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Real Estate Investing for Beginners – Express Homebuyers
This week Brad and Jeremy are at a house on 13th Street in Northwest Washington, DC talking about generating revenue and how to maximize profits rehabbing houses. On the drive over, Jeremy complains about leg pain and Brad speculates at the cause. (Hilarity ensues.)
The Secret to Finding Good Contractors
Once they arrive, talk changes to finding good contractors. Jeremy’s not going to give away the secret of exactly who his contractors are, but he will share that selecting a good contractor starts with building trust and developing a relationship. Then you have to understand what their strengths are and what their weaknesses are. It took him a long time to get to the point of having a good stable of people with whom he can work confidently.
How did Jeremy find the contractor who’s working on this job? He says he actually found this contractor through Craigslist; which is how he finds many of his reliable contractors. He spent just $25 to post an ad that puts respondents through an entire process, primarily to ensure they’re able to follow directions.
In it, he says “We are a high volume rehabber. We have many opportunities for you to make money and do work. But to become part of our contract list, you have to follow these instruction and do X, Y and Z.”
If they don’t manage to follow the instructions and complete steps X, Y, and Z, it’s game over. They don’t even get put into the review process.
If you have any interest in a video or an article on “how to write an ad to find the best contractors,” like and/or share this video and comment below.
In a previous video, Brad and Jeremy discussed “scope creep.” Scope creep can become a huge problem after you get a property under contract. You talk with the contractor about adding a project on to the original scope of work and he comes back to say it’ll be an additional $20,000 to complete.
To prevent that problem, and to maximize profits rehabbing houses, you need to look at your property from top to bottom, front to back at the very beginning, before you even discuss a scope of work with the contractor. When Jeremy first approaches a property, he starts with the landscaping. He recommends starting off with what’s in front of your feet and slowly working your way up.
Make sure you’re very specific about what you want the contractors to do from the beginning. You want to have a solid, completely detailed plan for the contractor. Don’t leave any loose ends because loose ends are what drive change orders.
As an example of the level of detail you need to achieve, Jeremy points out where there’s a chunk of concrete missing from one of the front steps leading up to the house. Most people would think “We’re spending all this money on this rehab. We don’t need to actually TELL the contractor to repair the concrete; they’ll know.” Nope, that’s not how it works. Never make such assumptions because that becomes a change order if you didn’t put it in the original scope of work and specifically say it needs repair.
He continues that it would be the same thing with the railing. There’s a chintzy aluminum railing here. We’re going to put in all new railings.
This is a house that’s probably going to sell in the $850,000 range – close to a million dollar house – and still a contractor would overlook a detail such as that. When it comes time to put your rehabbed house on the market, you obviously cannot show it with crappy front steps! First impressions are everything. If you’re looking to buy a car and the door is flimsy, you’re not going to want to buy that car.
Same thing here. Your prospective buyer walks up to the house and sees chunks missing from the steps, what’s the buyer going to say? The buyer is going to say, “If they did a poor job here, what else did they do a poor job on? Did they cut corners on the electrical, the plumbing, or whatever?” You have to pay close attention to every detail on a house.
You look from the bottom to the top, notice everything that needs to be done. Put it in the scope. Line item it all out. Everybody involved must know what you’re going to be doing. Everybody knows so there isn’t any “Hey, I need you to do this but I don’t have another three grand in my budget.”
Rats? What Rats?
At this point in the video, a neighbor shows up and asks what’s happening. Brad tells him they’ve bought this house and are renovating it from top to bottom and making it look pretty. The man asks “What about the rats?”
Brad says, “The rats? What about the rats? What rats?”
The man walks away and leaves the parting comment, “You’ll find out.”
Brad laughs. But *are* there rats? It is Washington, DC.
The Homeowner may be Financially Distressed if…
Before Jeremy and Brad step inside the house to talk with the contractor, Brad mentions if you’re driving around looking for houses and you see an air conditioning unit hanging out the window, especially in a neighborhood where houses sell for $850,000, you might conclude the owner is financially distressed and could be a good prospect. So pull over, put a door hanger on the door, get the address, send them six mailings over six to twelve months, and you might find yourself a deal.
Security bars are another good sign. They’re on this house, but Jeremy’s getting rid of them before they put the house on the market for $850,000.
Inside the house, Jeremy continues talking about building great relationships with contractors. For this house, it’s a large project, it’s important to be in constant communication on what’s happening.
