BiggerPockets

I always buy materials, simply because I refuse to give a big down payment on work, and the contractors don't like to buy a bunch of materials out of their own pocket. They deal with too many deadbeats who refuse to pay after the job is finished.

While trying to be nice, and not offend the origial poster, I couldn't disagree more.

The reason most people have problems is simply because they take the wrong approach. You should view your contractor like you would any other memeber of your team. If you hired an attorney, accountant, banker, etc, you would check references and find somebody worth their salt.

Many people assume they are going to somehow get a better deal by finding bottom-of-the-barrel guys to do the work. They wind up with guys tweaked out on drugs, not showing up, stealing stuff, and doing crappy work.

Although we area bigger shop, we can do everything "turn-key" better, faster, and often CHEAPER than if you tried to piecemeal it yourself.

A few pointers:

1) If you don't trust someone, you shouldn't be working with them. Period. Check references, do your due diligence, make sure they are licensed and bonded. If they are bonded, and leave you hanging, you will be compensated for your damages. You can also go after their license.. assuming you hire a licensed contractor.

I've been very fortunate and have never been burned. I just don't work with people I don't trust.

2) Buying your own material doesn't save you money. Licensed contrators get better pricing on virtually everything. If your trying to avoid their "mark-up".. I've got news for you. Your still paying it - just to Home Depot instead.

We don't mark up most of our materials.

3) Insisting on going with your contractor everywhere is a waste of both of your time. If your job is hourly, your paying him instead of a $10-per-hour laborer to go shopping. If it's fixed fee - EVERY contractor will build the PITA factor into their price.

4) As stated above: ALWAYS get lein releases. EVERY TIME YOU WRITE A CHECK.

Your GC's invoice should inclued lein releases, or "partial" lein releases from each sub he is paying. The "partial" is for jobs that aren't complete yet, but they are acknowledging that you paid them so far.

Don't pay in cash, you have no recourse, and if you have a contractor that is okay with tax evasion.. what else is he okay with?

5) Yes, any contractor can put a lein on your property for $15. Actually, its worse. They don't even have to have done work on your property to file a lein. That's right, I could walk downtown and file a lein on your property even though we have never met.

That said, the last place I ever want to waste a few hours is at the County Recorders Office. And it wouldn't hold up once it was challenged.


I guess the whole point is you shouldn't have issues if you work with good people. Good people aren't any more expensive than bad people. But bad people will cost you time, frustration, money, and the color of your hair.

"The reason most people have problems is simply because they take the wrong approach. You should view your contractor like you would any other memeber of your team. If you hired an attorney, accountant, banker, etc, you would check references and find somebody worth their salt. "

That's all great in a perfect world, But unfortunately the nature of the beast is that the majority of contractor/subs are typically living hand-mouth--or close to it. Attorneys, accountants, bankers don't typically fall into this catagory and furthermore these people aren't in control of your say, %$200k investment. No offense, but it's not a comprable analogy, You can check all the refs, bonding etc.all you want but you never know if your contractor is one paycheck away or one day away from the street. It's the nature of the business. I can't say that about many attorneys, accountants or banks that I can walk into.

My suggestion of buying materials was not to so much focused to save money as it is for legal ownership and possession. If I got a $250k investment on the line, I am going with my contractor or have my contractor order what he needs but it will be paid by me directly. Not him. I mitigate potential problems this way. I also want to know that I can return any unused materials of worth.

I have had a great people work for me for a long time but on a dime they became unreliable and soon enough they had money problems as I suspected, and went out of business. Unless you are a well healed big contractor, or live in ones back pocket 24/7 a reliable contractor is a as reliable and trusting as the day he shows up and finshes the work. It's the nature of the beast. Not all contractors are like, but the majority are unfortunately. I suspect I'm not alone in this line of thinking and experiences.

Read the original first thread.

I also want to own that stuff and return any worthwhile leftovers. If I pay for materials it is then legally mine and there at least won't be any disputes about THAT issue. If a contractor buys materials himself, and say, walks off the job or something it's another layer of muck in disputes. He legally owns it and could take it off site at anytime, put a mechanics lien on your property for failure to pay for it, or whatever. Hey, you could have half your cabinets installed and then he walks off the job with the rest of them...you really want to go around shopping again and look for the ones he took...esp. if they are special order) while you try to track him down. Good luck!! No thank you!! Unfortunately this is not a business swarming with Saints and Mother Theresas'.

If you aren't willing to pay for materials directly out of your own pocket (whether you actually go with the contractor or not to shop) you are waiting for a legal problem to happen. Blanket blind trust in this biz is fools gold. All the due dilligence in the world is no gaurentee. Your trusty contractor of 5 years maybe great but you have no clue 365/24/7 about his personal business or month to month financial strength or maybe lawsuits against him going on.

