Business Management

How to Best Work With Contractors as an Investor (An Ex-Contractor’s Point of View)

Expertise: Business Management, Mortgages & Creative Financing, Landlording & Rental Properties, Real Estate Investing Basics, Personal Finance, Real Estate Deal Analysis & Advice, Commercial Real Estate, Personal Development, Real Estate News & Commentary
228 Articles Written
Businessmen are meeting with contractors about business plans.

Oftentimes, I’ll hear of horror stories about relationships between contractors and real estate investors. The funny thing is, I hear it from both sides.

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For 23 years, I personally worked in construction, and for 10 of those years, I had my own contracting company until I got hurt at the age of 42. Today, my oldest son has his own contracting business, so I have plenty of stories and viewpoints from the contractor side.

I’ve also seen the other side, as the real estate rehabber or homeowner. Although I typically work with contractors that I have known for many, many years and I usually don’t run into any problems, sometimes issues still arise.

For example, there was an emergency call from one of my tenants last winter, and my property manager brought in an HVAC contractor whom I had never used previously. Next Monday, I'm going to court with this HVAC contractor, who was trying to take advantage of me by charging me outlandish fees when he never actually fixed the unit.

I also have a hard money deal going on right now, where the rehabber is unhappy with his general contractor, as he wasn't showing up consistently and was trying to grab the last draw and split from the job.

So, sometimes you still run into these types of problems.

find-contractor

Why Are Contractors So Tough?

You probably know the old saying that “the contractors are worse than the tenants.” Well, oftentimes, it’s true. Many of them are pretty much cavemen, and I know this because I was one.

When I had my painting company, it was a balancing act working for large builders, apartment complexes, general contractors, real estate agents, and occasionally a real estate investor with a smaller deal. As I think back, I remember that this season was the busiest time of the year. Some days, I would wake up thinking about which customer I was going to have to let down that day.

It was really hard to worry about the cheapo real estate investor and his little rehab when the builder who brought us 200 houses a year to work on was on the phone.

But if you're in the market for a contractor, how do you find a stand-up person who will do good work for you?

Related: The Investor’s Complete Guide for Hiring a Trustworthy Out-Of-State Contractor

Ways to Protect Yourself

Well, there are many ways to try to protect yourself from the unscrupulous contractor. You can check with the Better Business Bureau and see if he/she is licensed and insured. You can check reviews and try to get referrals. You can also have tight contracts with deadlines and draw schedules that enable you to inspect the work for completion and quality. But regardless of what you put in place, if you do enough volume, at some point, you're just bound to run into problems.

So, what else can you do to make sure the contractor makes your job a priority?

contractor-commandments

Providing Value

Sometimes, it makes sense for the little real estate guy to provide more value to the contractor besides just giving him or her a job. Maybe we can pay quicker, have the house ready, and stick to our schedules as promised. Or maybe we can be more professional and stay in communication, especially if the schedule falls behind.

Related: 10 Expert Tips for Finding the Perfect Contractor for Your Latest Project

I also think it’s smart to try to provide value in other ways.

For example, when I was a painting contractor and real estate agent, I often did my general contractors' work. On top of that, I assisted them in finding deals and other contracting jobs, and I even helped them with everything from creative financing to title work. In other words, I helped them to build wealth, too.

Most of my contractors owned multiple properties, and we also did each other’s work, so there were much fewer problems between us.

It really comes down to a fair exchange. When I placed an emergency call to my carpenter or plumber, they came right out because they knew I would come to their aid just as quickly, without nickel and dime-ing them. It was like I said before, a fair exchange.

So, how do you provide value to those who work for you? Any creative strategies?

Please share below.

Since 2007, Dave Van Horn has served as president and CEO of PPR The Note Co., a holding company that manages several funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, a real estate investor, and a fundraiser. As the latter, Dave has raised over $100 million in both notes and commercial real estate. In addition to his investments and role as CEO, Dave’s biggest passion is to teach others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of the real estate business.

