Is the Answer to my Contractor Problem Starting my own Company?

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I love fix and flipping homes and buying rental properties.

I love the money you can make and finding great deals, but my biggest problem has been working with contractors.  I have 9 fix and flips going right now and I can’t find good people to fix them!  I have interviewed new contractors, hired new contractors, used old contractors and I am having no luck finding enough great contractors to keep up with the work.  I have decided to take my own advice and focus on how to improve my luck with contractors by writing out this article.

My luck With Past Contractors

In the past I have never had so many fix and flips going at once.

I also had a great contractor who was a little slow, but could handle a few jobs at once and do a good job.  However, on one of the last flips I had this contractor work on we ran into major problems.

He hired a worker who used to work for a HUD field service company.  I know the kind of work many HUD field service companies do so I was a little worried about how it would work out.

The contractor let this worker do a major rehab that was over $40,000.  New kitchen, new bath, rebuild trusses in the roof (because the previous owners had taken out a support wall), new doors, new paint in and out and a bunch of minor items were fixed on this house.

Immediately we had problems on this job including cabinets hung over an inch off level, horrible drywall finish work, bad paint jobs and more.  I talked with the contractor and he admitted the work was bad and had it redone.  The job also took almost 4 months to finish, which was way too long.

The worst part is the contractor told me the job was done three times; I drove out to the house 15 miles away and it wasn’t done!  His worker was telling him it was done when it wasn’t.

I decided to give the contractor another chance, because he promised he would never use this worker again on my houses.  He admitted he was good at plumbing and electrical, but not painting or drywall.  He said he had other guys who could work on another flip I had ready to work on.

The new house took almost two months to finish and less than $10,000 in work was done.  New paint, new bath, a few new cabinets and other minor times were all that were needed.

Guess what?  The few cabinets that were added were hung crooked!  The contractor used the same worker he promised he wouldn’t use for the entire job. When I asked him about it he said he never remembered telling me he wouldn’t use him.

My Luck With New Contractors

Having to fire this contractor happened at a very inopportune time, because I had so many flips I was buying.

I used an old contractor for one flip who I stopped using because he got very expensive and slow.  I started using a contractor who is a licensed plumber and who has been great to me as a plumber.

He wanted to go out on his own doing full remodels and I helped him get started with a job on one my flips.  I also hired a brand new contractor that I found through Home Depot.  He sounded awesome, had a great crew, and promised short turn times.

Related: The Investor’s Guide to Working with Contractors

The Results of the New Contractors

The contractor who I used to use and decided to try again is being very slow, but getting the job done.

The plumber is doing awesome, but he is not big enough to handle multiple jobs yet.  He has hired another guy to work with him and I have high hopes for the future.

The new contractor is doing a flip, but his bid was higher than I hoped and he is taking way longer than he said it would take.  I had him bid two new jobs and his bids were astronomically high.  He also has been sketchy on getting bids back quickly and returning phone calls.

I Have no Choice But to Hunt for More Contractors!

I bit the bullet and paid for Angie’s List last week.

It only cost me $7.99 for the entire year, so I wasn’t too upset about the cost (I remember it being much higher).  I am meeting two contractors in the next week I found off Angie’s List.  I hope they can help me get some more properties fixed and sold so I can buy more.

Related: 9 Tips for Choosing and Managing Contractors

Planning for the Future with Contractors and Fix and Flips

With all these problems with contractors, I started thinking about how to improve my system.

I know an investor in my town that has 60 or so rental properties and he has a full-time handyman/contractor on his payroll that maintains his properties and fixes up new purchases.

I have ten rentals and I plan to buy 100, which will require a fair amount of maintenance.  I buy 10-15 fix and flips a year and I hope to increase that number over time.  With so much work going on, I am wondering if it would be worth it to hire my own contractors/handymen and put them on the payroll full-time.

Pros and Cons of Creating My Own Contracting Company

Pros:

  • Contractors dedicated only to my properties; I know I will have priority over all other jobs and get work done quicker, which saves me money.
  • Save me money; paying a handyman or contractor full-time I would be taking over the management of the jobs and cut out a general contractor saving me money.
  • I have control over the jobs; I don’t have to worry about costs increasing or contractors cutting corners to make more money for themselves.  The workers do what I want or they don’t work for me anymore.
  • I don’t have to worry about finding new contractors when other contractors don’t work out.
  • I could potentially market this company and start doing outside jobs for another income source.

