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IWP!, flagship product is Chicago's premiere real estate Investment
magazine. Entitled Invest With Passion!, it is the tool for investors and professionals in the
Mid-West. The publication seeks to grow it's market share by providing
powerful information designed to build the reader both as an investor and a
person.
Since it's release in January of 2006, the magazine has been well received and
continues to gain momentum and support. The education, information, and
networking opportunities for the real estate investor has been long neglected.
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The time is now and the momentum is building.
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MY FIRST REHAB
By Tom Sallas
It was the best of rehabs and it
was the worst of rehabs. I'll leave the smart remarks to my partners;
suffice it to say that when I was asked to write this article, all I could
think of was Dickens.
I'm too far removed from my first
rehab to talk about it with any meaning. I was a kid, I had help and my
projects went well. Twenty years later, I'm pretty sure I know what I'm
doing, but from time to time even the best of us take it on the chin.
This is a tale of two condos - same configuration, same building, same
basic scope of repairs with two very different outcomes.
Around July of 2006, I picked up a
nice, 3-bedroom, 3-bath condo for $95,000, subject to the existing
mortgage. It has lake views, sits across from the golf course and there
were many reasons to hold onto this property in our long-term portfolio.
We liked the condo so much, we decided to purchase another unit, two
floors down, for $88,900, with private financing. The second condo was
ready to rent, and we were still trying to finish the punchlist on the
first.
June 2006, we interviewed and
hired a contractor, Mark, to work on our first unit. He had the requisite
experience and referrals to give him the job. He came in at about $7,000
in labor to complete the job in two weeks. The day after we closed, he
was to re-tile the bathroom walls, patch & paint the entire unit, refinish
the kitchen cabinets, install counter, sinks, etc. The only thing
atypical about this job was the tiling component. The tiles were set in
Portland cement and though my experience and instinct told me different,
my contractor swore up and down that he knew how to remove and re-tile
this without a problem. He stated he had done it many times before.
While Mark was working on the bathrooms, his workers were going to prep
the walls for paint in the other rooms.
A couple days in, when I came to
check on the job, I found a terrible mess. Mark, after unsuccessfully
trying to cut the tiles out with a concrete saw, resorted to first a
sledge hammer and then a jackhammer to break the tiles. In doing so, he
had destroyed the integrity of the vitreous clay bricks that made up the
supporting wall, making it impossible for us to use them for retiling.
Mark had tested his technique on all three bathrooms and subsequently all
three bathrooms had to have their interior walls rebuilt. Not to mention,
we still had to find a way to remove the remaining tiles without making
matters worse. At the same time, Mark's workers had put stripper on all
the trim in the other six rooms. Unfortunately, stripping the paint
turned out to be a bigger chore than expected and had we not started in
all six rooms, we would have stopped and done something different. To
make matters worse, Mark's “crew” turned out to be day labor and only one
other person remained to help him complete the job.
Needless to say, our timeline was
completely blown. I helped Mark figure out a solution to the bathroom
walls and after six weeks, just barely got enough work out of him to cover
the down payment I gave him. I fired him and began looking for a crew to
finish the job. In my spare time I worked on individual projects to keep
things moving. My painters came in to finish the patch & paint. I found
people to re-tile the bathrooms and refinish the cabinets. Pretty soon
the job got too far along to make it worth anything but a handyman's
time. We did everything piecemeal and every time I tried to save a
dollar, I ended up spending two. It seems that whenever we brought someone
in to work on this project, they took us half-way closer to completion but
never all the way.
When we bought the second condo in
this building, we were determined not to have a repeat performance. The
property was purchased in September 2007. We hired a general contractor
who we knew wasn't going to try to save money by doing work himself. By
the end of October 2007, the unit was appraised for refinance and placed
on the rental market. This time, having learned from our mistakes, we
opted to reglaze the tile in the bathrooms and replace the kitchen
cabinets instead of refinishing them. In addition, we kept a careful
watch on the project from start to finish. We budgeted and spent $15,000
to do this project. All in, the condo cost $105,000 and appraised for
$153,000. We are in the process of refinancing and will have none of our
own money in this deal.
In comparison, on our first condo,
we tried to do the project for half-price. We've ended up spending
$145,000 and though it will probably appraise closer to $160,000, we will
be lucky to break even on this project. If we had purchased this
property to resell it, this investment would be a total disaster. As it
stands, for as long as I rent this unit, I will be reminded of how much
money we wasted on holding costs. I chalk this up to an expensive
refresher course in Rehabbing 101.
Here's what I learned (again):
MONEY IS YOUR LEAST EXPENSIVE TOOL
I am again reminded that if one
has to pinch pennies to make money on a rehab, then the rehab isn't worth
doing. Now, in both these cases, we bought correctly but I approached the
first rehab with a scarcity mentality. Had I not tried to protect my
checkbook, I would have ended up saving money by having the property
available for rent months sooner.
THE LABOR YOU PAY FOR IS THE LABOR
YOU GET
Over the years, I've accumulated a
working knowledge of just about every trade necessary to build a house.
In other words, I could be considered a handyman. That doesn't mean I can
do it better, faster or cheaper than a tradesman. The most elusive lesson
I ever learned is that union-trained tradesmen are generally worth the
extra money they charge. Sometimes handymen are all one needs, but screen
them carefully or risk having a project held together by duct tape and
joint compound. Some handymen really can build a house by themselves from
scratch - but they're probably not the ones asking for work. Many
handymen are the plumber who learned to tile or the painter who learned
basic carpentry, etc. Very rarely will one find someone who's had any
formal apprenticeships in every skill a handyman might need.
Additionally, any money I save by hiring a handyman is usually offset by
the time I spend watching them.
WHENEVER POSSIBLE USE A GENERAL
CONTRACTOR OR A CONSTRUCTION MANAGER. I've found that it pays to have
someone make it their job to watch and manage a project. One of our
delays on the first condo resulted from my leaving the project to take
care of urgent family matters. Had I been using a construction manager, I
would have been able to make sure the project kept going - with or without
me. GCs and Construction Managers can usually pay for themselves by
finding better rates on labor and materials, but even if they cost more
money, they're a valuable insurance policy against unnecessary delays and
holdups. These are the guys I use to make sure I have materials when my
labor needs them and vice-versa. Now this extra layer of management needs
to be screened, managed and watched, too, but now we're only talking about
one person versus an entire crew.
WORK ROOM BY ROOM
Whenever possible, work room by
room. It's rarely practical to take one room from start to completion
before beginning the next room, but each tradesman should start and
complete rooms in sequence. For painting, this means doing your brush
work and applying paint in one room before starting the next. For
plumbing, it means finishing the plumbing work in one bathroom before
starting the next. If three bathrooms are being remodeled, it is almost
always better to have one bathroom complete and the other two untouched,
versus having three bathrooms 33% complete. For the purposes of changing
scope or contractors, it is always more cost effective to give a
contractor a job that wasn't already started by someone else.
DON'T GET COCKY
I've been rehabbing properties for
over 20 years now. I thought I had made all the mistakes I was going to
make. I was sloppy with references, I wasn't on top of the job, and I
tried to save in the wrong places and I paid for each mistake every step
of the way.
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Do you have a good or bad rehab
story you would like to share with our readers? Remember we are here to
learn from each other. Send your story to investwithpassion@yahoo.com or
we will write the story for you. Call 708-991-2861 to schedule an
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