Gaps, Cracks and Whacks: A Hard Money Lenders Guide to
Identifying and Preventing Poor Quality Contractors and Construction

Many hard money loans in Orange County involve a borrower rehabbing or repositioning a property before a sale or rental.  The resulting property sale or rental will happen faster when the rehabber deploys proper project management and quality construction. A well-run project will facilitate a timely exit and the lender won’t have to fix substandard building problems if the borrower has trouble and the property reverts to the lender.   This Blog discusses ways a lender can identify and review potential issues with a Borrower/Contractor or Construction on a Fix and Flip or Fix and Rent Loan:

  1. Ensure the Borrower is Compliant with Contracting Laws: A simple “paint and carpet” type of rehab can many times be handled by a borrower, however sometimes a rehab requires a General Contractors (GC) license for some or all of the construction. If permits are required or any work is being done on Structural, Electrical or Plumbing, a properly insured General Contractor will need to be used. Make sure the GC’s license and insurance is current and that the specified GC is the person doing the work and/or inspections.
  2. Heavy Lifting Rehabs Should Involve a Local General Contractor Familiar with City/County Requirements:Many cities have special codes, specifications and permits that need to be adhered to.  Deck redesigns are especially notorious for special permits. Before the City Inspectors arrive, be sure that the General Contractor knows the rules of the game in that specific City. A qualified General Contractor probably already knows the City Inspector!
  3. A Good General Contractor Will Give a Cost up Front with a Line Item Budget: A good contractor can look at a job and give an estimate of what it’s going to cost them to take care of it–including overhead and profit for them. A bad contractor will keep adding to the initial estimate, finally offering a bill that’s much higher than anticipated.
  4. A Contractor Should Have Several Solid References:Beware if a Contractor does not have any positive references. Make sure to see examples of previous work that are real and verifiable, not stock images cut and pasted from the Internet.
  5. A Contractor Should be On Time to the Job and Meetings: Any hard money lender can tell you that if the contractor is always late and constantly making excuses, it’s a bad sign.
  6. The Contractor Should Have a History of Making Deadlines: The borrower needs to get the property fixed up in a reasonable period to make money on the investment. If the contractor constantly misses deadlines and there are several signs that work isn’t progressing as it should be–barring, of course, things like the weather that are out of anyone’s control— it is then time to provide more management, guidance and checkups.
  7. Ensure Proper Materials are Being Used: Be aware of the materials being used and that they are the quality that was discussed and agreed upon, if they are not, the contractor may be pocketing the money instead of putting it into the property.
  8. Quality Workmanship: When deciding to lend to a borrower/contractor, check out a previous job and notice the quality of the work. Are there gaps around the cabinetry?Misplaced light fixtures? Cracked floor tiles? Sloppy paint? Poorly spaced Tile? Gaps between the floor and the wall?
  9. Design Appropriate for the Geographic Area: While many “rule of thumb” fixes apply to Flips; different geographic areas require specific local design elements. Art Deco styles work well in gentrifying locales.  Feng Shui should be considered in Asian areas. Proper color schemes in Hispanic areas make for faster sales.
  10. Non-Matching Fixtures: Successful rehabbers know to match the finish on hardware fixtures. Whether the new occupant is a buyer or a renter, consistent oiled bronze, chrome, polished nickel hardware finishes illustrate a well-executed rehab.

The better the Construction quality, the faster the borrower will earn income to repay the loan.  Please contact us at 949-632-6145 today.