Why You Should Never Pay Your Contractor Up Front
I preach all of the time about the need to vet contractors carefully before using them on an investment property (or any property for that matter). There are simply too many fly-by-night contractors out there who will you tell you what you want to hear to get the job, but will ultimately burn you in the end. In fact, one of the reasons I really like the turn-key model is that it insulates an investor from ever dealing with contractors. (A turn-key property is purchased with the repairs already completed with no need to manage a rehab or worry about the funds needed for repairs –see article on this topic)
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With that said, I'll be the first person to admit when I make a blunder â¦ and I will openly admit that I recently made a mistake that cost me some money. While we have great long-term relationships with the daily contractors in our investment business, I needed a specialty contractor to do some work at my personal house and I simply didn't take the time to perform the necessary due diligence on this particular contractor. While this gentleman appeared to be very knowledgeable and professional, he was also less expensive than other more reputable contractors in this trade. Like many investors do on investment properties, I was more interested in using the less expensive contractor in hopes of saving a few bucks â mistake number 1.
After having met with this contractor 3 times and agreeing to pricing, I committed the job to him. Knowing that he was the kind of contractor that worked out of the back of his truck, it did not surprise me that he wanted me to pay for the materials up front. Against my better judgment, I cut him a check for the materials with the understanding that the work would commence a few days later â mistake number 2. Suffice it to say, it has been almost a month and this contractor is nowhere to be found.
I am not proud of the egg on my face from this experience, but I really think it’s worth sharing and reiterating the importance of working with reputable contractors – even when it costs a little more. In fact, this experience has led me to create a personal principle that I believe is worth passing on to other investors:
Never work with a contractor who needs payment before work has started (including materials).
If a contractor doesn't have the means to float material costs and some amount of labor before receiving a draw, they simply aren't worth the risk of doing business. I don't care if it's your friend, your cousin or even your pastor â a contractor who doesn't have the cashflow to begin a project is one small crisis away from walking away with your money.
The great thing about a forum like BiggerPockets is the opportunity to learn from others experiences and mistakes. Having been in this business full-time for seven years, I have made my share of mistakes along the way. While I have learned from others, I am hopeful that I can also steer others clear of potential pitfalls. Unfortunately, working with bad contractors just happens to be one of those areas that new investors are especially susceptible to. To those investors I simply want to reiterate the benefits of paying a little more for a reputable contractor rather than compromising quality and honesty.
Photo: US Army Corps of Engineers