It may seem unusual for a hard money lender to advise on the selection of a general contractor. But, when the position and the objectives of a hard money lender in Los Angeles are considered, the reason is clear.
The best use of a hard money loan is the creation of value over and above a competitive purchase price and appreciation. The use of hard money in an investment is over the short term regardless of when the investor sells the property.
The General Contractor
The scope of the work by the general contractor is what will create value in the investment. The hard money lender will look at the potential borrower’s selection of the general contractor as part of the due diligence process. The objective of the investment will not be met, nor will the value be created, if the right general contractor is not selected for the construction work.
Below are six important tips when selecting a contractor.
Leverage the Network
The network an investor has established will play an important role in identifying and vetting a contractor. The network should include real estate attorneys, commercial brokers, a hard money lender, the Better Business Bureau, and various social media platforms. All are excellent resources to use in the early stages of selection.
It is always advised to obtain multiple bids for renovation projects. Each contractor prospect should be given an identical set of plans with instructions for an “as built” cost, with contingencies. Each prospective contractor should be instructed to itemize the contingencies and to specifically state the added percentages for overhead and profit. It is easier to evaluate the bids when each contractor bids from the same plans and set of instructions.
The target is to select the contractor with the lowest qualified bid, not the lowest bid.
Hire a Local, Qualified Contractor
As previously stated, the general contractor should have experience not only with the scope and type of work but also a good reputation in the market where the work will be performed. The contractor should be licensed and registered with the local jurisdiction. Often, the requirements for registration include an active license and an insurance policy.
Require References and Act on Them
A general contractor being considered for renovation work should not have a problem with giving at least three references from past clients with similar projects. These references should be called and visited. This meeting should include a tour of the referenced project. A visit to the contractor’s office and a reference from its primary bank will provide good insight into the business operations.
Although bonding may not be a requirement for the local registration, it may be a requirement of the hard money lender. Be sure to have both the insurance and the bonding requirements of the lender early in the selection process so as to not waste time. Your time and that of the prospective contractor are valuable.
Create a Contract
A hard money lender will want to see a valid and legitimate contract in place with the selected general contractor. The contract should set forth the terms of payment to it and to the subcontractors. The contract should incorporate a proposed payment draw schedule. This draw schedule will be incorporated into the loan documents.
An important part of the payment terms is the requirement of releases from each subcontractor covering payments from a prior draw and the partial release of the contractor for the current draw. Never agree to pay anything upfront, and payments should cover work performed, not work to be performed.
Notwithstanding the “never” above, there may be certain instances when a general contractor will require an upfront payment to secure materials or to cover lead times for certain products. Payments for these purposes are for the benefit of the time schedule as opposed to paying the contractor front money to begin the project.
Any hard money lender in Los Angeles will want a full explanation of any upfront payments if the payment will be made using the loan proceeds. It would be extremely helpful if these upfront payments were included in the approved draw schedule.
If the above advice is followed, then the completed project will be a success for all involved. The general contractor will build important relationships with the investor and the lender. The lender will meet its criteria for the loan and meet its investment targets. The investor will have created the value envisioned in the proforma.
The selection of the general contractor is crucial to the success of the project. An investor needs to enter an investment knowing its hard money lender will be scrutinizing the general contractor.
If you are interested in purchasing real estate or need funding for your next project, then you need to work with a reputable and respected hard money lender in Los Angeles. PB Financial Group is a premier, direct hard money and bridge lender that has been providing quick funding since 2006 and has funded over 2,700 hard money/private money loans. Our objective is to satisfy your financing needs on important real estate projects throughout California in an efficient manner.
To learn more about how to successfully finance your next real estate venture, please contact PB Financial Group at 877.700.3707 to schedule a consultation or visit www.CalHardMoney.com to learn more.
PB Financial NMLS #357614/DRE #01522495