Cons:

  •  I have to manage people and manage jobs which takes time (I do have people on my team that can handle most of this work).
  • I have to create a new company, add payroll, workers comp, insurance and take on more liability (Again my team can take care of the paperwork and accounting).
  • I will have turnover with handymen and contractors and may have to hire out specific work like electrical or plumbing if permits at required.
  • I will have hourly workers who won’t be extremely motivated to work fast.
  • The market is crazy here and it may be tough finding workers and the workers willing to work for hourly wages may not be as good as a general contractor.
  • I have never been a contractor myself, but I do not the basics of making repairs.

What Do you Think?

What pros and cons did I miss and is it worth the pain and hassle to set up a contracting crew of my own?

I would not have just one handyman, but a crew that could work on multiple houses at one time.

Is anyone else out there managing their own crew of workers?  If they saved me enough money and time I could even hire my own dedicated manager to look over everything.  One of my new goals is to improve our contractor situation so help me out!

Be sure to leave your comments below!

 

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About Author

Mark is Real Estate Broker and investor in Greeley, Colorado. Mark invests in long-term SFR rental homes and also does 8-15 fix and flips a year. Mark started a blog this year that focuses on investing in long term single family rentals.

42 Comments

  1. I’m certain we’ve all been there and probably are still in your pain spot!!

    I put ads on craigslist often, in their “gigs paid” section. It seems there’s some smart phone app that scrapes craigslist for key words and folks reply in minutes. I phone interview. Get a ball park price based on a verbal description. I want someone bright enough to be able to know a standard price based on; paint a 1400 sq ft house, 2 wall coats, 1 ceiling, 2 coats trim paint on all doors and trim. This should NOT need an eyeball to know the price is precisely and without variance: $1400 labor and takes 4 days. If I hear other wise I drop them. In fact I’ve stopped asking for bids. I now give the price I’ll pay and have them sign a completion contract with a bonus if they complete by 2 days after the date they agree to. :)

    Mark you didn’t mention penalties in your contract of $500 per day past the date they agreed to? Not sure why you’re not doing that? Some penalty and some bonus structure.

    • Thanks Curt. I have never used penalties or bonuses but that is a good idea. The problem i see is we almost always change something along the way which would change the scope of work as make it difficult to enforce a contract with penalties.

  2. Mark, sounds like you have a lot going on. We (my dad, brother, and I) structured our business in reverse order. We have a construction company, then started buying rentals. We buy distressed properties in rejuvenating downtown areas that needs lots of rehab. We can only do this efficiently because of the construction company. It does take more active management, but for us the positive outweighs the negative. I think if you already have people in place to help you manage the crews, then it could prove advantageous to your fix/flip operation.

    • Thank you for the comment Billy! I know a few contractors myself who started fix and flipping because they could save money on construction costs. I think I am going to talk to a couple contractors/ex builders I know about this further.

  3. I was a highway contractor for ten years. The smallest and largest projects I managed during that time were anywhere from $75k to $45 million, so I understand that I’m from a different world than renovators. But that’s the point I’d like to make.

    In any business, if you can do something well, why not do exactly what you do now and make a lot more money? It’s all about scale. It sounds like what you are doing with the fix and flip business. In the contracting world, if you are good at fixing houses and making $5k profit from each job, why not do the same thing on a bigger scale and see your profits be in the millions? That is exactly what most good contractors do–if they’re good at what they do, they go after bigger fish.

    In the contracting world, you’re the smallest prize out there. Basically, home builders and renovators are the bottom of the barrel of the contracting world, because they don’t have to be sophisticated or great at what they do to make a living, and if they were good, they’d move on to higher profits.

    That leaves you in this painful world you have now–you have greatly scaled your business, but you can’t find contractors who can do the same at your level. And you never will.