Contractors make their money at the very end of the project, so they want to expedite the whole process just as much as you do. You want to get the property completed and back on the market as quickly as possible.
Meet George, Contractor Fabuloso
The faster and more efficient you can make the process, the more organized you are, the better it is for everyone involved. George, the contractor in charge of this job, agrees. When Jeremy brought George into this project, he already had the permits and selections all taken care of.
Jeremy found George through a Craigslist ad. Brad asks George what attracted him to the ad. George says he and his guys were looking at lots of ads and this one looked better than the others. And then when he contacted Jeremy, he noticed and appreciated the higher level of organization and more detailed explanations. It was far more professional.
Your Competitive Advantage
This is what you’ve absolutely got to do in this, or any, business. Hire really great people because your only long-term competitive advantage is your people. Brad hired Jeremy because he is highly qualified. Jeremy comes up with this great ad and attracts George. You hire great people and then you step out of the way and let them do their jobs. Don’t micromanage any part of the process. Make sure you’re on track, but don’t micromanage.
Some new business owners want to control everything and be in everything; you can’t do that. If you want to grow and you want to scale like Express Homebuyers has, and be able to buy 250 houses a year, you have to hire great people and then step out of the way.
To create a successful relationship, set expectations up front. Come up with a scope that is super detailed. Let your contractor then come back with “I can do all these items for x price.” Then there’s no ambiguity around should I paint this wall? Should I do this other thing? Because you’ve set the expectations up front, for both sides. Set the proper expectations of every person you hire in your organization and you’ll experience far fewer unpleasant surprises.
Brad: If you are driving around looking for houses and you see an air conditioning unit hanging out the window, that means the house doesn’t have HVAC which means heating, ventilation, air conditioning.
Jeremy: That is Brad kicking some knowledge right there. He is totally kicking some knowledge.
The last three or four weeks I have been trying to get up every morning and do some type of exercise. I just recently turned 40 and I am trying to make a few changes as most people do as they hit the big 4-0.
I have been doing great other than the fact that my legs are freakin’ killing me, like on either side of my shin bone it is [bleep] killing me.
Brad: Are you wearing high heels?
Jeremy: [laughter] Only on Friday night.
Brad: Speaking of running, where the hell are we going?
Jeremy: We are going over to 13th Street Northwest.
Brad: What is 13th Street Northwest all about?
Jeremy: It is going to be all about generating revenue.
Brad: Maximizing profits on a rehab. What is this property? How long have we had it? What are we doing?
Jeremy: We started this project February 3rd actually. The guys worked over the weekend and started getting it going. You will be surprised how far along we are.
Brad: So we are jamming.
Jeremy: Yeah, we are jamming along. We will go in here and take a look.
Brad: Oh, we were here a couple weeks ago.
Jeremy: That’s where I almost killed myself.
Brad: This is where Jeremy fell through the floor and almost killed himself. I’m sorry we didn’t get it on video.
Jeremy: Thanks Brad.
Brad: We were here a couple weeks ago and shot some good video. If you guys want to see what we talked about a couple weeks ago about how to scope out a house, check out the video from a couple weeks ago.
Do we need a little topper before we go in for the educational shoot on how to make big profits investing in real estate?
Jeremy: The way that you start off with your profits is you have to start off with the bourbon.
Brad: You’re not even drinking with me.
Jeremy: You had me talking the whole [bleep] last half hour.
Brad: All you do is talk – talk, talk, talk.
Jeremy: We have to bleep some of that stuff out because I get a little chatty.
Brad: We’ll see you in there.
Jeremy: This property is probably going to be the higher end of the scope of work that is typically done on the average rehab, if you will. We are lowering the basement slab completely, all new plumbing, all new electrical, all new HVAC. There is framing involved.
It is a substantial scope of work. It is literally going to be a whole new house. To give you an idea, we started this project on February 3rd.
Brad: When you say started, what does that mean? Started what?
Jeremy: They rolled in here. They mobilized. They have their tools and equipment and started doing actual work.
Brad: The contractors are rocking on this job. Who is the contractor?
Jeremy: Brad, I can’t give away all my secrets here. I can’t let everybody know who our contractors are. It took us a long time to get where we are.
Brad: So how did you select a contractor that was so good? What did you do?
