My Early Real Estate Transactions: Contracts for Contractors

Back in 2005 I saw a building for sale on a main road near my parent’s property in North Carolina.  The road is a well-traveled and busy thoroughfare so I thought it would be a great investment for a commercial property.  Aside from the location the asking price was around $25,000.  That, I thought, was a steal.  I contacted the owner went through the negotiation process and bought the property at $22,000.  

Now the property needed some renovation so I asked some of the people my dad knew in the area about renovations and they recommended a guy to me who wasn’t licensed but did great work.  I contracted the job out to him and he started work.  I told him that my payments to him in the beginning would be small but that I would have more money to give him in a month or so.  This was my first mistake.  I should have drawn up a contract and clarified everything in writing.  

They contractor complained a few weeks in about getting payment and I told him that I had a large payment that was coming in a couple weeks.  When I did pay him, I gave him extra to pay for future work so he wouldn’t feel neglected.  To my dismay, he took the money and ran.  I never heard from him again, neither did the guys who recommended him ever hear from him either.  It was a dramatic and painful first lesson to rehabbing.

Because the work was still incomplete I asked a buddy of mine who owned several properties what she knew about renovations (because I was totally clueless as a newbie).  She actually had a guy working for her who had family in NC and said that he could come down and work on the project.  He wasn’t licensed either but I trusted my friend.  This time around I drafted a contract for the work.

This new contractor actually worked his tail off and did a lot of the work the other guy didn’t complete.  Unfortunately his work was nowhere near the quality of the previous contractor.  After he was done I had to hire another contractor to come and correct some of the issues that were unresolved.

All in all I spent about $7,000 to get the place renovated and was able to appreciate the value at the time to around $50,000.  Although it could have been better, it was a good first investment and I learned a lot.   

The Best Strategy For Private Money: Buy and Hold or Fix and Flip

By tungphoto, published on 10 March 2011
Stock Photo - image ID: 10033486

Deciding on a lender can make or break a deal because the profit margin depends on your interest rate, points and loan term.  Having a low interest rate can keep your costs low and for buy and hold investors this is crucial in determining if a deal is profitable.  For fix and flip properties the interest rate is not as important just so long as you can turn the property around and sell it in a short period of time.  The key for fix and flip deals is to keep the points low and to also have a buffer of time in case the renovation is taking longer than expected.  However the longer you have a loan for renovation the more money you’re spending which can eat into your profits in the long run.

Private Money lenders are more suitable for fix and flip properties than they are for buy and hold but you can make it work for a buy and hold property if it’s your last option.  For people who have bad credit, private money is usually the only option and that means you have to have really high profit potential from a property to make it worthwhile for a buy and hold property.  

One way to make private money work for a buy and hold scenario is to buy the property and then use it for collateral for a bank loan.  Banks are more likely to give you a loan if you have real estate as collateral.  This way you can pay off your private money loan faster, get a lower rate from a bank and save money on your rentals.  Community banks and credit unions are the best option for rates and more lenient terms than larger banks.  

Just remember that private money is for short term solutions and make sure you create a relationship with your private money lender so they will be more willing to loan to you again.