Flipping Houses

5 Vital Rules For Working With Contractors on Investment Properties

Expertise: Landlording & Rental Properties, Real Estate Investing Basics, Personal Development, Business Management
29 Articles Written

As I get older, I want to believe that I get wiser. I learn from my mistakes. I learn from others' mistakes. As I get older, business has gotten easier, but there are still areas of my business that I seem to struggle with. I've talked to many other investors, and it seems that they too struggle in this area: Contractors. The dreaded contractor.

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I want to be clear, my business has come a LONG way from my beginnings. I’m no longer on the job site working and electrocuting people. (My partner won’t let me work on job sites anymore.) My biggest struggle in my business right now is finding and keeping quality contractors.

As I said earlier, I’ve learned from my mistakes and others’. Every time a mistake is made, I try to figure out how can I sort it out so I don’t repeat it again. I now question whether the pendulum has swung too far, and whether I now struggle to keep contractors because I have set up too many rules. I want to share with you the rules that we have set up and see if I should keep my rules or relax some.

Related: How to Choose the Best Possible Contractor For Your Next Renovation

All of these rules have been established because I have been burned by contractors in the past.

5 Vital Rules For Working With Contractors on Investment Properties

Rule 1: Never give a contractor more money than the work that was completed.

When we are working with a new contractor, we require the contractor put a week of work in before a draw. We have been burned so many times by contractors that we don't want to take the risks any more. They say they are going to do the work and then disappear. Most recently another investor I know was ripped off by a contractor for five figures. The contractor bid his jobs and cut rates and took the deposit money and split them. We've had that happen in the past, and we don't give deposits until after the relationship has been established.


Rule 2: Never make the final payment to a contractor until the job is completely done.

All too often contractors will disappear after getting that final check, even if they still have work to do. For some strange reason I haven’t figured out yet, the last 10% takes 25% of the time. I don’t know why we don’t just rename it “the last 25%.”

Rule 3: Understand your contractor’s cash position.

If they can't make it through the week and pay their guys with cash on hand, any delay on the project could threaten whether or not they can complete the project. We've seen it too many times that everything is fine up until something goes wrong and the contractor doesn't get his draw. His workers stop showing up because they haven't gotten paid, and the project comes to a standstill unless you carry his payroll.

Rule 4: Control all materials.

The contractor provides us three separate lists of materials. We will do three deliveries during a project: rough, between rough and finish, and finish materials. These three orders will cover 85% of all the materials they will need. We do this for two reasons. One, it controls costs. We have preferred vendors that we get preferred pricing from. Second, after auditing projects, we have found that contractors seem to overbuy a lot of materials when they are in charge of materials. For some reason, those materials never make it to the next job site.


Rule 5: Don’t give new jobs to contractors who can’t even complete one project on time.

All too often, we have contractors who see the amount of work we have and they want consistent work. They continue to push and say they need/want more work. If they are two weeks behind on one project, that delay will multiply by the amount of projects they have going. And eventually they will have a cash crunch and all of your projects will stop. It is easier to find one contractor to pick up the pieces of one project than to pick up the pieces of multiple ones.

Related: How To Find & Manage a Top-Notch Contractor for Your Projects

All of these rules have been created over the last 12 years, and they have served us well for not getting into trouble, but they have also cost us contractors over the years. It also makes it harder for us to find good contractors who can deal with this.

Have we gone too far on protecting ourselves? 

I’d love to hear some opinions.

Mark Ainley is an investor, managing broker, and property manager with almost two decades of experience in real estate. Mark found his way into real estate by purchasing and flipping condominiums prior to the great recession, and since, he has built his own portfolio of rentals alongside co-founding GC Realty & Development LLC (GCR&D), a full-service real estate brokerage, property management and investment firm, and GC Realty Investments (GCRI). He has rehabbed and stabilized over 450 properties and currently manages over 900 investment properties throughout the Chicagoland area. Mark was featured on CNBC’s TV show The Deed, which chronicled one of his rehabs. He has also been featured on podcasts like The BiggerPockets Podcast, The Real Estate Mogul Podcast, Joe Fairless, REI Diamonds, and Positive Phil.

