Best methods to pay contractors??

Land & New Construction
7yFollow

Best methods to pay contractors??

Anthony Porembski
Rental Property Investor · Cleveland Heights · Member since 2019 · 74 posts · 35 votes

I’ve heard most investors say they wouldn’t pay any money upfront but then most contractors I’ve heard say they wouldn’t start work without a deposit. How do you come to an agreement where both sides feel comfortable to move forward without any snags or resentment before the project even starts. Thanks guys and gals.

2Reply
105 views

Most Popular Reply

Ralph Stowe
Richmond, VA · Member since 2019 · 48 posts · 28 votes
7y
A common theme I hear from pro's is to pay in 3-4 parts. Maybe an initial deposit to pull permits, then pay them after rough-in work is done, then a 2nd payment when they finish and finally, the last payment when it passes inspection. This keeps them obligated to complete the work correct the first time to get paid. If they are total scammers, you are only out permit pull money, but hopefully your due diligence beforehand will avoid those types.
7Reply
See this reply in the discussion

68 Replies

Jump to latestLatest
  • Anthony Porembski
    OP
    Rental Property Investor · Cleveland Heights · Member since 2019 · 74 posts · 35 votes
    7y

    @Matt M.

    I just have to find someone like you and problems solved. From what I’m gathering you get what you pay for and it’s up to you to find the right guy worth paying.

    1Reply
  • Anthony Porembski
    OP
    Rental Property Investor · Cleveland Heights · Member since 2019 · 74 posts · 35 votes
    7y

    @Chad Gaddie

    Got it! Solid advice. Thanks Chad.

    0Reply
  • Rob B.
    Chicago, IL · Member since 2018 · 546 posts · 227 votes
    7y

    Dennis has the right idea here. It is standard to pay a deposit (or a percentage of the cost) upfront. But a lot of it comes down to their individual references, so I would check those and BBB. Never tried John's route but may need to try that this next go-round. I hope everything works out! @Anthony Porembski

    1Reply
  • Anthony Porembski
    OP
    Rental Property Investor · Cleveland Heights · Member since 2019 · 74 posts · 35 votes
    7y

    @Rob B.

    Thanks man! Yeah, I think I’ve got a solid list here. Thanks to all who’ve chimed in and help out. Appreciate you too Rob.

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    7y

    You will typically get multiple points of view with this question which has been asked many times before as you can see just from this thread alone. As others have mentioned, the first and most vital step that can NEVER be skipped is performing your due diligence on the contractor or sub. Step 1 (after you have received your referrals, etc) is locating the proof of insurance and active license documentation. Once verified, you do want to check references and ask the contractor to visit an active job site to see how they run and perform a job.

    Always provide a scope of work, the more detailed, the better, and you must find a happy medium between the debate of no deposit vs too much deposit. Here CA, it is illegal for a contractor to charge more than $1000 at contract signing. To receive the next draw, they must perform at minimum some mobilization. Always get a draw schedule with your contract and it is wise to include a penalty for lack of performance and even a bonus for exceeding timelines (which save you money in holding costs).

    Not all contractors are created equal. As an investor of 15+ years and as a project manager/contractor/designer, I see both sides of the coin. I don’t expect a client to pay me 25% upfront but I also don’t expect to front thousands of dollars for any period longer than a few days either. So with that in mind, find a fair and legal draw schedule and stick to it.

    Podcast Guest on Show #130
    2Reply
  • Steven Lowe
    Real Estate Agent · Scottsdale, AZ · Member since 2019 · 448 posts · 320 votes
    7y

    I typically structure my construction projects so there is a down payment of 20 to 25 percent followed by progress payments depending on what landmarks are met. Example, rough mechanicals, roof, etc. I've been asked to start projects with no funds up front but those have always been backed up by a bank.

    The problem with no money up front is it puts the contractor in the position of also being the lender, albeit a short term one. Materials still need to be purchased and the subs have to get paid.

    0Reply
  • Ryan McKinney
    Flipper/Rehabber · Fresno, CA · Member since 2019 · 9 posts · 3 votes
    7y

    @Michael Spittler

    Well said, I am also a contractor and have been since 1997. I truley love what I do and have made a descent living. I hope to get into successful investing (I have done alittle unsuccessfuly) so that when my body isnt up for it anymore I can retire or do otherthings. I live in california so we are only allowed a 10% deposit.