Jeremy: You have to start off small and work big. You have to build that relationship. It is like anything else. You have to build that relationship with the contractor. You have to be able to trust. You have to be able to understand what their strengths are and what their weaknesses are.
Brad: How did you find this contractor?
Jeremy: I actually found this contractor through – you’ve heard me say this before – through Craigslist. We put the ad out there.
Brad: We find great freakin’ contractors through Craigslist. What did the ad say? Was there anything special about your ad?
Jeremy: There is. There is a whole process that we go through to make sure that number one, they are able to follow directions. You put the ad out there and say, “We are a high volume rehabber. We have all these different opportunities for you to make money and do work.”
But to be a part of our contract list, you have to do X, Y and Z. If they don’t respond to X, Y and Z, then they don’t even get put into the process. They don’t even start the vetting process.
Brad: Do you guys think it would be helpful if we did a video and/or blog on how to write an ad to select the best contractors? If yes, share this video. If you share this video, it is a way for us to know that it is good content and then we will produce more videos like this.
Go ahead and like it. And if you want us to, we will write a whole program on how to select an awesome contractor on Craigslist for zero dollars. Did you spend any money?
Jeremy: We actually did. I think it was $25. It was a minimal investment.
Brad: I don’t know what the profit numbers on this deal could be, but we are talking in the tens of thousands. So if you want, let us know if you want a video on how to or a tutorial on how to select contractors on Craigslist.
The last time we were here, you mentioned some really cool stuff about scope creep. Scope creep is a huge problem where you get a property under contract. You think you are going to do something and then you come back the next day or a week later and the contractor is like, “There is $20,000 more.”
How do you prevent that? When you walked up to this house the first time, you start looking from top to bottom, what are the things you said you have to do to stop the scope creep?
Jeremy: Ultimately what I do whenever I first walk up is I start looking at the landscaping. You start off with what is in front of your feet and you just slowly work your way up. You have to be specific on what you want the contractors to do in order to make sure that you don’t leave any loose ends, because loose ends are what drive change orders.
Brad: Here, the last time you mentioned something about the porch, the lattice work, the awning. What would you put into your scope? One thing we said before, and you can look at the video from a couple weeks ago, is you want to have a solid completely detailed plan for the contractor – scope of work – that is just so detailed.
Jeremy: It even goes down to this – I will give you an example right here. Most people would think that we are spending all this money on this rehab. Well, you would think that we need to fix this concrete right here. Well, unless you tell somebody that we actually need to repair the concrete, they are not going to do it.
That would be a change order if you didn’t put that in there somewhere that this needs to be taken care of. It is the same thing with this railing.
Brad: So this house is going to sell for – give me an approximate range.
Jeremy: This would be in the $850,000 range.
Brad: So almost a million dollar house – someone would renovate this house, a contractor, and they would overlook a detail like that. Obviously you cannot – first impressions are everything. If you buy a car and the door is flimsy, you are not going to want to buy the car.
It is the same thing with this. You walk up to a house – and of course we would paint this – but if you see chunks out, what is the buyer going to say? The buyer is going to say, if they did a poor job here, what else did they do a poor job on?
Did they cut corners on the electrical, the plumbing, or whatever? You have to get every detail on a house.
Jeremy: Another example is look at the railing. We have this chintzy aluminum railing.
Brad: It’s demoed.
Jeremy: That is going to come out clearly. That is really going to come out. We are going to put in all new railings. Brad actually created us more work because if we don’t clean this up then we are going to get a fine in D.C. for having trash out here.
I will make sure to let the contractors know that we helped them out with the demo, but you have to give us a little help with the demo cleanup.
Brad: There is a dumpster right there. Let’s get rid of it. We’ll clean it up later.
Back to what we were talking about. You look from the bottom to the top, everything needs to be done. You put it in the scope. That is the important thing.
Jeremy: It is line itemed out. It is transparent. Everybody knows what we are going to be doing. Everybody knows so there is no, “Hey, I need you to do this and you are not going to charge me three grand to fix this concrete step.”
Brad: What we did for years when we would start a renovation project, we were dealing with contractors who probably know more than we do, so they will fix this stuff. But did they fix it? No.
We show up to a project and now we have to fix all this stuff. It was just change order after change order.
Jeremy: Obviously this was before my time, by the way, before my time.
Man: Why are you arguing?
Jeremy: We’re really not.
Man: What you drinking?
Brad: A special type of bourbon.
Man: Dead coffee.
