What I learned the hard way in build-to-rent: Lesson No. 2 | Think Realty | A Real Estate of Mind

What I learned the hard way in build-to-rent: Lesson No. 2

RJ Palano build to rentWhen equity funds like Blackstone rushed into Atlanta and other cities in 2012, I knew I could not compete head-to-head with them in bidding for foreclosures, so I decided to head down the path of build-to-rent.

In the last column (Lesson No. 1), I mentioned the importance of knowing your builder. Now, I want to warn you that builders and contractors often take the path of least resistance – it’s just human nature. So Lesson No. 2 in your build-to-rent strategy should be to focus on inspections.

One of my favorite sayings is, “Don’t expect, what you don’t inspect.”

It’s critical to have a third-party home inspector on your side inspecting the property once a week and to have all elements in writing for the inspector so he can keep watch on the builder for you.

Why? Because a contractor may start out good, then either cut corners or raise prices or both. I’ve changed my tune over the years because some have not even started out good.

Builders may cover up their mistakes, or not inform you of potential issues as they develop on a job site.

Build to rent house in AtlantaYour agreement with the builder should be clear that all work will be completed in a specific time frame and will be completed to existing county codes and to the satisfaction of your home inspector. County code enforcers often are friendly with builders and sometimes will allow items to pass that your home inspector would not.

A good case in point is how builders deal with drainage issues and landscaping.

If these issues pop up and they were not discussed and written into the agreement, the builder may inform you these issues are now an “extra cost.”

Think in terms of what you want read in a courtroom in front of a judge if your builder doesn’t complete the work as described in your agreement.

I highly recommend that you have “back charges” on the builder if he does not complete the work in the time frames set forth in the agreement.

While they will always tell you it depends on the weather, there should be a “drop dead date” upon which all work must be completed or the builder will have his invoice reduced by a certain dollar amount per day until completed.

Build-to-rent can be a good business plan, but it can be speculative. I wouldn’t recommend it to most real estate professionals.

History shows us that developers go bust at some point in the real estate business cycle. Their eyes get big when things are good, and typically they lose when the market slows down. What happens is this: when the slowdown hits, their interest costs go up and their crews go unpaid.

On that note, a good point to have in your contract with the builder is that he will pay all the sub-contractors on time, and on completion of their work. If that is not in your contract with the builder, put it in writing that you will pay the subs and deduct it from what you owe the builder.

Like all things, hindsight is perfect.

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