    I usauly wait until after work has begun and materials are delivered and get 50%. Then the rest on completion. In our industrie we hear all the time about contractors taking advantage, honestly I dont know how they stay in bussiness, or if they do, but I can say I have been takin advantage of a few times and it hurts from this side too. In those instances I had a part to play as well. Like doing deals over the phone, not dotting my i,s and crossing T,s. Lumps on the head hurt but I try to learn from them. What is impotant is people and relationships, over money.

    2Reply
  • Anthony Porembski
    OP
    Rental Property Investor · Cleveland Heights · Member since 2019 · 74 posts · 35 votes
    7y

    @Michael Spittler

    I will use your advice in its entirety moving forward. Especially being that you’re a contractor I’ll definitely heed your words, they sound fair, professional and empathetic. Thanks Michael, much appreciated.

    1Reply
  • Anthony Porembski
    OP
    Rental Property Investor · Cleveland Heights · Member since 2019 · 74 posts · 35 votes
    7y

    @Will Barnard

    Concise list Will, much appreciated. I’ll put insurance and license documentation on top of the list. This thread has really helped a lot.

    0Reply
  • Anthony Porembski
    OP
    Rental Property Investor · Cleveland Heights · Member since 2019 · 74 posts · 35 votes
    7y

    @Ryan McKinney

    I agree with the human element and relationship building. Empathy is a powerful perspective. Thanks for the input Ryan.

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    In Maryland its 1/3 up front, 1/3 when work starts and 1/3 when completed. Its set by law here.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group546 Reviews
    WebsiteView Page
    4Reply
  • Anthony Porembski
    OP
    Rental Property Investor · Cleveland Heights · Member since 2019 · 74 posts · 35 votes
    7y

    @Russell Brazil

    I’ll definitely look into the laws as well for reference. I’ll be curious to learn state to state. Thanks Russell 🙏🏻

    0Reply
  • Kyle Nelson
    Polson, MT · Member since 2017 · 115 posts · 105 votes
    7y

    always save a little before job completion to make sure that works gets done and gets done satisfactorily. I’m a self employed sub, generally the good guys don’t want all the money until you’re happy.

    1Reply
  • Steven Lowe
    Real Estate Agent · Scottsdale, AZ · Member since 2019 · 448 posts · 320 votes
    7y
    Originally posted by @Kyle Nelson:

    always save a little before job completion to make sure that works gets done and gets done satisfactorily. I’m a self employed sub, generally the good guys don’t want all the money until you’re happy.

    Agreed. I usually save 10% for the end of the job, depending on the scope.  

    1Reply
  • John Theriault
    Contractor · Pittsburgh, PA · Member since 2017 · 8 posts · 10 votes
    7y

    There's no way I do work without some money up front, typically half for small jobs under $10k, and a smaller percentage for larger jobs. The risk goes both ways, if I am working for someone I don't know, I need to hedge my risks as well by having the client provide money down. Even if it's a labor only job, I require money up front. I do realize there are scammers out there (on both sides of the equation) so of course do your due diligence as others have stated! Here in Pittsburgh, currently, anyone with a tool belt is a contractor and is busier than you can believe. 

    Hope this helps!

    2Reply
  • Kyle Nelson
    Polson, MT · Member since 2017 · 115 posts · 105 votes
    7y

    I know more contractors that have gotten scammed by customers than the other way around. Finding mutual trust is huge , paying on time and as agreed goes a long ways in building that trust.

    2Reply
  • Trey Williams
    Realtor · Tampa, FL · Member since 2019 · 31 posts · 17 votes
    7y

    @Anthony Porembski don't forget to give them a 1099 for expenses over $700

    1Reply
  • Steven Lowe
    Real Estate Agent · Scottsdale, AZ · Member since 2019 · 448 posts · 320 votes
    7y
    Originally posted by @Kyle Nelson:

    I know more contractors that have gotten scammed by customers than the other way around. Finding mutual trust is huge , paying on time and as agreed goes a long ways in building that trust.