Brad: It is dead. It tastes good though. Do you live in the neighborhood?
Man: Yeah, I live down the street.
Brad: We’re going to buy this house that we are going to renovate top to bottom.
Man: You’re going to buy this house?
Brad: Actually, we already bought the house. We are going to renovate it top to bottom and make it look pretty. Do you own in this neighborhood?
Man: No, I live in apartments.
Brad: You live in an apartment.
Man: What about the rats?
Brad: The rats? What about the rats? What rats?
Man: You’ll find out.
By the way, if you are driving around looking for houses and you see an air conditioning unit hanging out the window, that means the house doesn’t have HVAC which means heating, ventilation, air conditioning.
Jeremy: That is Brad kicking some knowledge right there. He is totally kicking some knowledge.
Brad: I learned that in property management course when I was in college. When you see this in a neighborhood that houses sell for $850,000, you might want to think that the seller may be a bit distressed and they may be a good target.
So pull over, put a door hanger on, get the address, send them six mailings over six to twelve months, and you might find yourself a deal.
Jeremy: Also, with the security bars, you want to cancel that. You don’t want to be in a neighborhood where you have to have security bars.
Brad: So when you say cancel that, you are saying that obviously we are getting rid of the security bars when we try to sell an $850,000 house.
What are we doing here today? What are we teaching?
Jeremy: Let’s just go in here and we will go over some of what we are doing and give you an idea of where we are.
We are going to make great relationships with contractors. We all have to be on the same page as far as the scope of work. This is clearly a large project what is going on here. We have to be in constant communication on what we are doing, where we are, and that way it keeps him saving on time because for the most part contractors make their money on the backend.
You don’t make your money throughout the course of the project. Contractors make their money at the very end of the project. In order to make their money at the very end, they want to expedite the whole process just as much as we do. We want to get it back on the market as quickly as possible.
You want to get it completed as quickly as possible.
Jeremy: I tell you, it is a win-win for everybody. It is a win-win for everybody, so the more organized you are, the faster and more efficient things can be. Would you agree?
George: It is the same for us. For contractors in this situation, we have to check everything. We have to have it calculated. So at the end, we will earn. That is the idea.
Jeremy: So for this project we had some very detailed plans. We had the permits all taken care of. We had the selections take care of. We had an overall scope of work so that way you know exactly what is outside of the plans in addition to the plans.
Brad: George, tell us how you met this guy? How did you hook up?
George: Me and my guys were looking for jobs. We had something small, but at that time we found something really serious.
Brad: On Craigslist.
Brad: He wrote a really good ad that you read and said, “This is different from all the other ads.”
George: What I read looks better than the other things that I saw, because I am applying for different situations. The thing was that when I contacted him, things were different because what I liked was the organization especially in the way he explained stuff.
It looked more professional.
Brad: So I taught you well. I trained you really well.
Jeremy: Totally, Brad trained me really well.
Brad: Guys, in all seriousness, here is what you do in business. You hire really great people because your only long term competitive advantage is your people. I hired Jeremy because he is highly qualified. He comes up with this great ad. It attracts George and then what does he do?
He hires George and he steps out of the way and he lets George do his job. Some new business owners want to control everything and be in everything; you can’t do that. If you want to grow and you want to scale like we have to be able to buy 250 houses a year, you have to hire great people and then step out of the way.
Is that right?
Jeremy: I 100% agree. I don’t micromanage any part of the process. I make sure we stay on track, but I don’t micromanage. I don’t tell them that they should have guys here doing X, Y and Z. These guys know what they are supposed to do. We have this relationship to where I know what they can and they can’t do. And we have grown over the years.
Brad: Do you know what makes a relationship successful? Expectations are set up front. What we talked about earlier in the video is what you do is you say to George – you come up with a scope that is super detailed.
George looks at it and says, “Can I do all these items for X price?” And he says, “Yes, I can do them.” Then there is no ambiguity of – should I paint this wall, should I do this, because what you have done is you set the expectations up front.
So whether you are hiring a contractor or you are getting married or you are hiring an employee, set the proper expectations of every person you hire in an organization. We sit down before we hire them and say these are the expectations of you and us.
We go through about 10 different questions about how you want them to handle this and this. We are completely on the same page. That is why this relationship is working is because you set expectations and then George says, “Yes, I can do it.” And he is good. He is great. He is better than a normal contractor, so he delivers. Is that right?