Reasons why you should not partner with a contractor?

Question

Happy Tuesday My BP Family. I was reading through different post and I heard a few people saying that you should never partner with a Contractor. Me being a Contractor and Investor. I toom offense to that. It kind of made me feel like we are not adequate enough. But then I realized it is probably because those people had a horrible experience. Maybe the partner/contractor was greedy, did not pull his weight, still marked up the reno to retail, and many other scenarios. I made me wonder. Other then giving up some profit and all of the other downsides to any partnership.

Why not Contractors specifically?

Dallas Kidd · Answer

These are great points. And as I suspected it sounds like an integrity issue more so then a partnering with a contractor issue.

With any partnership I believe as long as everyones expectations are lined out in advance there is no issue.  Also in a partnership you both should bring something to the table.

I was reading some of the comments on previous threads and it sounded like Contractors had an uncureable disease or something. (called givinguphalfmyprofitosis)

I can see the conflict of intrest for sure. Even in my own deals I pay my company the same rate any other investor would. Its a sort of job security for my contracting company.

So a better way to say it would be. Does the contractor add value to your investment business that would not be there if you just hired them.

Also if you are partnering with a contractor to save money and make a deal work, it was never a good deal to begin with.

I just wanted to hear opinions and feedback. That is my favorite part of BP.

Trent Vanderzee · Answer

@Arpan Patel The contracting and repair of a property is a cost that has to be part of the calculation before you determine if "the property does well".  It would be absurd for any contractor to come into a deal to manage the repairs and then split the "profits".  The profit gets split after repairs are paid for, including the cost of managing the project.  Unless there is an equity differential and the contractor invests labor instead of cash, but that is a different story.

@Dallas Kidd I too am a contractor and investor, but I would rather work for retail than for budget investors who want to cut corners, skip permits etc.  Maybe that's why some investors don't like working with contractors.  They don't want the costs of compliance or of 25 years repairing homes as they don't realize the value that brings.  Why pay for licensed, insured painters and flooring contractors when $10 or $12 an hour guys can do the "same thing".  As @John Mathewson said, he is worried about the contractor "profiting on construction".  Isn't that what a contractor is in business for?  But trust is the key factor, he said, so I will give him the benefit of the doubt.  I suspect he means profiting beyond a normal margin or taking advantage of the situation.  Communication is the key to it working.  Discuss the contractor's costs and margin up front or have him bid the job so there are no surprises.

John Mathewson · Answer

I think most investors just have too many horror stories when it comes to contractors that the thought of partnering with them is scary in itself. I think it all comes down to trust. One of the best partners I used to have was a General Contractor but if the investor is having to worry about the contractor jacking up prices and profiting on construction as well and profit from the deal it can get a little hairy.

Arpan Patel · Answer

I agree in the value of full disclosure. Also, that people's time should be compensated as well before the business gets compensated in this type of scenario. I certainly don't think contractors have a disease - well maybe an affinity towards a broken in hammer (might just be my contractor though... he loves that hammer) - and I agree in that my main concerns are mostly related towards a professional arrangement between partners with full disclosure. That question to me is key. "Does the contractor add value to your investment business that would not be there if you just hired them."  Well said.

Arpan Patel · Answer

@Trent Vanderzee: I understand the point and I maybe I wasn't very clear in my explanation. There are two parts of the repairs, the materials and the labors of the those individuals who are physically dong the work and then there is the profit (or management fee if you like) for the GC running the job. My only point was whether or not the property generates income and hits its numbers for cash flow, for the GC, specifically, those are all secondary incentives. The GC has already been paid their normal fee for running a project. The rest is gravy for the GC but that secondary part is where the investor gets paid. All I am saying is that I can see how someone might be nervous by partnering with a GC based on the investor getting paid after the GC has already been paid his management fee.

Now, if the GC can show that those fees were for running the internal house besides the pure labor of those performing the work or materials, then I can see how that can start to make sense. There are other costs for the GC in house that will need to be taken care of as well - bookkeeping say - that without being paid for would hamper the GC's ability to get the job done and that may ease some people into the deal. I don't personally partner with GC's and I haven't heard of people who have been successful doing so. My experience is anecdotal and shouldn't be taken as a rule or anything; it is just how we run house. I hope that helps clarify what I was saying.

Arpan Patel · Answer

Agreed with @John Mathewson in that it is probably related to experiences. I don't believe it is meant as a slight to you or the trade but it can be scary to walk into a partnership where one partner is going to get paid regardless of the outcome. (The assumption here is that the contractor is getting paid two ways, first as a contractor and then again as an owner) If neither gets compensated until the property does well then there should be no issue. Contractors - as a gross generalization - are seen as not as very professional. This of course can and cannot be true depending on the person. Furthermore, there is a perception that contractors don't want to go by a contract or a written agreement which is one of the base components of any good partnerships. Just some thoughts mostly rooted in perception and the aggregate of "others past experiences." I hope that helps,

Dallas Kidd · Answer

Thank you all for the feed back!

Reasons why you should not partner with a contractor?

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