     In 2018 I had an investor hire me to rehab two buildings for him, a family restaurant and a retail store.  Apparently he had seen some work that I did nearby and he got in touch with me.  He had been the director of real estate acquisitions for a major retailer and also built shopping centers.  He was opening businesses in space he had just leased.  He had a solid business plan.  He had the backing of a prominent local real estate investor who owned the buildings.  He talked a very good game.  I was really excited to work with him because I always look for learning opportunities whenever possible and he was always willing to sit and talk real estate with me.  This is someone I can learn from, I thought at the time.  So I drew up the contracts, he gave me a small down payment, provided me with drawings, and all seemed on the up and up.  

    We started demo on both projects.  Once the funds were running low I approached him for another progress payment.  He was agreeable and gave me more checks, but these were from a different account I noticed.  There had been other things which didn't add up at that point but not enough to worry me.  However this was a red flag.  Sensing something was up, I called my workers off of the projects and I went to the bank to verify the funds.  Both checks (totaling about $90K) bounced.  I went back to my client and he said it was a banking error and to try again.  A few days later, the banking officer at my bank called to verify the funds in his accounts and neither of the checks were good.  Then the excuses started.  Oh, my ex wife and I are divorcing and she froze my accounts.  Oh, my lawyer is working on it.  I have some investments I'm waiting on to get transferred.  Etc.  Etc.  

    At that point I realized that the person I had been dealing with was not who he had represented himself to be.  Since I was only out about $8K and the cost of pursuing it in court was going to be way more than that I determined it would be best to just walk away.  I spoke with the property owner and was told it wasn't his problem and I had to deal with his tenant so that avenue was also fruitless. 

    You hear stories all the time about contractors who are dishonest, who disappear with unsuspecting property owners' money, but trust me there are just as many bad owners out there as bad contractors.  Owners sometimes can be worse because their money allows them the financial means to screw contractors over and get away with it.  

    Due diligence is important on both sides.  I won't do a project for anyone if there's no down payment unless it's coming directly from a bank and I can deal with the bank officer myself.   

    4Reply
  • Genaro Lopez
    Member since 2019 · 3 posts · 1 vote
    7y

    @Dennis Cosgrave as a contractor, we pay to be on BBB.. And pay to remove any bad reviews. I wont be based off that at all.. FYI, I'm not listed there anymore.

    1Reply
  • Charles London
    Norfolk, VA · Member since 2017 · 5 posts · 3 votes
    7y

    @Anthony Porembski what I generally do is offer to purchase materials and the the contractor provide labor. I never let the contractor get ahead of the work, in other words they don’t get paid for work that hasn’t been completed.

    1Reply
  • Anthony Porembski
    OP
    Rental Property Investor · Cleveland Heights · Member since 2019 · 74 posts · 35 votes
    7y

    @Trey Williams

    Brilliant. I’ll have those docs ready. That’s the first I’ve heard of that but important. Thanks Trey.

    0Reply
  • Matthew Paul
    Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
    7y
    Originally posted by @Charles London:

    @Anthony Porembski what I generally do is offer to purchase materials and the the contractor provide labor. I never let the contractor get ahead of the work, in other words they don’t get paid for work that hasn’t been completed.

    As a contractor , we do mark up materials , its a part of the profit in the job . Professional contractors dont supply labor , we supply a finished product . As a contractor we NEVER let the work get ahead of the money . Its business , we dont extend credit . As much as a customer should vett their contractor , a good contractor will vett the customer , my process is similar to how I vett tenants . 

    2Reply
  • Erik B.
    Rental Property Investor · Amityville, NY · Member since 2018 · 351 posts · 441 votes
    7y

    Just remember the contractor is vetting you just as much as you are vetting them. There is a lot of scummy people on both sides. If both the owner/investor and contractor are professional upstanding people there should be absolutely no problem coming to an agreement on payment terms.

    1Reply
  • Erik B.
    Rental Property Investor · Amityville, NY · Member since 2018 · 351 posts · 441 votes
    7y

    @Dennis Cosgrave

    FWIW I wouldn't use BBB membership as a way to vet anyone. The BBB is not a govt backed or run "bureau" like most people think it is, although that's what they want you to believe.

    The BBB is similar to Yelp, Angie's list home advisor. Service provider pays membership to join and gets a rating. The more a member pays the better the rating and more exposure.

    1Reply
  • Eduardo Medina
    Member since 2019 · 4 posts · 3 votes
    7y

    Quarter up front. Half when half way done. Amd nene pay in full till job complete and all the crap remove from property.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free