Fourteen percent of the rehab budget to have someone else run it. Too much?

Question

I got a number back from a construction manager on a small two-unit I'm circling. Fourteen percent of hard cost to run scope, bids, draws, and inspections, with me signing checks and never visiting.

On a 60k rehab that's 8,400. The purchase discount I think I'm getting versus renovated comps is somewhere around 30k. So the fee is roughly a quarter of the reason this deal exists.

My long holds have all been land and boring, and the appeal of this strategy for me was the rental at the end, never the construction. If paying the fee is what keeps me out of a job I don't want, that's arguably the price of the strategy being passive at all. If the fee comes out of the same stranded capital the refinance won't return, then I've paid 8,400 to convert a rehab discount into a slightly smaller rehab discount and taken on the risk anyway.

The people I've asked split hard on this. Half say never pay it on your first, because you learn nothing and can't tell when you're being managed badly. Half say never skip it, because a first-timer's mistakes cost more than the fee.

diane_kowalski · Answer

The number I'd want is what the fee does to the timeline, not what it does to the budget. If the manager reliably finishes six weeks sooner than you would, you've bought back six weeks of carry plus six weeks of rent, and on a two-unit that's most of the 8,400 right there. If he finishes at the same speed, you paid for peace of mind and nothing else. Orchard, ask him for the last three jobs of this size with start and certificate dates, and see whether he flinches.

mitchell_ray4 · Answer

Fourteen is on the high side for a two-unit with a simple scope, ten to twelve is more common in the markets I've worked. Where the fee actually earns out is bid coverage. A manager with a bench gets three real bids on the plumbing rough-in and you get one, and that spread on a 60k job is frequently bigger than his fee. Where he does not earn out is change orders, because he has no reason to fight them unless the contract says his fee is fixed rather than a percentage of final cost. Get that in writing.

brandonlee36 · Answer

Solder's last line is the whole thing. A percentage of final cost pays him more when the job goes badly.

samantha_ruiz · Answer

I ran my first four myself and hit a ceiling around the fifth, because the constraint stopped being money and became my own calendar. That's the real argument for the fee if you're building a portfolio rather than doing deals. On the learning question, I'd say do one yourself, not because it's cheaper, since it wasn't for me, and then hire out. You need to have read one set of bids with your own eyes to know when a manager is handing you a bad one.

Fourteen percent of the rehab budget to have someone else run it. Too much?

4 replies