    I’ll bet that more than a few successful commercial contracting companies were started because the owner met the same problems as you. If you can be successful at fix and flip, you can be a successful contractor. I’ve personally seen owners like yourself start their own contractors simply for the reason you’ve stated, and in every case I’ve seen them become contractors and ditch the house stuff. Why? Because there’s way more profit in doing big construction work than in 10-15 flips a year.

    So my advice to you–if you want to pick up the pace of your fix and flips, start your own construction firm to manage the projects yourself. But if you’re as good at flips as you sound, be prepared to leave it all behind when you find out how much money you can make from leaving the housing world behind.

    • I like the way you think Darren! I am always open to new opportunities and I had this thought in the back of my head already that it could be a big money maker. I always wanted to build houses at some point In my life as well an this would be a great stepping stone for that.

  4. Mark,
    More than anything it gives you the one factor that matters most in flips, control. You control timing, at least to the extent possible. You have much better control of costs. You take the markup on labor. We do all but some of the licensed work ourselves. At least for us it works great. And since we are still ramping up, gaps are filled by hiring out to others at a nice (but smaller) profit. And yes, it does help that we have contacts in the trades, as well as among the builders.

  5. I am a general contractor in texas.
    I work for investors only. Which by the way is extremely hard to do. Way to many investors try to squeeze thier deals out of the rehab part of the business. Running way to many projects at one time. Dont do it. You are putting way to much pressure to make the numbers on the contractor.It will cause the issues that you have now. You just cant cut corners on the remodel. The contractor can’t cut material prices. So for him to make any money he has to cut in the only place he can. That is cheaper labor! That usually leaves him hunting for guys that are not highly qualified. End result bad work caused by the pressure put on by investor. Structure your buy better. Be realistic about labor and materials costs. You can not open a floor plan, texture and update everything in home for 15,000. It just can’t be donrYou will get better results… Scale back your business!

    • Mike, I have been doing this long enough to know what costs should be. My last bid I got from my new contractor was $26,000 for a 1,000 square foot house that needed paint, hard wood refinished, a roof, doors, new vanity, new fixtures and minor siding work. The kitchen was fine, no drywall work, no electric work, no plumbing work. I thought that bid was ridiculous especially since the last job he did he bid for $32,000 and it needed roof, brand new bath, new counters, painted cabinets, walls moved, 90% of drywall redone, plumbing and electrical work along with fixtures am all The Minor stuff.

      I understand where you are coming from and I understand many investors try to squeeze their contractors. My contractor who I had to fire I never complained about cost to him. He was similar in price to other contractors I have used.

      If I find the right people or create my own company I can handle this volume no problem. I always budget in $5,000 extra for unknown costs like increase in repair budget. The flips have room for profit.

  6. I’ve been tormented by this dilemma for years. With only a limited number of hours in a day, you have to prioritize in order to really get good at something. If you want to be good at flipping, searching for deals should be your focus. If you want to be good at drywall and paint, then do that but just know that you’re probably missing some flip opportunities while your managing contractors or watching the paint dry. I’ve found that there’s nothing more efficient than hiring a team of craftsmen (not generalists) to get the job done right the first time. Both referrals and trial and error have been my best sources of good talent.

      • Mark,
        Unless you are doing a ton of houses, licensed trades such as plumber, electrician and hvac will need to be hired per job. But drywall, roofing, carpentry and tile layer etc are generic and common enough skills to hire people.

  7. The same can be said for having your own property management firm. If you do not manage your own properties, creating a contracting company is crazy.

    However, if you can see that the old saying is true “To rely on others is to be disappointed”, then you may want to.

    • I am a strong believer in delegating and letting others help me reach my goals. But I also am a big believer in creating your businesses. I would not be doing any work myself, just management which I coulda eventually hand over to someone else.

  8. In my first construction management class in college, someone asked the professor, a large man, if construction management involved swinging any hammers. He looked shocked and replied, “Does it look like I’ve ever swung a hammer? We don’t do the building–we tell other people to do the building!”

  9. I started my own contracting company for my rental properties. I got a builders license and LLC created. The main reason is for liability. It gives me an additional 1 million dollars for insurance. Also I can use it for workers comp if a contractor has no insurance. Some rental policies reject claims if you did the work in the property yourself. I will eventually hire employees but need more houses first.