    Terry Martin-Back
    Replied over 3 years ago
    I’m a licensed General Contractor in Florida, Real Estate Broker and I host a monthly investor workshop. I give a handout to all who attend, “a cheat sheet” of what it should cost for major expenses when walking through a project and determining what it will take to flip. I quit working for cheapie investors years ago because it was my name on the finished project. If an investor has a realistic budget and wants quality work, expect to pay what is normal for the area. In Florida, we have a pretty strict building code, don’t ask a contractor to do something against code. Finally, if you are investing in Florida, make sure to check with the state if the person you are about to hire is really a licensed contractor.
    David Kuhlke
    Replied 4 months ago
    Hi Terry, Came across your post on how to work with contractors. Do you have an updated cheat sheet on repairs and the average costs associated with each repair? Appreciate it much, David
    Stephanie Younger from Washington , DC
    Replied over 3 years ago
    Thanks for the info. May I have a copy of the “Cheat Sheet”? Great info! S.Y.
    Elliot Rivera Rental Property Investor from Fort Lauderdale, FL
    Replied over 3 years ago
    Terry, I live in Florida as well. Any way I can get ahold of the cheat sheet you mention? I want the GC to profit but at the same time would like to have a better grasp of what ranges common items should be. Thanks, Elliot
    Lenzy Ruffin from Washington, District of Columbia
    Replied over 3 years ago
    That cheat sheet is brilliant, Terry. I’ve lost a number of deals because contractors were giving me the homeowner price instead of the investor price. I found a local contractor through BP who should be able to help me put together a cheat sheet like yours.
    Mike White Investor
    Replied over 3 years ago
    Lenzy, how do you provide the value to a new contractor to convince him to give you a discount just because you’re an investor? Thanks!
    Ryan Schroeder Rental Property Investor from Saint Paul, MN
    Replied over 3 years ago
    Good article Dave, Our approach as a small rental property owner who only uses contractors occasionally is to pay immediately upon completion. Unless its a large job over a long period of time we do not make progress payments and we never make down payments (we will buy the materials ourselves if need be) and everyone who works for me knows that in advance and during the bid process if we are taking bids. However, if they are done today at 3PM I’m there with a check at 315. And of course they always know the check is good. The only problem I’ve experienced over the past decade or so is with follow-up/inspection finals. I often have paid before the project is approved by the City and on occasion that has resulted in me having to follow up with the contractor/sub more often than I would like should there be a need for a correction. However, the few times that has happened hasn’t been sufficient for me to change payment practices.
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied over 3 years ago
    Thanks for commenting Ryan! Back when I was a contractor, some of the builders I worked for would give us our pay in installments as we completed certain tasks and they would hold the final 10% of our pay until they closed or met inspections. This 10% idea could alleviate your issue with inspections. I will say though, since we were working with a builder on a regular basis we were provided with steady work. So you may not have as much success with the strategy with a small amount of rentals, but as you get bigger and the more properties you have (and relationships you build), it could be a more viable option. Best, Dave
    Jeffrey Hare Professional from San Jose, California
    Replied over 3 years ago
    Thanks for emphasizing the importance of a good mutual working relationship with the contractor, Dave. Allow me to add the absolute necessity of making sure the contractor is licensed for the work you are having done. In California, this is easy to check online (www.cslb.ca.gov). Equally important, make certain the contractor has Worker’s Compensation insurance or they are exempt and working alone. If WC is not current, license is invalid! A “C-10” Electrician cannot act as a General Contractor (Class B). A contractor claiming exemption from WC requirements cannot have employees on the site. Flippers, if you want to act as your own Gen’l Contractor in Calif, you need to sign the Owner-Builder Affidavit – under penalty of perjury. Also, keep in mind that the “good” contractors are working – hard – so be patient, and get everything in writing!
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied over 3 years ago
    Hi Jeffrey, That’s a great point about the worker’s comp and liability. Thanks for reading! Best, Dave
    Michael Lenahan Rental Property Investor from Philadelphia, PA
    Replied over 3 years ago
    Can you expand on the “ways to protect yourself” section?
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied over 3 years ago
    Sure, Michael. Other pre-emptive measures like the BBB could be Angie’s List, Yelp, or you could even run a background check. When I managed properties myself, I always went to my network at Real Estate Investor Meetings. Whenever it came to looking for good recommendations, I always knew the first people to ask were the guys with 50 to 100 houses. Their experience would always lead them to the best contractors, sources for materials, etc. Best, Dave
    Wilson Churchill from Madison Heights, Michigan
    Replied over 3 years ago
    Have penalties for every day over schedule. Make sure the scope of work is well defined and insist that any change orders must be approved in writing.
    Lawrence L. Real Estate Investor from Bronx, New York
    Replied over 3 years ago
    I just want to say awesome article……a lot of sage advice..this article has a lot of suggestions which I am defiantly going use as I am about to start looking for contractors to do some work on my rentals. Thank you!!!
    Alex Craig Real Estate Professional from Memphis, TN
    Replied over 3 years ago