    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied almost 4 years ago
    I don’t think you’ve gone too far in protecting yourself. Every contractor knows there are a ton of bad ones out there, and a good contractor should understand where you are coming from. That’s the problem, finding the good one… We do most of our work ourselves. We’ve found a couple of really great guys for smaller projects, like gutters and drywall. But for larger projects, no one cares about it as much as we do. Careless, showing up late or skipping days completely, 8-4 turns into 9-4, which turns into 10-3:30 plus an hour for lunch. They see this one house, and don’t think ahead. I also don’t share with them that I have another project after this one. If they don’t do a good job here, I certainly don’t want them hounding me for more work. These are great tips! Thanks for sharing.
    Mark Ainley Developer from Roselle, IL (Chicago Suburb)
    Replied almost 4 years ago
    Thank you Mindy for your reply! I hear you on the 10-3:30 work days. Sometimes these guys travel to and from just as long as they work. Blows my mind.
    Bennet Sebastian Investor, Rehabber, Broker from Orlando, Florida
    Replied almost 4 years ago
    Hi Mark, All those are good points and I don’t think you are being unreasonable at all. I started my career working for a very large construction management firm dealing with subcontractors who often had 8-figure subcontracts. It was a completely different ball game from the stuff I’m engaged with now as an investor/rehabber but the fundamentals remain the same. Prequalify your contractors, assure their proposals are sufficiently detailed and reflect the scope of work, get their license and insurance info, clearly state the schedule and periodically check with them to make sure they are still on schedule well before they are supposed to be on site, consistently check the work to ensure adherence to drawings/specs and workmanship standards and ensure draw requests reflect work in place. You should also have to be the project cheerleader to keep things moving forward in a positive way. Also, little stuff like complementing them on things they did well, sharing a laugh and providing lunch once in awhile go a long way to developing loyalty with your contractors and their crews. They’ll be excited to work with you again and you will be too. Rehabbing can definitely be exhausting but it doesn’t have to be.
    Mark Ainley Developer from Roselle, IL (Chicago Suburb)
    Replied almost 4 years ago
    Thanks Bennet, our partners definitely try to be cheerleaders to keep the sense of accomplishment high even though these guys make it tough at times. Thanks for feedback!
    Jeffrey Hare Professional from San Jose, California
    Replied almost 4 years ago
    Mark, all good points. As a California real estate lawyer who gets calls from investors and other property owners complaining about their contractor, my first question is “Is the contractor licensed?” My second question is “Does the contractor have anyone working with them on the job site?” The usual answer to the first question is “I think so but not sure,” and to the second, it is invariably always “Yes.” We then check to confirm (1) is the contractor currently licensed with the State for the type of work being performed, and (2) does the contractor have Workers’ Compensation insurance. If the answer to either question is “No,” the property owner may find themselves exposed to liability much more serious than unfinished work. Owners are urged to check the contractor’s status online at http://www.cslb.ca.gov.
    Mark Ainley Developer from Roselle, IL (Chicago Suburb)
    Replied almost 4 years ago
    Right on Jeffrey. Most owners/investors may even know a contractor isn’t properly licensed but they take the mind set if I don’t ask I will officially never know, and they feel they can turn a blind eye and it wont effect them.
    joann m.
    Replied almost 4 years ago
    no mention of mechanics liens from unpaid subcontractors who come after the property owner —– even if you pay the contractor if he does not pay his people, they file the lien on the property–this happens in all states— our attorney recommended a mechanics lien release from all subcontractors–
    Mark Ainley Developer from Roselle, IL (Chicago Suburb)
    Replied almost 4 years ago
    Joann, you are right….we have been burned on this one as well and do the same with the waivers now a days. Understanding our contractors financial situation also helps us avoid/prevent those issues too. Thanks for chiming in!
    Pyrrha Rivers Investor from Yokosuka, Japan
    Replied almost 4 years ago
    All very good points. Thank you for sharing. I think I made all of the mistakes you listed from 12 years in just one project. Lots of learning for me!
    Mark Ainley Developer from Roselle, IL (Chicago Suburb)
    Replied almost 4 years ago
    Thanks for comments Pyrrha! I think no matter how much due diligence we do, it is the mistakes we make that define us but it is how we learn from them is what helps us succeed the most.
    Steve Jervis from Covina, California
    Replied almost 4 years ago
    I’m a complete newbie to treat estate business and have been on this site for only as long as it took to read this articles and comments. Already I am learning so much. My goal is as a potential investor and not be a potential sucker. Thank you all.
    Daniel Cedre
    Replied almost 4 years ago
    A couple of things which we encourage all of our clients to add to their contracts with home improvement contractors are: 1) All components will be installed according to the installation instructions of that component’s manufacturer. and 2) All work will conform to the local building code. If we don’t make the performance standards clear to the contractor they have too much latitude and will often cut corners. If, in consultation with the home owner or landlord, a decision is made to perform an ‘off label’ installation then that should be agreed upon by both parties.
    Replied almost 4 years ago
    You’ve gotta follow rule #2 because you have to keep that carrot on a stick dangling in front of them. If they’ve already been paid, where’s the incentive to work? Imagine if every business paid their workers up front! Productivity everywhere would plummet.
