Today’s REI Classroom Lesson

Ron Carlson talks to us today about the need for change orders in a rehab job, but how to do them the right way.

REI Classroom Summary

From making sure everything is on paper to having a buffer in your budget for changes, there are strategies to help changes so more smoothly and help the project stay on track.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Ron: Hi, my name’s Ron Carlson. I’m with Renovation Gurus. We’re a general contracting company. And today, I will be hosting the REI Classroom and I want to talk to you a little bit today about the curse word in contracting, and that’s “change orders.”

Mike: This show is sponsored by passiverental.com.

Ron: Change orders, they’re frowned upon, but the truth is they’re almost mandatory in every single rehab. Typically, when we’re rehabbing a house, we’re not trying to bid the property to get a change order at the end, but there are what we call known unknowns, meaning once we start tearing out walls, once we start lifting foundation, things will happen that have happened in the past, but do not happen on every single job.

For example, we can be lifting a foundation job and then a window will break. Well, the window wasn’t broken before the foundation, but now it’s currently broken. Or we’re remodeling a bathroom, and we get in there and the whole subfloor is rotted out, the walls are termite-infested. There’s no way for us to see past the sheet rock and past the tile to know that it was rotted out.
So I want to talk to you guys a little bit about change orders and the truth is just expect change orders on every single job. When I’m rehabbing my own personal properties, I’m an investor myself and we do rehab our own personal properties, I always give myself a 5, 10, or 15% grace budget based on . . . if I have $10,000 bid, I’m always going to calculate $11,500, or $11,000, because there are always going to be some things that are changes.

Now, some changes are from the house because the house has got problems and some changes come from the client. For example, we just remodeled a two-story home. The client came back after it was all painted and we were almost done and said, “Okay, now I want to put crown molding in. I didn’t know I wanted to do that before, but I want to do that now,” but that’s a change order. So you have personal preference and you have property, but change orders are just a part of the construction world, unfortunately. The contractor doesn’t want to do them, the client, they don’t want to do them, but they’re a needed necessity.

I just want to tell you how to protect yourself once you get into that, into a change order situation. So first of all, get all change orders in writing. Don’t ever do a verbal change order. You’re going to get yourself into a he said, she said problem, like, “Hey, you said $50 and it’s $100,” and you want to know exactly what you’re getting. If you’re doing a backsplash, how many linear feet of the backsplash are you getting? Are you getting four inches tall? Are you getting all the way up to the ceiling? Are you getting grout? Are you getting thin set? Are you getting Durock? All in that bid, you just be very specific and get your change orders in writing.

Clarify what is on the change order. For example, “Hey, what kind of baseboard are you going to install,” or, “What room will get an additional color of paint,” or kind of go hand-in-hand. Get it in writing and get exactly what you’re getting, but know what you’re getting before you pay for it and before you make the change, and just expect changes to happen when you’re doing a remodel.

And then, if you make a change to your remodel, let’s say that you add $5,000 or $10,000 of extra work, now you have to change your expectation date, or your finish date, as well. If you had a two or three-week project and then you add an extra $5,000 or $10,000, you might add an extra week or an extra two weeks. So when you’re doing the change order, make sure you say, “Okay. I understand that this is going to be $5,000 worth of more work, but when will you be finished now that we’ve made the change?” And then put that in writing and hold your contractor accountable for that date.

And, if possible, once you get into your rehab and you decide that there are going to be changes or things come up, try to do all of the change orders at one time. Otherwise, the invoicing gets real crazy, “Hey, you did $100 here, you did $50 here, you did $1,000 here.” You don’t know if your change order was in your original bid, if your original bid covered your change order.

So try to do all your change orders at one time if at all possible. It will be a lifesaver for both you and your contractor, both time, money, and communication-wise. Just get it out there in writing, set a deadline, and then try not to change it further than that. And then, try not to do 100 change orders 100 different days because you’re going to find yourself in problems.

And then, like I said a little bit earlier, just budget for change orders. It’s really, really important that you don’t expect a $20,000 rehab before you started rehabbing it to be $20,000. Make sure you have a little extra money for the, “Oh,” and, “I didn’t know about this and I have to pay for this now because of whatever happened.”

My name’s Ron Carlson. I’m with Renovation Gurus. If you have any more questions or you just want to pick my brain, feel free to call me on my cell phone, 817-566-4346, or you can check us out at renovationgurus.com. Have a blessed day.

Mike: passiverental.com is your source for turnkey done-for-you rental properties. If you’d like to be an investor and not a landlord, please visit passiverental.com to learn how to purchase cash flowing, professionally managed rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting passiverental.com.

Please note, the views and the opinions expressed by the individuals in this program do not necessarily reflect those of flipnerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.

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Ron Carlson
Wholesaling house after house gave enough capital to start flipping houses. For a short time he worked alongside a few hedge fund companies. Started a real estate brokerage firm, started a construction company, started owner financing houses. He spends a lot of his time speaking at local REI groups, and time leading his team of acquisition agents