I’m just giving … It’s no extra cost to me. I’m saving on the hard money because it’s debt cost. It’s going to my contractor, which is great. He’s getting a bonus. At the same time, what’s fair is fair, and if I’m going to bonus him early, he needs to chip in from his penalties too. Also in there, we have a clause that does state what they’re not at fault for, and that’s very important. I explain that paragraph to them. If it’s a permit issue, they get no days credited against them. We have a bullet point of things that say, “These will not be counted in the days or delays.” We had to add in a pandemic part too. If they’re out of materials and they provide us with the receipt but it’s backordered two months, that’s not their fault. We’re not going to penalize them for it. You just have to make sure that your contract is written very clearly. Typically, from my experience, contractors don’t really read it, so I like to read it back to them, saying, “Hey, this is what this is set up for.” Majority of the time, by you offering that bonus, they’re so excited that they’re not going to care about the delays either. Also too, you guys, if you find a good general contractor and they’re doing a good job and they’re a little bit late but they did everything right and they were working their tails off the whole time, don’t charge them that late fee. Take care of those people. I don’t nickel and dime them on those late fees, but where it does come into play is if they’re not showing up at all and if you have a conflict, that becomes a bill for them. You’re saying, “Hey, you’re 30 days late at $200 a day. That’s $6,000. What are we going to do about this?” It’s actually a way to separate from the contractor too. If they’re pushing back on that … It’s a very reasonable request. Don’t bend. Just be logical and figure out what’s a common ground to get to an agreement to have that in there.
Ashley: This reminds me of a rental lease, going by the lease agreement and what you have in there and sticking to it, because you both signed the agreement, and using that so that there isn’t any controversy down the road. Like your clause, I love that you have things that they’re not responsible for, those what ifs. If there’s a permit issue, you’re not going to charge them, so that there’s not an issue going forward, things like that. Once the project is complete, do you do a final walkthrough with the contractors? Do you go through and blue tape? What does that look like?
James: Yeah. After we’ve scheduled everything out and we go through, we get the project done, the steps that we always take is … We’re really big on this because, especially on a flip, the last thing you want to do is spend time working on this project for three, four, or five months, and then rush the end to where there’s a bunch of little, small detail. You’ve already spent 99.9% of the money, and because you didn’t spend that last 1 to 2%, the house isn’t that marketable or it just has a weird feeling to it. We spend a lot of time on that last two weeks, punching out the house and checking for quality items. What we always do is, within two weeks of being done, we start blue taping it. We do our first prelim blue tape, where it’s just getting on the bigger things that we’re seeing through. Then once it gets to almost the completion date, we have a construction clean done because if you’re also blue taping when the house is dirty, it’s still not quite as good. You’re missing things. It feels weird. We have a construction team done and then we do another blue tape. At the same time, we use an app that’s super handy on the Apple Store. It’s called Punchlists with an S the end. It makes it very, very easy that we go through, and not only blue taping it, because contractors sometimes will just straight take your blue tape off and throw it on the ground. They’re like, “Well, maybe they won’t notice it later.” We take a photo. It goes into this report on this app, and then you can write what needs to be done next to it. Then it prints a PDF at the end that we leave on the counter for our contractors saying, “Hey, here’s all the items. Here’s a picture of it. This is what needs to be done. Initial it when you’re done,” and then we have a clean report. We do our walkthrough, go through that report and make sure everything’s been done. At the same time as that’s going on, we always do pre-inspections before we go to sell or lease. The reason we also do it before leasing is once a tenant moves in, if something breaks right away that was maybe something easily fixable, it makes it really hard to schedule and get back there, and so it’s just not very efficient. The pre-inspection, we do our own punch list, but then the pre-inspection then punches out even more items to where we can give to the contractor. We want to have both these lists because we don’t issue final payment until all are done and all permits are signed off.
Ashley: Who is doing that pre-inspection? Are you actually hiring a licensed inspector, or is that somebody in-house, or is that you that’s going through and doing that?
James: No. You always want to hire a third party for that because, especially if you’re selling a flip or any property, you got to do a Form 17, you got to disclose. What I like to do is have, have a third party come in, because especially if you’re selling too, a lot of buyers are going to think, “Well, you flipped it, so everything’s right on the house.” That’s not true. Sometimes, you’re not doing things certain ways on a flip because that’s what you don’t need … You don’t technically have to do that to sell the house. You’re just going with a different plan. Having a third party’s going to reduce your liability. It’s also going to put a new, fresh pair of eyes on it. Then also, you can provide that to your next buyer or tenant, say, “Hey, we did have a third party inspect this property.” It shows that you, as an investor, has taken time and care and that you actually care about your project, rather than just winging it. Not only does it give you a really good punch list, it also makes your end buyer or tenant feel better about you as a person too,
Ashley: And holds your contractors accountable, so if there’s something that was in the scope of work that maybe an outlet isn’t working or something even small like that, you can go back to them and have them fix that before you actually list it.
James: Yeah. That’s a great point because a contractor’s relationship’s like any relationship. If you’re dating somebody or you’re married to somebody, you could tell that person, all day long, the same thing and just because of how long you’ve been together, you’re like, “No. No, you’re wrong. You’re wrong.” Then this random person goes, “Oh, here’s this fact. Look. See, this is right.” It places a mediator between you and your contractor. After some time, you can tell them until you’re blue in the face, and they’ll argue with you and do all these things, but then when you have the third party come in, they’re like, “Okay, fine. I’ll fix it,” so it helps things move forward too. They’re kind of like a counselor for the relationship with your contractor as well.
