Contractors are difficult to deal with.
It’s just the nature of the beast.
But if you are a landlord, or any kind of real estate investor, dealing with those in the construction trade is part of daily life. This is especially true for landlords, like myself, who choose to invest in fixer-upper rentals to gain that extra equity push. (See How to Make $100,000 Per Year with Fixer-Upper Rental Properties for more info on this “BRRRR” strategy.)
But how do you start? How do you know they aren’t ripping you off? How to do you decrease the stress and make the process streamlined?
The truth is, there is no perfect system. But hopefully these eight tips can help.
8 Tips for Managing Contractors and Handymen
1. When to Use Bids vs. Hourly Pay
Larger jobs tend to work better by “bid” where smaller jobs tend to work better by “hourly” pay, but there is no hard and fast rule for either. Some contractors prefer one method over another, but it’s usually negotiable.
Having a contractor bid a job helps you estimate exactly how much the job will cost before the contractor begins, which can help you budget and plan a rehab project. You can also compare multiple bids to see which contractor will be the best.
For other jobs, however, a bid is just overkill. Why get multiple bids from contractors just to fix a leaky sink? Other jobs are too difficult to bid until work has begun – such as water leaks or issues behind walls.
Typically, anything that will be over $500 I try to get a bid for, but things under $500 I will usually just pay hourly. And unless you plan to flip houses or do a lot of total rehabs, 90% of the work you’ll need finished will be hourly.
2. Always Sign a Contract
When you finally select a contractor to do work for you, make sure you get everything in writing in the form of a contract. It doesn’t matter if you are hiring by the hour or by the job, just be sure the conditions are spelled out in a contract between you and the contractor. Most good contractors should have their own contract, but if not, you can pick one up online through websites like www.uslegalforms.com.
The contract should outline what work will be done, deadlines for getting the job finished, the compensation for the work being performed, and when that compensation will be rendered. This contract will keep everyone honest and remembering exactly what was agreed upon, as well as give you legal ground to sue the contractor if the work is not performed according to the contract. Also be sure that both you and the contractor sign the document.
Also be sure that both you and the contractor sign the document.
3. Be Clear with Instructions
When dealing with contractors, you must be 100% clear about what you want completed. Don’t simply say “paint this room,” but let them know what color, if you want the ceiling and trim painted, and even spell out that you don’t want paint on the carpet. It may seem silly to spell everything for the contractor, but trust me: the more detailed you can be with your instructions, the less risk you have of something going wrong.
4. Keep the Contractor Hungry
This tip is incredibly important: keep the contractor hungry. If you pay the contractor upfront for the work, they have very little motivation to get the job done fast or right. They’ve already been paid. Therefore, as the landlord, it’s wise to always give the contractor just enough to get by but not so much that they aren’t motivated to work. Work out payments on large jobs so that there are benchmarks to hit before payment is rendered.
Also, on big rehabs it’s typical to get “1/2 down” so the contractor can pay for materials, but, at least in the beginning of a new relationship, I’d recommend paying this 1/2 directly to the store they plan on buying the materials at (so they don’t pocket the money.)
5. Ask for Invoices
Don’t rely on your memory to know who to pay, when. Not only is this a quick way to get taken advantage of, it will also bring hell upon your bookkeeping. Require all contractors to give you detailed invoices for the work they do and keep an accurate record of all the money you spend.
6. Get a Lien Release Signed
When a client doesn’t pay a contractor, that contractor can place a lien on the property they were hired to do work, making it difficult to ever sell the property until they are paid. This is known as a contractor’s lien or a mechanic’s lien. Therefore, when a large rehab project has been completed, always get the contractor to sign a lien release form. This form simply states that the bill has been paid in full and the contractor releases their right to file a lien on the house.
7. Verify All Work Before Paying
After a job has been finished, always check to make sure the work was done correctly. You’d be surprised at the number of times we’ve received a phone call that the work was “done” only to find out the contractor had left a lot of loose ends not yet tied up. Sometimes the work hadn’t even been started! Therefore, always verify that the work is done and meets your expectations before you hand over the final bit of cash.
8. Reward Great Contractors
Finally, when you find a good contractor, do everything you can to hang onto them. Perhaps the best compliment you can give a contractor is fast payment. Many property management companies wait 30 days or longer to pay a bill, so stand out from the crowd by paying quickly.
Also, don’t be afraid of doing other small things to make the contractor feel valued, such as the occasional thank-you note or small gift card after a big project. Good contractors never need to fight for work, so make sure you are their favorite client and you’ll never need to fight for it either.
Dealing with contractors may not be the most glamorous part of your real estate business, but it is one of the most vital.Working with the wrong contractor will not only cost you money, it could cost you your entire business. Finding and working with a great contractor can help you make more money, work fewer hours, and have far less stress doing it. The good news is: dealing with contractors is a learned skill, something you will get better at if you make an effort to improve.
With that, what questions do you have? Leave your comments below and let’s talk!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.