  10. I use craigslist also. Advertise for a specific skill and hire them as Contract Labor. If they do a good job for you, then hire as full time employee. I sometimes let them bid the labor with me supplying materials. I pay $100/day for early completion and charge the same $100/day for late completion.

  11. Maybe the truth is more in the middle.
    If your main goal at this time is to avoid contractor issues and streamline your flips and rental maintenance maybe create a construction and maintenance manager position.

    So a guy that will basically GC the rehabs and coordinate the repairs and maintenance on the rentals. They won’t necessarily do the work (or at least not much) but will hire all the needed tradesmen and laborers for the various jobs (Like the GC does) but since they manage all your projects he can move them around as needed, his focus will be to keep all the jobs on time and on budget and without hiring a lot of full time laborers they will still contract with them on a 1099 basis like you do with a GC.
    When not on the job sites they also can go to the local big box stores, supply houses and specialty suppliers and negotiate bulk material pricing since all your materials for all your jobs will be ordered by the same person you can consolidate all of that (Which you could do with GCs but they like marking up materials so they resist it) and save on those costs.
    Pay a base salary and then say quarterly bonuses based on the overall performance of the rehab portfolio for time and budget in that time (Not each project since if you have one that isn’t going to earn a bonus they might neglect that one to put all the resources into another to finish early to get the bonus tied to that one).
    If they work out well, you continue to scale or decide you want to take on jobs for other people at some point then you can always establish a stand alone company and just move them over to running that and hiring the full time construction employees then.

    All conjecture but seems like a something like that is a nice intermediate step that would meet the immediate need and to get your feet wet with the idea of starting a full on company to do this stuff.

    • Shaun, I think that is exactly what my end goal is. Basically have my own general contractor on salary who is working to get me the best deals and work done quickly. Thank you for the information.

  12. Mark,

    I have done it both ways- had my own team for 5 years. I also hired out “whole house” projects for years on contract. After 75 houses, I am tending to lean in the opposite direction of what you suggest. I am leaning to bidded projects with draws based on finished work.

    Here’s why… if you get your own team, you will still have the same pressures (as you feel with a bidded team) only you will have transferred ALL of the pressure onto yourself. At the end of the day, you are paying more for slow work than you are for fast work. Yes, your team will be aggressive and out to impress on the first couple of houses. They will look busy every time you are in the house. Eventually they will figure something out… hey, I get paid $20 to install a dishwasher in one hour, or $60 to install the same dishwasher in 3 hours.

    Eventually, the will start to think they do all the work while you make all the money.

    Eventually, they will tell you all the reasons why things take longer and longer, and they will act frustrated as h-ll for these delays. You will write a check based on hours, and they will go home happy. You will try to figure out ways to make it work, even change teams from time to time, but it never changes. SLOWER WORK PAYS MORE WHEN YOU PAY HOURLY.

    I myself vascillate between how to get it done, and right now I am bidding jobs with tight draws for pay and completion dates in order to transfer the stress onto a team. Feel free to pay hourly, but I would advise RIGHT NOW that you go to your doctor and ask for high blood pressure medication. If he says you don’t have high blood pressure, tell him: “Don’t worry, doc, I will have high blood pressure. I plan on paying my workers hourly.”

    • Hi John,
      Thanks for the comment. This is the side that I would be worried about. I know getting hourly paid workers to perform quickly is not always easy. This is why I like Shaun’s idea of having my own GC with bonus system to overlook the workers which would transfer the stress from me to the GC, but also keep all the work done in house and on my properties.

  13. I understand the reasoning behind why you want to start your own construction company, but like others have stated, you have an area you want to focus on because you like it and your good at it. Taking on the construction aspect, even with others to manage it, will mean your attentions will probably get split even more because something’s are going to need YOU decision on. I’m leaning to one of two ways. 1: expand your current property management department, manage other properties besides your own and then negotiate lower contractor rates because you are able to throw more business their way. At the same time, make sure you have some sort of rewards and penalty system for those jobs that are bigger or time critical. 2. Find a good GC that is smaller, help him grow his company, and maybe become a joint venture partner or some such, by providing work and some of the capital necessary for a smaller company to grow to a larger company with the caveat that your jobs take priority.
    When it’s all said and done, your wanting some sort of system that requires very little management by you, will get it done the way you want with a high accountability factor. It won’t ever be perfect, but if you set the groundwork from day one of what you want then there isn’t an excuse of “things keep changing so we aren’t sure what your asking for.” Good luck in whatever approach you take! And thank you for all of your candor and articles. Helps the rest of us see we aren’t the only ones who have the same problems. Lol!