Ashley: Or if you’re like someone like Tony that doesn’t know anything about construction, you don’t even know how to check if things are done right or wrong, then you have the inspector come in.
Tony: Seriously. Yeah.
Ashley: Well, James, is there anything else you wanted to add on to finalizing the walkthrough with the contractor and just closing up the property with the rehab?
James: No. I think it’s just the best thing you can do … Because all these processes are great in theory. It’s intimidating when you’re a newer investor and people are telling you all these things. You’re like, “Okay. I’m going to do all these processes.” They’re really good steps to implement in, but still not knowing, the unknown’s the scary part. Really, what I wish I would have done, it would have saved me a lot of money, is really go find that investor in your market that you can shadow, that you can work with. Offer them services. I have people reach out to me all the time, say, “Hey …” I had somebody that worked for me for a year and they were really good at making CAD and as-builts. They’re like, “Hey, we want to learn about construction. We want to buy our first rental property. We want to learn about apartment buildings.” We made a deal to where she got to go check on all of our sites. She would go around, take photos of all of our projects once a week for us. She would get to learn and see things as she was doing that. Also, she would do as-builts for us so she could see about floor plans and things moving around. She did this for free for us, as long as we gave her access to information, and now she owns like … She doesn’t do this for free anymore for us. She now has it figured it out. We actually hired her now to do them. She offered service and she got to learn so much. It’s one thing, like you could read a book and go, “Okay. That’s a great concept,” but it’s about doing, and putting that motion in play. If you’re really new and you really want to learn, I would say shadow an investor. Shadow a general contractor and really learn what they’re doing because the more you understand, the less you’re going to get taken advantage of. The more you’re going to understand your margins. You’re going to also understand how to get things done, or the cost of implementing the right plan. Like we talked about in that last show, is inventing that margin. When the market’s hard and it’s not easy to find a deal, you’ve got to put the right plan in there to make a return. By knowing these costs, the more you know, the more you can dictate, the more you can control, and the better plan you can put in play.
Ashley: James, I think when I was out there in the fall, you had somebody that had been doing some virtual work for you for free. They were actually moving to Seattle to come work for you.
James: Yeah. That was for wholesaling. He reached out to me. This guy, I was hyper-impressed by him because he not only reached out to me five times on social media, and I didn’t respond, he then called my office four times. Then he’s like, “I just want to learn how to wholesale. I just started doing it. I’ll make phone calls for you if you teach us.” Then he ended up moving out to Washington and yesterday, we inked his first deal.
Ashley: That’s awesome.
James: His first deal got done.
Tony: That’s amazing.
Ashley: Yeah. I was actually worried about bringing it up. You were going to be like, “Oh, actually, that didn’t work out,” so I’m glad it is working out. That’s good.
James: His first deal. We just signed and rented a house in Lynnwood, and it’s a good one too. It’s a really good buy. Yeah, offer yourself of service. Don’t underrate … Everyone wants to get coffee. Like, “Oh, can I buy you a cup of coffee?” Or, “Can I take you to lunch?” People are busy. There’s entrepreneurs … The people you want to follow will be busy because they’re doing work. Offer them something that helps alleviate pressure points for them, and they will give it right back. They got to pick and choose who they can spend time with, and if you’re on a team, you can learn a lot of information for free if you’re working with the right investors. Also, watch BiggerPockets. There’s a lot of really good information on there. The more you watch, the more you hear, the more repetition, the more you hear people implementing, and then not only just hearing about how they’re doing it right, but find out how they’re doing it wrong. I have thousands of nightmare remodel stories. Those are the stories you want to listen to because you want to not step in that thing or do that thing, and it will save you a lot of time down the road.
Tony: James, maybe we’ll bring you back for a third time and just have you talk about all the things that have gone wrong for you. That might make for a good episode.
James: Oh, it will blow your minds on the stuff I’ve seen. Everybody thinks, they’re like, “Oh, well, you’re just this investor that does all these projects so you can do whatever you want. You get the pricing.” It is the complete opposite. That just means I’m exposed to way more types of projects, which means way more problems and way more people. I’ve seen the weirdest, craziest stuff. I’ve hired contractors that had fake identities and fake businesses, like legitimate fake people and they disappear with your money. Be careful. It’s a crazy business.
Tony: Well, James, thanks so much for bringing so much value today, brother. This was, honestly, one of my most favorite episodes. Partially because you obviously provided a ton of value, but secondarily, because I’m trying to learn how to flip more efficiently myself, so I very selfishly asked a lot of questions that I’ve been thinking of. James, if people want to get in touch with you, they want to learn more about you and what’s going on, where can they get in touch with you?
James: Come find us. My Instagram is probably the best way for you guys to find free construction, see what we’re doing, see the crazy things we do. That is jdainflips. Then also, on our YouTube channel, ProjectRE, we release a ton of really deep dive, specific things on construction to help you guys out and keep your plans going forward.
Ashley: Well, James, thank you so much for coming on. You guys, follow James and I on Instagram, and check out his YouTube channel to follow my first flip, as I’m flipping my first property in Seattle. Thank you guys so much for listening. I’m Ashley @wealthfromrentals. He’s Tony @tonyjrobinson on Instagram. We’ll be back on Saturday with another guest. We are all done with James Dainard. Check out what’s new on biggerpockets.com.