Why Do Contractors Lie?. J.O.A.Maurice
the speaker asked everyone who has ever invested or considered investing to outline what their dream come true was. After perusing many answers, he again picked on John’s answer. It was in line with the general idea of many in the group: to hire great contractors that get my real estate projects done on time. Many in the group agreed that if someone can get a good contractor, put in place the right policies, and manage the process well, then money will come. Such well thought out and properly designed policies will, in many cases, minimize the pain that may come during the rehab process.
The speaker said the initial thought process in any new business should not be to become profitable from the get-go, but to put in place proper business and management procedures, and then money will come. He also said the weakness of many new rehabbers is to worry about making money straight from their first rehab. This focus on profitability takes away from building your business on sound structures and understanding. These sound structures and understanding become your solid foundational bedrock that contributes to your future peace of mind, longevity, and profitability.
Another desire for many in the room was to learn the importance of managing the investor—contractor relationship in a way that reduces the deep mistrust that sometimes occurs between the contracting parties. To this, the speaker presented case studies of some successful investors. From analyzing the paths of these successful investors, you will realize that many of them spent time upfront learning about the business. “Knowledge is power,” people say. The consensus is to spend time learning about the business you are in so you can hire the right contractors. That successful path may take engaging consultants to help navigate the rough waters until you know what you are doing.
Another way is to be involved is continuing education and spending time with like-minded individuals through membership in the local and national chapters of the real estate investment associations, meet-ups, and other networking groups. Attendance at such group meetings may also keep you updated on the regular changes in the real estate environment, including the basic legal requirements of the industry. You may also learn some key characteristics of a good contract, as John had mentioned that this is one of his problems in the business. Contracts are covered extensively later in the book. Poorly structured contracts represent one of the ways contractors will cut corners and lie to you just because they can, and also because they can tell from what you accept of the wordings of the contract that you have little knowledge in the business.
The bottom line is that you may experience problems as you commence your real estate investing business when you start on shaky grounds. When you start on the wrong footing without knowing where you want to start and end, you may experience a myriad of problems that may include sleepless nights, floundering business, and loss of money. However, if you start well, with the right education, consultancy and a good team around you, you will progress well. You will get grounded in the correct methodology of hiring the right contractors who will get projects done well and on time so you don’t lose your investment.
Chapter 2:
My Journey with Contractors
Why do many contractors lie? Why do even some decent contractors lie? These are the questions that have, for a long time, haunted me and many of the investors I have interacted with since starting my investment career over fourteen years ago. I am always shocked when I visit investors at their job sites and other venues. The one key overriding complaint is on the challenges of hiring and retaining good contractors. As someone who has been in the real estate investment trenches for many years, I can state with a deep sense of conviction that my business took off once I was able to resolve my questions dealing with hiring and retaining suitable contractors. I can also state emphatically that other investors have gained and will continue to gain from my research as they seek to better handle contractor and contracting issues.
The year 2006 was pivotal for the U.S. economy. The first part of the year recorded a hugely accelerated growth. The second part saw a significant slowdown. Since the U.S. economy had been experiencing tremendous growth for the prior three years, people were spending money as if the economy would grow and grow, ad infinitum! Real estate went through the roof. These were the days when you wondered how people qualified for houses. Many people who wanted to buy a house got one or more.
It was a time of creative financing, creative appraisals, no doc loans, and stated income. In many instances, when you wanted a house, you didn’t have to put money down and you didn’t have to prove your income. I, too, got into the game and experienced the ups and downs of the market. It was a rough ride, but I rode it with optimism and fear! Optimism that I was in a business line I had always admired. Fear because people were buying houses too fast, and as a keen business student, I suspected that this level of growth was not sustainable. Somewhere along the line, a burst would come. Nevertheless, many people were joining the business, and I knew you could only win if you were in the game. I stupidly stayed on and played along!
I was forty-five years old, with a Master of Science in accounting, and a number of finance courses under my belt from a prominent school within the state university system of New York (SUNY). I also had a bachelor’s in business administration from a liberal arts college in the Midwest. I had also taken a number of doctoral classes online in business administration (DBA). In general, I was already well schooled in the field of business and finance before starting on this investment route. Also, before setting up my business as a real estate investor in 2006, I had worked in the corporate world in various capacities for over twelve years—some in managerial positions. My experience in the real estate investment field started when I worked in a real estate investment company (REIT) for six years. I saw first-hand what was going on in the real estate investment world. Also, during three of those years, I helped a friend manage a start-up in a real estate and rehabbing company on a part-time basis. Experience in this small company was an eyeopener, since it gave me the opportunity to interact with contractors, realtors, and other investors.
In the REIT and my friend’s company, I rubbed shoulders with teams that comprised of contractors, attorneys, mortgage experts, and other real estate professionals. In my opinion, I was seeing all the aspects of real estate investing. In 2005, I resigned from my REIT corporation job with the goal of starting my real estate rehab company. I thought I had seen everything I needed to know to start my company. I was wrong. In mid-2006, right before the noticeable beginning of the major economic and real estate downturn, I bought my first investment house. It was a turnkey investment with a tenant and little touch-ups to do. A turnkey investment is a residential property that an investor may buy with tenants already in it, so he starts making money immediately without doing much work, if any. I started collecting rent the following month right after closing on the deal. The turnkey was a good start, but I needed experience with an actual rehab. Soon, I bought my first rehab, and then many more houses within a short period. The going seemed good, or so I thought! It appeared like my REIT experience and part-time work in my friend’s business was beginning to pay off. I had believed my experience, especially in the REIT world, would easily translate into a personal thriving real estate investment empire. This was true for a short time.
As a finance student, I quickly learned the concept of using other people’s money (OPM) to advance my real estate business. Using a combination of my savings, home equity line of credit, and hard money financing, I bought ten houses in quick succession, within one year. My business was booming. I was on a roll. My experience in the REIT world was paying off big time. My interactions with tenants, contractors, banks, and other stakeholders were spot on. From the look of things, I was on the road to buying many more houses, selling some, renting others, and the circle would repeat. For two years, all aspects of my business were moving smoothly like a well-oiled machine. Money was flowing in. Everyone under my business umbrella was working in unison.
I met and exceeded my construction deadlines. I bought and rehabbed properties, rented, sold, managed, and bought some more. My team was a happy one. A team in a rehabbing or a real estate investing business is a group that an investor can have at his disposal to call on for work or consultation. Such team members may include general contractors and other