Today’s Investment story comes from Ryan Smith…. (Ryan specializes in the REO niche market, representing clients throughout Chicagoland, including Cook, DuPage, Will, Lake and Kane counties. He has become an expert in the default industry while working to provide his clients with unprecedented value. He treats each asset as if it were his own, often repairing many bank-owned properties.
Since being licensed in 2004, Ryan has been highly successful in real estate, having sold and been involved in over 4,500 transactions He is consistently awarded for being in the top 1% of brokers in the country year after year. This past year, which is Ryan’s 15th year in the business, he was honored to be recognized as the “No. 1 Re/Max agent in the country for most transactions in the United States!
Story 1
Pre-close
The first story is about a single family house (SFH) in Skokie that involves contractor issues. While at a conference in Dallas, Ryan actually met a general contractor from Ohio. This GC had a national presence and had an impressive array of jobs completed. His bid came in 15% less so Ryan figured he would give him a shot on this rehab.
The building needed a moderate rehab which began with obtaining permits from Skokie. It took the GC about 5 weeks to do so, which was a huge red flag However, they were given the benefit of the doubt. It turns out this was a stall tactic to try and find subcontractors that could back into the lower price.
Execution
The GC that Ryan picked was priced at such a low point that he had to find low priced subs to make his own numbers work. Without having a real footprint in Chicago or any loyal crews on the ground, the GC kept burning through subs that had no care for a long-term relationship with the GC nor Ryan, and a two-to-three month job ended up taking over nine months.
In addition to the increased timeline, the quality of the rehab suffered tremendously. For example, the subs didn’t prime the walls before painting, and only used one coat of paint. This led to paint literally peeling off the ceiling. Worse, even the backsplash started falling off the walls.
To add to the complications, the plumbing wasn’t fully repaired. This led to a backed up sewer line and subsequent rehab of the entire basement due to water damage and the buckling of hardwood floors.
Final Result
In the end, the original estimate of $65k cost Ryan over $92k. He also incurred the associated headaches and holding costs of adding an unnecessary six to seven months to the timeline.
Story 2
Pre-close
This next investment was a bank-owned SFH in Naperville where Ryan and his team were to oversee a rehab for the bank and then sell the property on the MLS upon completion of the rehab. Ryan had a bid from one of his trusted contractors for $110k, but the bank had a contractor from Harvey who was offering to do the rehab for only $80k. As many investors know, the lowest bid is enticing, but does not mean it is the best option. Ryan even asked the contractor if they had worked on a house like the one in Naperville, as it’s a completely different market with different buyer expectations than a home in Harvey. Ryan recommended that the bank (owner of the property) not use the contractor from Harvey, but the bank was attracted to the low price and ignored the request.
Execution
The first issue arose when instead of removing and remediating mold in the basement, the contractor chose to drywall over it. Of course, this will not resolve the issue, and it would have to eventually be fixed again.
Next, the floor installed was an unappealing grey color - not the popular Oak Grey that Ryan expected. This had to be completely re-done, resulting in a complete rip out of the disgusting grey and a doubling of the flooring costs to install the appropriate flooring. It was clear the contractor was not ready for the necessary finishes to sell a home in this specific market. It became even more evident and this was exasperated when the contractor decided on brass light fixtures that were about 20 years out of date.
Execution
Ryan ended up spending an additional $85k to fix everything, bringing his rehab cost up to $165k, a far cry from the original $80k quote and the $110k quote that would have netted $55k less out of pocket (plus the headaches and holding costs).
Lessons Learned
If you don’t have a contractor, use your network to find them. Ask someone who’s been successful for a reference so that the contractor is not only loyal to you, but also to them. Reliability comes with working with someone.
Don’t use contractors for the moment. Find them in advance and play the long game. Trust your gut, keep oversight, and use transparency to avoid being blindsided.
Understand who the right contractor is for the project. Do they understand the right finishes, end buyers, and exit strategy for the property in that location? Validate this information for yourself, and make sure the contractor is on the same page.
Look at other markets to see what the trends are. See what $1 million houses are doing in their rehabs, and replicate it on $400k houses to get ahead of the competition. Show the contractor five or ten pictures from Zillow to explain what you want yours to look like.
When screening contractors, ask to see the jobs they’ve done. This includes looking at the before/after pictures, reviewing the scope, and talking to owners or investors who’ve used them.
Hold back money until the very end of the project and if possible, pay to have an outside party walk through and tell you what is right and what is wrong (this can be a contractor or hands-on investor)
Protection for vacant property:
Use DAWGS to protect your vacant property if needed.
Wait to install appliances until absolutely necessary
Winterize the property
How to best contact Ryan