Lastly, $5k, $10k or $20k I save from his mark up is money in MY pocket not his. I'm not in the charity business (I give in my personal life because my biz life is is successful). Maybe that extra allows me to add something else of value to my project.

If it's all too much for then perhaps one shouldn't be in this line of work. You got to watch EVERYTHING like a Hawk with a bit of circumspect. It's YOUR money. It's YOUR profit all at stake. No one elses. I trust and believe no one except my wife and dog! It's served me well: I never lost a dime in 10 years in RE. 24/7 blanket blind faith is a receipe for eventual a problems. It will happen. The odds are certainly there...unfortunately.

Steven

If you insist on buying your own materials, and micro-managing your contractor you are severely limiting your opportunities for growth.

Treat your contractor like a member of your team. Trust has to be earned, and put systems in place that control and track expenses. But one house you micro-manage equals at least 4 houses your team could manage. Do the math.

I have had contractors save my butt on more than one occasion because I have a good team.

MY OPPORTUNITIES ARE NOT LIMITED BECAUSE I'VE NEVER ALLOWED MYSELF TO GET BURNED BY BEING AS YOU SAY 'MICRO-MANAGER' I'M DOING JUST FINE AND FOR 10 YEARS IT'S WORKED FOR ME. I DID THE MATH: I'VE NEVER LOST A DIME BY HOW I DO BUSINESS.

WHAT YOUR EXPERIENCES SOUND LIKE ARE AN ANOMALY TO THE BUSINESS IN GENERAL. GLAD TO KNOW THERE ARE RARITIES LIKE YOURS STILLOUT THERE.


Beyond that, the fact that you wrote the check for the materials doesn't mean your contractor, or one of his guys can't steal them. Possession is 9/10ths of the law and you'll face the same battle either way.

IF HE STEALS THEM THEN HE'S JUST ELEVATED HIS PROBLEMS TO NOW A CRIMINAL OFFENSE, DINGED HIS LICENSE AND HIS BUSINESS WITH A CRIMINAL ACTION AGAINST HIMSELF AND BUSINESS. NOT SURE HE WOULD WANT TO SUBJECT HIMSELF/LIVELIHOOD TO THAT. HENCE BUYING THIS STUFF YOURSELF IS A GREAT PROTECTIVE MEASURE IN CASE THIS HAPPENS,

Just my $.02...

- First, someone asked why reason Robyn Thompson recommends never buying your own materials... The reason is that doing so can help the IRS classify the contractor as an employee as opposed to an independent contractor. This could put you on the hook for payroll taxes, workmans comp, and could open you up to lawsuits. I'm not saying I agree with her on this, but that's her rationale.

- I ALWAYS buy my own finishing materials, though I'll generally let the contractors buy the building materials (lumber, siding, sheetrock, roofing materials, etc).

- That said, I would never waste my time going shopping with my contractors. Shopping is an $8/hour job, and my time is more valuable than that.

- I keep a spreadsheet of materials on-hand, and when I need to order stuff, I fax it to the supplier (oftentimes Home Depot or a local builder supply store). They charge my account, gather the materials, and ship them to the job-site. This way, I get the bill, I know what's being ordered, and neither my contractors nor I need to waste time shopping. If the contractor needs something that I forgot, my project manager can pick it up.

As Scott pointed out, scaling your business is all about systems. If you don't have systems in place to allow you to efficiency allocate your time to high-value tasks, you're not going to be very successful in this business.

As you grow and develop as a real estate investor, the need for control increases. Not in a bad way, but in a good one.

Buying your own materials helps the investment company to control it's costs and maintain profitability.

Remember, if you're going to assume all the risks, you should enjoy the reward.

And you can't do that when you hand your control over to somebody else.

I have a commerical acct at hd and use there bidroom pricing which usually equates to a10% to 15% savings if you spend .2500. I go and submit the quote for all materials and have my gc as an approved purchaser on my acct. I receive a call every time he checks out for my approval. I try to knock out most of hte purchases in the first trip or two and I go with him if Im available. At that point, if he goes back on his own, its usually for small odds and ends. It seems to work very well but again, a level of trust needs to be established.

J,

I see what you are saying but to clarify, how would the IRS ever get involved in this scenario? In other words, if you as the investor are buying your own materials and your contractor (who is licensed, bonded, and insured) installs the items, how would the IRA ever know or get involved ? Would it be only due to some complaint by your contractor?

I do find it hard to believe that the IRS would rule that way if it was the ONLY factor and as such, make sure it is the ONLY factor.