    Michael Letarte from Leominster, Massachusetts
    Replied almost 4 years ago
    All great points!! You can also let your contractors know up front what the pay schedule will be. Usually a bill put in by thursday can be paid by the following thursday(or any other schedule you choose). Another thing you can inform them up front about is holding back 10% for at least a month after completion. I have found that sub-contractors usually leave something out, ruin something, or don’t clean up after themselves. They will avoid your phone calls if they have already been paid and something needs attention. Having that extra 10 percent will save lots of headaches in trying to get them back to the site.
    Karen Rittenhouse Flipper/Rehabber from Greensboro, NC
    Replied almost 4 years ago
    Mark: Absolutely no way you have gone too far. Contractors can make or break your profit (and your property) and it is hard hard hard to find contractors who are good and, especially, good consistently. I no longer want to use contractors who want up front money. Small jobs – 50% when 50% of the work is done and the balance when the job is complete. Sometimes, 1/3 – 1/3 – 1/3. Nothing makes me crazier than a contractor who is constantly calling for money. We pay and we pay well, but I am not a babysitter and if they have no money to buy what they need to do a job, I know they’re taking what I give them and using it for things other than my project. I am worn out by CONtractors. All that being said, I often pay for things like appliances or granite to be delivered to the job site, but I don’t want to hear that they can’t keep working unless I give them more money first. (notice a pet peeve??) Thanks for your post.
    Richard Varga from Burbank, California
    Replied almost 4 years ago
    WOW. You NAILED it with this article. I’ve been through all 5 of those scenarios and just thought I had run into a string of bad luck. Seems like its universal
    Sandra Mccain Real Estate Professional from New York City, New York
    Replied almost 4 years ago
    Thanks, Mark, for the great article and useful tips included. Well, I am sure we’ve already known these pieces of advice, nevertheless we still step on the same rake twice. Personally, I prefer to work with those contractors with whom I’ve already completed a project successfully. What I found extremely important is a contract, where all unexpected situations and occasions are mentioned. Another point that is worthy attention is setting the milestones. From my experience, I could say that if to give the problem a careful consideration right fro the start – we can save ourselves from later problems and avoid any omissions.
    Jeff S. Specialist from Portland, OR
    Replied almost 4 years ago
    I Love that CONtractors word from Karen. Have given starving workers money before work is done and gotten burned every time. My pet peeve, and have a great handyman with this problem, is getting right up the the finish line but not crossing it. I would fire him and have before but he is so good and reasonable that have not found a replacement that comes close. Many investors are struggling right now to get and keep good workers. Another problem is the creeping up in prices that occur when trust and supposed friendship develops. Tough to get extra bids when working with someone for a period of time.
    Shane Rupe Investor from Grand Island, Florida
    Replied almost 4 years ago
    Great post Mark! You are absolutely right about the difficulties in working with contractors. These are all valid points and ones I learned before getting involved with my first project. This knowledge is invaluable when working with contractors. Money is the only leverage you have over a contractor, always remember that!
    Justin Jocewicz Investor from Royal Palm Beach, Florida
    Replied almost 4 years ago
    100% agree with this post. I have a long list of “Do Not Use ” contractors in my phone. It is actually sad. I just told my wife yesterday that we could probably make a pretty good living brokering contractor deals! I find that professionals move fast and anticipate possible pitfalls. Amateurs are focused on price. The sweet spot is somewhere in the middle, but I have yet to find someone reliable at a fair price 🙁
    Account Closed from Frederick, Maryland
    Replied almost 4 years ago
    Hi Mark… if the boundaries and parameters that you’ve set to protect yourself, help you reach your goals, then, no, you’ve not gone too far. You have to do what’s best for you. Often, the best offense is a good defense. However, I believe that such is far more applicable in the world of sports, more so than in the realm of successful investing. After all, the defensive position of protecting cash in the likes of bonds, CDs and the like, pay little more than stuffing it in the mattress! Perhaps, taking an offensive position and moving from hiring CONtractors (props to Karen) that work FOR you and change to partnering with PROfessionals that work WITH you could change things? The dichotomy that exists within the REI industry puzzles me… one which fully acknowledges the essential role the contractor plays in the success of projects, yet continues to keep them at arm’s length as a service provider rather than a partner. The widespread wisdom that counsels new investors to build their team with folks that are also investors (e.g., attorney, CPA, real estate agent), is solid advice – what not apply that same advice to the contractor? Solid construction professionals are in short supply and in high demand. As a result, the truth of “Econ 101: The Basics of Supply and Demand” apply… they basically get to name their price. As well, those who are in such a position have the luxury of choosing their clients and projects. And typically, retail customers pay substantially more than most investors are willing to, and the choice and type of projects may offer non-monetary benefits that rehabbing doesn’t. Some of the best construction pros I know don’t do any marketing and usually have a continuous pipeline of work coming their way nonetheless. So why would this class of professional want to work with investors? What do we have to offer them that is a better gig than what they already have?
    Russell Brazil Real Estate Agent from Rockville, MD
    Replied almost 4 years ago
    All great points Michael!