9 Tips for Choosing and Managing Contractors

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If you catch me banging my head up against the wall it is likely because a contractor failed to show up on time or didn’t perform to our expectations. If you see me popping a bottle of champagne it’s probably because a contractor saved a project by providing a necessary service in the nick of time and for a great price. Fortunately for me I have done a lot more celebrating because we have worked with some great contractors.

In real estate investing there is a direct relationship between the quality of contractors and profit.  If nothing else – the connection between your contractor and your bottom line should be enough to make you, the investor, realize the importance of being able to choose and manage your contractors wisely.

If you are a real estate investor you have worked with contractors at some point, whether you are an experienced rehabber, or a second home landlord, good contractors are essential to running a successful business. While there are many great contractors out there, there are many that can only be described with words I shouldn’t use, so knowing how to work with contractors on each end of the spectrum and everywhere in between is an important skill to master.

Here are some tips for finding and managing quality contractors and creating rewarding relationships with them:

Get Multiple Quotes from Different Contractors:

It may seem obvious but so many people don’t do it. The disparities between quotes for the exact same job is sometimes mind numbing. If you are only getting one or two quotes you are potentially wasting money and marring your return on investment. On our very first rehab we had to deal with a fairly major foundation problem. The first quote was almost eight thousand dollars, which we initially thought was reasonable until we received additional quotes. The repairs were completed by a reputable company for half that, saving us money and boosting our returns.

Be Specific when Seeking Bids:

Just like other professions, there are contractors looking to take advantage of vulnerable people; don’t be vulnerable. To provide defense from predatory contractors be as specific as possible and leave no room for interpretation. Specificity will also demonstrate confidence, awareness, and knowledge, compelling shady contractors to look elsewhere.

Ink It – Get a Detailed, Written Scope of Work:

In a perfect world a handshake is all you need to ensure an agreement is upheld, but a handshake is not enough today. Once you have selected a contractor and agreed on a price, use a scope of work agreement to put EVERYTHING in writing. The scope of work should describe in detail the work to be performed and should be signed by both parties. This document will come in handy should any disagreements arise.

Go With Your Gut:

Instincts are very powerful and have saved a lot of people for potentially disastrous situations, so if you are not sure what to do, go with your gut. If you get that feeling that you are about to be ripped off, or that hunch that the person you are about to hire doesn’t know what he is doing, follow your instincts and move on to the next one. I have found that instincts are correct more often than not, so don’t be caught thinking “I knew I shouldn’t have done that” down the road.

Cover Your Butt – Hire a LICENSED Contractor:

While it may be cheaper to hire an unlicensed and uninsured handyman from Craigslist, you should consider the risks involved. There are inherent dangers in construction and rules and regulations vary by market. Make sure that you hire contractors with the proper credentials and understand local rules and regulations before starting a project. Failure to comply could bring your project to a standstill and cost you in fines. While ignorance may be bliss, it can also be expensive.

Try Them Out:

One of the best ways to get contractors to see things your way is to let them know it may not be a one time gig. Talk about your future endeavors as an investor and your need for reliable, trustworthy contractors. Many contractors will treat this as a try-out, trying to earn a spot on your team. Be careful for repeat contractors that creep the costs up on you after the first couple projects…some seem to think they are locked in for life.

Get a Warranty:

One of the best steps you can take to sell a property is to provide warranties to the buyer, especially on certain items like foundation repair. In fact, we try to convince the contractors to provide two-time transferable warranties so the buyer can also transfer it when they are ready to sell. Keep in mind a warranty is worth nothing if the company is not going to be around for long, so make sure you are dealing with reputable contractors.

The Golden Rule Applies:

As a paying customer you probably expect your contractors to show up on-time and follow through with agreements. It is important to practice what you preach. How can you expect a contractor (or anyone for that matter) to take you seriously if you are not conducting yourself in a professional manner? In essence, the golden rule applies.

Learn to Move On if Your Contractor Doesn’t Meet Expectations:

Let’s face it, sometimes things just don’t work out. Breaking up is always hard to do, but it can save you a lot of money and problems in the future. If a contractor is not meeting your expectations it is important that you let them know. Be professional but provide honest feedback. It seems that truthful feedback is becoming rare, but it is important in conducting business.

Ultimately you want to have a network of reliable and well-priced contractors, but getting to that stage is much more difficult than it seems. When you find contractors that exceed your expectations, do your best to keep working with them. If you are continuously getting burned by contractors you may need to look in the mirror and find out what it is you could do to better prepare yourself and manage those you work with…your business ultimately relies on it.

Image Credit: Wonderlane

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About Author

James (G+) is a Principal Member of K&V LLC, a real estate investing company in Lexington, KY. His firm focuses on distressed property rehabilitation in the Bluegrass Region. He is also a licensed real estate agent.

8 Comments

  1. Very good post, from a contractor and RE investors point of view I would like to stress two of the points you made.

    I would guess 75% of my work as an hvac contractor is created by homeowners and investors failing to create specifications and not doing their due diligence in order to secure a contractor who is qualified to do the work. Getting many quotes for unspecified work is going to result in a poor quality job.

