My grandfather used to always tell me

A bargain is worth just as much as you paid for it!

What does this mean? It means that taking short cuts and using the lowest bid may cost you more in the long run.

Every time I review a Hard Money Loan application I also review the inspection reports, scope of work and repair bids as part of my due diligence. I am constantly amazed with the small amount that rehabbers are willing to invest in repairs on a house that they want to sell for top dollar. Regardless of the value of the home, the lowest bid may save you hundreds of dollars in repair costs but cost you THOUSANDS when you are ready to sell the house.

All of us are guilty of this. I am like all of you. I want to get the best price for the best work I can afford. I don't want to over-rehab a house or worse, under-rehab it. A few months ago I was talking to my GC about the countertops I was having installed in a home that will retail for $330k. We were discussing the option of tiling over the existing laminate countertops instead of installing new granite tops to save $1000.00 or more. Now $1000.00 is a lot of money on a $30k job. However the more we talked it over the more I came to realize that while tile is a "high quality" alternative, and while it would have saved me some money, it probably would have cost me $5k or more on the sales price due to longer hold time or lower sales price due to perception of value. At that price people are expecting granite counter tops.

Every day rehabbers are faced with this same decision regarding roof or foundation repair; painting and plumbing. More often then not they sacrifice quality for a few bucks. Now I know that everyone is working on tight budgets, heck I am typically "funding" those repairs. However as a lender I worry if the borrower is taking the low bid because more often than not it will bite them in the behind when they are ready to sell.

FOR EXAMPLE:
Your project needs foundation work. Should you have the GC or lowest bidder jack up the house and put in a couple of piers or should you pay 20% more to get a major foundation company who will give a "lifetime transferable" warranty? Well when it comes time to sell and the buyers asks about the foundation (since their inspector noticed signs of repairs) what do you think that they will want to hear? That it has a lifetime warranty or not? If not, I can tell you even if they love the house they will want it discounted to cover the "potential" foundation problems that are not going to be covered since there is no warranty.

It is not just foundation work either. Hiring the lowest bidding GC sets up other problems. Many "low-balling" GC's make those bids because the NEED the work. Why? Because they have other jobs that they are running out of money on and need your deposit so they can finish up that job before starting on yours. Or they are moving crews from one job to the next to try to work a little on each job. I have seen this happen many times and all it does is cost you time and money, not to mention the dreaded "overruns". A good reputable GC will give you a "not to exceed bid" and stand behind it even if it "hurts" because that is how they run their business. This is why I always go with a reputable GC. Even though their bid may "APPEAR" higher at first glance when compared against a "low-baller" I have the knowledge of knowing that the job will be completed ON-TIME and WITHIN BUDGET and WARRANTEED for 1 year! No surprises, no delays and a quality of work that will maximize the resale value! That is what everyone needs to factor into their comparisons; Will "saving" 20% on the cost of repairs cost me 5% of the resale value?

We are all in this game to make the most amount of money we can for the least amount of capital. (Maximizing ROI). I know from experience that my grandfather was correct when he said, "A bargain is worth just about as much as you paid for it"
Good luck and may all your investments be profitable!



About the Author: Rob Barney View his Blog:Rob's Real Estate Ramblings

 

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