    • Roy,
      Thank you for the comment! I have thought about expanding property management, but after analyzing the current market and what is required there is no money in it. Competitors in the area are charging 8% to manage with no leasing fees. We would have to re-work things significantly to start managing other peoples properties. I do like the way you think.

      I have tried to help small GCs get bigger and that was the thoughts behind my newest GC, but he has not performed up to what he promised.

  14. Hey Mark, Can you take a picture of you leaning against the lamborghini in office attire, while telling your guys at a jobsite you can only pay them $14/hr and not $17 haha. I really hope you don’t drive that car to the work sites. Ok, that was poking fun at you, but is also the EXACT reason why you need an experienced, ball bustin GC who drives a big pick up truck and smokes marlboro’s! He should work as hard as any crew member, but always be their boss. Because the guys under him will respect him and not try to BS him. Because he will know if an extra repair is really needed or if it can be fixed inexpensively. I would do a small base pay for this guy (cigarette and beer money, some food too), but have the majority of his pay be tied to net profit on the flip. Keep the math simple, pay him very well or he will turn on you. Remove yourself from the jobsites as much as you can, and don’t bring that car around the jobsite. Nobody likes seeing the boss drenched in money while they are workin in 100 degree heat for $15/hr. They will respond much better to one of their own and you will only have to deal with 1 guy most of the time.

    • Thanks Dave, I do not drive my car to the job site, at least the Lambo. I need to get my 91 Mustang registered again and start driving it to sites.

      I appreciate the advice and that is the sort of set up I want.

  15. Mark and the other contributors,
    Thank you for the discussion on here! I am in the vacation rental management business. We manage some homes for owners and my wife and I own several ourselves that we have either built or renovated then placed in our short term rental program. We are in a relatively small resort area, about 3 hours from a major city. Most contractors in our area are on, what the locals call, “valley time” so trying to get contractors out to do work in a timely manner is almost impossible let alone having the work done well. I am in the process of searching for a full time maintenance handyman to service our rental properties with the intention of selling the services out to other homeowners or companies in need of a reliable service where the work is completed to a level of quality that I would expect and is lacking in our area. Your comments and the comments of the participants have really confirmed my thoughts on this new position in our company. The added suggestions on hourly, salary and bonuses or penalties are good as well though as Mark had stated sometimes the penalties won’t work due to scope changes that we have to make due to unforeseen issues once the walls are opened up, etc. The last project we completed, which was over budget and took far too long had me questioning my use of the contractors we had awarded the job to but I am clearly not along with respect to contractor issues. All the best, keep up the great content!

  16. Mark –

    I think Shaun is right. One of the most successful flippers I know does about 100 houses a year with a GC. This man doesn’t ever do any of the work or the managing of the work. His job is to build the business, and he takes a great deal of time hiring the “perfect” people in his business.

    It’s a tough call for sure but in the end, you have one more job when you have a bunch of employees. Nice post.

    Sharon

  17. Great article and comments! I’ve been working a billion hours a week getting quotes, managing the work…

  18. I am in the same boat as you. Have worked with contractor friend on last two houses. Approached him about being a money partner and helping him obtain his GC license for a percentage of profit. Also like the idea of having more control over the work on my houses. Would love to know what you decide and what influenced your decision.

    • Hi Thomas,
      I had lunch with an old builder I know. I told him a out my dilemma and he suggested I hire a full time maintenance guy to work on the rentals and flips to go along with my GC’s. I can sub out electric, plumbing, roof etc that the maintenance guy can’t do. Then when I find a good maintenance guy or two I can start subbing out more jobs and using my GC’S less.

      I’ll keep everyone updated.

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