Completing a home renovation can be challenging for new real estate investors. From building budgets to supervising contractors, there’s a lot to learn. And one of the frequent rehab-related questions I receive is, what’s a change order?
When investors renovate a home, they put together a detailed project plan. This plan covers all work and associated costs that need to be done, item-by-item. Once confirmed, the contractor and investor both sign off on the plan. A change order is used to make any updates to this original plan.
I’ll explain more details about change orders in this article. Specifically, I’ll cover the following topics:
- Rehab Project Plans
- Using Change Orders to Update Project Plans
- How The Investor's Edge Helps with Project Plans and Change Orders
- Final Thoughts on Change Orders
Rehab Project Plans
To understand change orders, investors need to first know how rehab project plans work.
When you pursue a fix & flip strategy, you’ll need to hire a general contractor (GC) to conduct the rehab process (unless you’re one personally). And as an investor, you’ll need to hold the GC’s feet to the fire when it comes to getting the job done on time and on budget. Otherwise, you’ll inevitably encounter “well I didn’t agree to do that,” or “that’ll cost you more” responses from your contractor.
This happened to me on my first fix & flip deal. The GC and I never agreed on a detailed scope of work at the beginning of the rehab period. I thought we were on the same page, but we hadn’t actually formalized a detailed plan. As a result, we quickly blew through the initial bid and busted my budget, because every new task came with another charge from the GC. I refused to let this happen again, and I knew I’d need to provide far better supervision in the future.
To accomplish this level of supervision, investors should create a detailed project plan for any rehab. A project plan is a detailed document that goes through, on an item-by-item basis, everything that a GC must complete during a rehab. And, in addition to the item-by-item tasks, a project plan will include the costs associated with these tasks.
Personally, I like to do this by walking the property with the contractor. Together, we’ll confirm everything that needs to be completed—and how much it’ll cost. You can either write notes as you go or just record the conversations. Regardless of approach, you then need to translate this walk-through information into a formal project plan. Then, you and the GC do a final review of this plan to make sure you haven’t missed anything.
Once you agree on the final project plan, both parties sign off on it. At the conclusion of work, you pay the GC the exact amount outlined on the project plan. And, if there’s a discrepancy about scope of work or cost of a certain item, you simply go back to the project plan for justification.
Bottom line, the project plan ensures both parties are on the same page with both A) scope of work, and B) cost of work.
Using Change Orders to Update Project Plans
But, not everyone’s perfect, so what happens if you need to update a project plan?
This actually happens frequently. Sometimes, you just overlook something in the initial plan. Other times, an unexpected repair requirement arises (e.g. a water heater breaks and needs to be replaced). When either of these scenarios come up, you need to update the original rehab project plan. And, you make this update with a change order.
A change order tells the contractor, yes, you are authorized to do this work, and you will receive $XXX to complete it. A smart GC will not do any work without a signed change order, as this new document serves as the payment guarantee. Similarly, a smart investor will not allow any new work without a change order, as this could result in the GC charging anything for that work.
A change order can either add more money to the overall bid, or it can reallocate funds from another portion of the rehab. For instance, an investor may decide to forego quartz countertops for a cheaper option, using the savings to pay for a required change order. But, whatever funding path investors take, they need to ensure that the change order includes the same level of detail as the original project plan. For whatever work it entails, the change order should include a line-by-line accounting of new tasks and associated costs. Once complete, both parties sign the new document. This will provide both you and the GC the same level of protection as the original project plan.
Smart investors should insist on detailed project plans for any rehab. And when they need to update those plans, they should insist on change orders that go into the same level of detail as the original plan.
How The Investor's Edge Helps with Project Plans and Change Orders
It’s easy writing about project plans and change orders, but it can be harder actually creating and using them for new investors. At The Investor's Edge, we recognize this reality, and we want to help.
When you secure hard money loans with us, our project managers (PMs) will guide and mentor you through the entire rehab planning and execution process. These PMs have years of experience with rehab work, and they have detailed process documents to help you craft a thorough project plan for your specific deal.
These PMs can also help act as “marriage counselors” between you and the GC, making sure everyone’s on the same page. For new investors, working with experienced GCs can seem intimidating, making people hesitant to ask questions or call out questionable behavior. Our PMs will ensure the planning and execution process goes as smoothly as possible. We’ll work with the investor and GC to create a detailed project plan. And when that plan requires updating, we’ll help you craft an appropriate change order.
Our PMs take pride in helping new investors. They’ll ensure that A) the deal goes smoothly, and B) you learn something in the process. As such, we want to set you up for success with future deals, providing you the experience necessary to thrive on your own.
Final Thoughts on Change Orders
In the ideal world, a fix & flip’s rehab period would go exactly according to the project plan. But, that’s not realistic. Oversights happen, and unexpected repair requirements arise. When these things occur, you’ll need to complete a change order.
However, you absolutely want to avoid change orders wherever possible. These changes have costs associated with them, meaning you’ll need to either add more cash to a deal or scale back on another aspect of the rehab—neither great options. By making the original plan as detailed and comprehensive as possible, investors can minimize the likelihood of needing a change order.
As the saying goes, good judgment comes from experience, and experience comes from bad judgment. You’ll certainly make some mistakes as a new investor. But, the key is to learn from those mistakes. Then, as you gain more and more experience, you’ll have fewer requirements for change orders.
Learn how to make money flipping real estate with us by attending our next webinar.
COMMENTS