    I have often thought the margins were so thin on investor jobs, that any good contractor would not waste their time messing with this type of stuff. We want stuff cheap and most people do not understand the cost involved with being a contractor such as workers comp and GL, which are very expensive. Not to mention the soft cost on each job. I know in Memphis right now, the best contractors are so busy with custom build out, huge additions and renovations that messing with a small job on a rental property is not worth their time. When I first got started, I used the cheapest contractors and the jobs took forever. That is why I started being my own contractor. Fast forward 10 year later, I hire the best contractors to work on my home and I can say they when they come to my house to start, there are people there everyday until the job is done. I could be wrong on my comments, but that has been my observation in Memphis.
    Patrick Desjardins Real Estate Investor from Amherst, Virginia
    Replied over 3 years ago
    I’ve only been here for a short while Alex, but it seems pretty accurate and I’m glad you were able to build a good team. I used to get really angry at handymen type guys working out of their pick up. “How can this guy show up at 3pm to start working!?!?”. They have very little pride in their work and don’t have a long term strategic vision (ie if they did a good job we would hire them often and also refer them). It took me a while but I finally grasped that most of them are jobbers and if they were quality / reliable workers they wouldn’t be desperately searching for odd jobs at close to minimum wage. The 3pm guy had been arguing all night with his girlfriend so he was too tired to come work on my house in the morning! The lower end workers are in the same pool as lower end tenants – their life is surrounded with drama. Just my humble opinion.
    Mike White Investor
    Replied over 3 years ago
    I’ve heard real estate “gurus” suggest things like hanging out in front of Home Depot with a box of donuts to find contractors. Terrible advice. To me a professional sourcing materials at HD is already doing it wrong. Sure you’ll find a cheap guy, and you’ll ultimately pay more when he screws up the job. Then there seems to be the guys that give me the “I don’t want or need this job” price. Another reason to get multiple bids. Then at least you’ll know the market.
    theresa
    Replied over 3 years ago
    Build a relationship first off….second I give occasional unexpected bonus at end of job when work was done well and on time. I listen to them… When I feel I can trust a contractor I give them the freedom (when possible) to have a completion date but not to stress if some other job with strict deadline needs to be finished. I have never had someone exceed time frame and they give me a better price for giving them the freedom to not have to turn down other work.
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied over 3 years ago
    All great points Theresa! Thanks for chiming in. Best, Dave
    Mike Dymski Investor from Greenville, SC
    Replied over 3 years ago
    Managing subcontractors is the most challenging part of REI and it is certainly the worst aspect of it. Many investors would rather supervise employees at their W-2 job than spend their career managing subcontractors. The best solution is to use vendors not subcontractors. The vendors have systems, buying power, they manage the subcontractors and the subcontractor’s and property owner’s interests are aligned as the subs can’t afford to not show, communicate, overcharge or do poor work or the vendor will end the gravy train. Some investors gear their REI strategy to have access to this business model and vendor network. It’s night and day from using subs.
    Mike White Investor
    Replied over 3 years ago
    Thanks, Mike. What is an example of a vendor? Do you just mean a general contractor?
    Mike Dymski Investor from Greenville, SC
    Replied over 3 years ago
    The best examples in my market are the vendors and suppliers that cater to apartment complexes (and some investors use them on SFRs as well). Regional flooring companies, regional equipment suppliers, large painting companies (who also clean the units on turns) and make-ready companies with an a la carte menu with set pricing (painting, cleaning, counter resurfacing, tub/tile/shower resurfacing, carpet cleaning, fixture replacement, blinds, flooring). These vendors all use subs rather than employees. This is not a solution for all rehab work but it is for investors that can cater their strategy to fit this model (or just fill in the missing holes with subs).
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied over 3 years ago
    Great point Mike, I’ve had much success with vendors as well!
    Dayn Beals painting contractor from Fair Oaks, California
    Replied over 3 years ago
    Thank you Dave for posting this article. How do you find a stand up person to do good work for you? A stand up contractor likes schedules and deadlines. They don’t want to wander through your project with you. It makes scheduling their other work easier. They like a clearly defined scope of work. On the fly decision making is time consuming and costs them money. Nothing in contracting is worse than laboring over decisions customers can’t be bothered to make, then be told how wrong they were. Written scope and drawings are awesome. They take responsibility for their actions and decisions. Their customers know this. They expect their customers to do the same. They buy material from suppliers, not HD. At least HD is not a way of life. Suppliers know these guys. They are realistic about their expectations and and act professionally. And they buy the good stuff. Dave makes a great point about the decision to work for an investor with a small project. I would as long as my professional conditions are met. Theresa is on to something. Creating relationships is paramount. Are they a stand up person like you?
    Michael Justice Rental Property Investor from Nationwide Remote Wholesaler
    Replied 5 months ago
    Very informative advise thanks for sharing the details everyone!
    Deanne Bourne Investor from Concord, California
    Replied 5 months ago
    Many times I’ll just say “give me the labor cost” bc I’ll pay for material. If there is no hidden issue and I pay for materials a contractor can give me a good guess at the cost. I discuss the quality of material he can order and then oversee what is happening. If I get a project price ( not hourly) it goes quicker bc they want to finish and go to the next project. I know my projects are small and sometimes a nuisance so when I find a good worker I pay quickly and let them know I appreciate their work. If I feel abused I move to other contractors.
    Aaron Tavares
    Replied 4 months ago
    Hello Terry, How do we gain access to such a cheat sheet. -Would be extremely helpful when out for initial walk through of prospects. Especially if haven’t identified reliable contractor for designated area(s) Thanks for any suggestions/information