    I am not sure if I made this slogan up, but it has served me and my customers well over 30 years in hvac. “B.I.D. = Beat Idiots Deal”.

    Asking for a quote where the equipment and related systems are not specified will have each contractor slashing his price in-order to get the job. What will result is the wrong equipment installed by the lowest common denominator. No design will be forthcoming as part of the quote. Simply picking the middle price means nothing as the middle price may also be from an incompetent contractor as well. Picking the most expensive also might yield
    the same results. In a lot of cases contractors will throw out a high number because they do not want the job, it is above their pay grade, or do not have the time to do the work.

    What is one to do? Part of due diligence is the referral process, asking around so to speak to
    other RE investors, Realtors, even Angie’s list. I would ask to see another similar installation completed as well as a reference or two.

    Never deal with a contractor who only offers up a cell number as the sole means of contact.
    There are no successful contractors without a physical address, and please take the time to go to this address and make sure it is not an empty lot.

    On many occasions I will not bid a job, due to my gut feeling that one: the property owner is wasting my time collecting bids, and two they have no idea what they actually want done.

    Leaving my company to design their system for the low-baller, don’t get me wrong I design all the systems. Price slashers do not and are fulling thinking they will low ball the customer and later find that one hidden thing to spring on the property owner that will add the proper margin to the job.

    Unless something is truly hidden any contractor worth their salt explains ahead of time to the customer what deficiencies exist and offers to include them in the scope of the work.

    A quick example of specifics from an hvac contractors point of view is: what size is the new equipment to be, and how did you come up with the size? Old equipment is 99% of the time too large, and the duct system is too small or falling apart or installed incorrectly to begin with. What brand are they installing? Require the full model numbers (this stops bait and switch), what warranty and will the contractor service the warranty?
    If they don’t do service I can assure you they are never coming back.

    Multiple quotes are worthless if you are not comparing apples to apples.

    The second point is contractor relations and this has two parts, if a customer was tells me to cut my margin in hopes of lots of other jobs, I would roll my eyes. This is the one B.S. line all landlords use in hope of getting a better price. My business is 100% referral, and I can tell you when I am done they will be using me again. That line only works with a newbie contactor and you don’t want to hire them unless you are doing a quick flip and quality and time line does not matter.

    The reason most contractors prices vary widely is they have no idea beside doing the work on how to run a business. They have no idea what their break even price is, or how to price their jobs at all. Most guess at a number based on what they call the going rate, this is acquired by calling other contractors posing as a customer. Either way you could see how they might guess low and this will be a detriment to your job as when faced with a better paying gig or losing money they tend to vanish.

    I know it is not the customers job, but if you find a talented contractor you might want to help them run their business in a successful manner by not taking advantage of their lack of business skills.
    I have done just this with my repeat contractors with great success.

    Finally the idea that keeping the money in your pocket, with your contractor behind the eight ball and in the process ignoring the agreed upon payment schedule is going to give you a reputation that will leave you working with pond scum on all of your projects.

    Write everything down that is in the scope of work, when completed make payment in full as agreed and one time. This one item will get you a loyal contractor who will give you more then your monies worth on every job.

    I could do business with no contract with some of all my customers, but they would never ask me to work on a handshake as they have respect for me as a professional businessman.

    The Golden Rule is golden and will make you a wealthy investor if you use it.

    A win win deal also applies to working with a team of good contractors. Contractors working as a team are self policing as they have to work together to arrive at the end result and get paid.

  2. Good Points James – I have been on both sides of that equation but more on the good side now that I have done lots of deals and have perfected the process. I have made better business people out of some the contractor’s we use. Always create a win-win.
    Dennis brings up some great & so true points. Get as detailed as you can in your scope of work & pay for it if you don’t how to do it yourself. I use an architect sometime to specify details. It is an upfront cost but can save you as well through an effective bidding process.

  3. Great Article! This is a subject that is often neglected by most of the real estate investing trainers, schools, and late nite clowns, out there however it is one of the single most important thing new investors should understand. NEVER pay your contractor in full before the job is compleated. We do not even agree to the 1/2 up front nearly every contractor will push for unIess we have done multiple projects with them and know their ability to perform as agreed. A 1/3 up front, 1/3 at a specific agreed upon point (Typically after a city or institunitinal inspection), and 1/3 at compleation of project is more than fair. If the contractor says they can not afford to keep the project going beteween draws do not hire them. Think about it, If they can not afford to pay their employees or cover opertionial expences for the couple days or weeks they will be on your job is this really the guy you want to entrust your project to? I have worked with hundreads of contractors in multiple areas i.e. commericial, residential, industrial, and on projects ranging from $500 to $500,000 and every one of them was able to perform with this payment arrangement. And finally if you want to attract and retain good contractors do your part and PAY THEM ON TIME. The most important thing to a contractor is that you have their check ready at the time and date agreed. Do not BS them or delay their payment without good reason or you will be getting a diletone the next time you need a bid.

    • Excellent points and tips Brandon. You are correct, most of the late night guys don’t talk about this, I guess they figure it doesn’t help fill their own pockets as much as spewing their “secret investing methods”. Thanks for the comment!

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