In my early real estate days, I’d walk through a house for sale and point out all the defects to the seller (as if he didn’t already know about them). We’d then engage in a sort of tango where I’d say, “It’s a big problem that’ll cost $5,000 to fix.” And he’d say, “No, I’ve got a guy who can do it for 300 bucks,” or something equally ridiculous.
If the house had lots of problems, we’d end up with big differences as to what it would take to get the house fixed up and, as a result, it always looked like I was trying to “low-ball” the seller with an offer that was much less than fair. Actually, all I was trying to do was get a fair discount for the work needed to be completed before the house could be sold.
Sellers seem to think the repairs can get done for next to nothing, and their idea of “fixed up” often isn’t much to go on if they’ve been renting out wrecks for decades. I know those repairs will have to be done properly, and to make money on this thing I’ll have to get full credit for whatever fix-up work I undertake.
Frankly, too many new investors underestimate the amount of work, time, and money it takes to fix up houses, and they often end up doing all the rehab…only to hope like crazy they can sell for a price that’ll allow them to at least break even.
My “Contractor Factor” technique
I needed a solution to this repair/credit dilemma! I didn’t want to appear to be constantly “nit-picking” the seller about everything wrong with the property (I can’t take those guys), but I did need a way to make sure I got a price that ultimately made sense and allowed me to make money doing the needed repairs.
Eventually, I ended up with the “Contract Factor” technique, my solution to this tricky little problem.Now, whenever I’m looking at a property to buy where there’s any fix-up work anticipated, I’ll show up with my contractor for that first walk through with the seller. My contractor has been fixing up houses for years, and he’s got a better idea of what can go wrong with a house than I do.
Whenever he’s along, he knows his job is to be on the look out for things that don’t look just right. During that walk-through inspection, the contractor does all the note taking for me so I don’t even have to juggle a clipboard. The whole time the seller and I are looking the property over, my handyman is knocking and jiggling and stomping on everything in that darn house that might be trouble.
When we’re through, I discuss the place with the seller and my contractor steps off to the side for a minute and calculates exactly what it’ll take for us to bring the property into first class condition. When he’s done figuring, he taps me on the shoulder and hands me the “bad news.”
Ouch!You see, he wasn’t just taking notes on a legal pad or some scratch paper. Heck no. I have him write up a real bid on his official proposal forms. And when he’s through, he adds it all up, adds on the sales tax and hands me a bill. More often than not that’s a number that darn near knocks me off my feet.
I get to be the “good guy”
Now, here’s the cool part….when it’s my contractor pointing out the problems to me (and not me pointing them out to the seller), I don’t have that “in your face” conflict with the seller at all anymore, and we no longer have to do the little tango. The repair work still gets brought out into the open, and it’s still obvious to the seller and me what needs to be done.
But now it’s not me beating the seller over the head with the costs. Instead of us arguing over how much it’ll take to fix the broken door frame, it’s now down right there in black and white, just like all the other items we’ll need to factor in when it comes time for finalizing a price.
How’s the seller going to argue with that? He ain’t!If I have to nit-pick the seller over each and every item, and if we have to go back and forth as to who’s opinion of the repair costs is more accurate, there’s just no way I can create a good atmosphere in which to deal.
But if I’ve got a bid on the repairs from a licensed contractor who knows his stuff, who am I or who is the seller to argue about what it’s going to take to get the thing fixed? And if the seller has a problem with the bid, well, it’s a problem with the contractor and not with me.
When we’re all wrapped up and the contractor has left and it’s just me and the seller talking turkey, he’ll occasionally say something like “Man, Joe, you really need to get another contractor…that guy’s ripping you off.”
I just get to give him my best, wide eyed “your kidding!” response and know my standing deal with my handyman is I pay half of whatever the contractor’s bid says, and he eats the sales tax. The “contractor” bids and the “handyman” actually does the work.
Try out my “Contractor Factor” technique. You’ll be amazed. Just last week I did one where my contractor didn’t make the meeting, and the seller walked him through on his own a couple days later. The result? The seller agreed to knock $7,000 off the price once that bid got tallied up and equaled more than 15% of the sales price. Not bad!