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Mindy Jensen
  • BiggerPockets Money Podcast Host
  • Longmont, CO
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Contractors: If I Buy Materials, Do You Still Need a Downpayment?

Mindy Jensen
  • BiggerPockets Money Podcast Host
  • Longmont, CO
ModeratorPosted Aug 26 2019, 09:07

I've seen so many forum posts advising NOT to give any money to contractors upfront - because so many people have been ripped off by contractors. 

I've seen many responses from contractors, saying they've got to buy materials, pay their workers, etc and if they don't know you, you should expect to pay a deposit.

I can see both sides of the problem.

Contractors, if I foot the bill for the materials, your risk is lessened.

How can I propose a fair solution to my contractors? I will happily foot the bill for supplies so they aren't out any money out of pocket, but with the prevalence of contractor-stole-my-money stories, it makes it hard to fork over an upfront fee.

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Replied Aug 29 2019, 18:39

As contractors. We have payroll as well. Which I am not covering out of my pocket payroll for an investors project. Not to mention.... sure, you picked up the big ticket items. But there incidentals that need to be picked, up and delivered. Valves, supply lines, misc parts, unforeseen items. These I will not pay for as well . Most investors think just because they ordered cabinets, flooring, vanities, and drywall that's all we need as contractors to get "your" job done.

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Mindy Jensen
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Mindy Jensen
  • BiggerPockets Money Podcast Host
  • Longmont, CO
ModeratorReplied Aug 30 2019, 07:32

There seems to be a bit of hostility here from the contractors, and this was really just a question so I could better understand and more easily work with contractors.

This question was for a first-time encounter with a new contractor not recommended to me by anyone I know.

I am happy to give weekly checks for progress, purchase all materials upfront including all the fittings, nails, caulk, and whatever else the contractor chooses. But it's difficult for me to just hand over money to someone I've never met, when I have so many friends (and have read so many stories here) who have been ripped off by contractors.

How can I protect myself? I know I'll pay my bills - just like you honest contractors know you won't run off with my money. But how can we work together if neither of us trusts the other?

Would you take an escrow account with a deposit? I'm trying to find a solution that is fair to everyone.

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Bill Kramer
  • Contractor
  • Evansville, IN
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Bill Kramer
  • Contractor
  • Evansville, IN
Replied Aug 30 2019, 17:59

It's just a risk you have to take. Start with a small deposit, to minimize your potential losses.

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Replied Aug 30 2019, 18:39

Do you guys write a contract with them before they start? Can anyone please share a sample of what the contract would be, i am going to start a rehab in 2 weeks, so the template would really help. Thanks in advance.

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Bill Kramer
  • Contractor
  • Evansville, IN
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Bill Kramer
  • Contractor
  • Evansville, IN
Replied Aug 31 2019, 17:56
Originally posted by @David Jackson:

Do you guys write a contract with them before they start? Can anyone please share a sample of what the contract would be, i am going to start a rehab in 2 weeks, so the template would really help. Thanks in advance.

My contracts have a design summary, detailed scope of work, then price list broken down by trade, followed up with an estimated time to complete the job, total price with payment milestones (big jobs I break into 4 to 6 milestones), and finally all the legalese stuff. Basically stating I can use pictures for promotional uses, access to job site and fee if access denied, and other expectations. 

It's a 4 page document. 

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Replied Sep 3 2019, 04:25

I am a big DIY guy, however for those jobs that are too big or just not interesting enough I sub contract my own jobs and hire the skills I need for the task at hand. I always provide materials with the exception of the small stuff, nuts, screws, etc, and pay the hired help an agreed upon hourly rate. I never place a deposit and immediately reject any arguments on the subject. Since I pay people daily for completed work I see no logic in making any upfront payments and any misc materials that are purchased I reimburse provided they have a paid receipt. Its unfortunate but you cant trust most contractors and have found that the ones who are reputable/trustworthy have no issue operating under these terms. For those who suggest that this approach garners one the PITA price structure I say you are wrong. First if you know what the market rates are for the labor you need and you manage the project like a project with deadlines and expectations you cant really be fleeced. Also who wouldnt want to work for an hourly wage, under the direction of someone else without the hassle of buying and transporting materials or the responsibility of permits, inspections and the like. I have had people work for me for years under this concept and with some very few minor disagreements it has worked out very well, the money saved allowed us to do 3x the work than if we had gone the traditional route. In the end it comes down to being able to detect the BS and find the right people once you do that you are in pretty good shape.

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Replied Sep 8 2019, 13:52

I am a contractor, and I would say, No. if they have no material or significant equipment costs, an upfront payment is unnecessary. If they balk that is cause for concern

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Josephine Wey
  • Ontario, CA
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Josephine Wey
  • Ontario, CA
Replied Sep 9 2019, 16:29

In my opinion, establishing a good relationship with the contractor is important. Typically, we can look at this issue from both sides of the coin as being fair for consideration. Either side can walk away from working together if the parameters for the working relationship are set up and understood upfront. A solid pre-screening of the contractor upfront that spells out the expectations should somewhat reduce or eliminate the question of one side bailing out on the other. Qualify the contractor and highlight the benefits of working together which would include consistent work for them and regular paycheck.

Personally, I'd buy the materials and never pay any money upfront, a "red flag" on its own. The agreement and expectations set up at the beginning of the contracting relationship should be consistently adhered to. A detailed system for each project level and payment plan for work that gets done to proper standards should show the contractor that you mean business.

I believe I'd follow the system described by one of the contributors to this discussion, Tom Shallcross a few days ago. Relationship and working history go a long way.

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Alfredo Martinez
  • Teaneck, NJ
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Alfredo Martinez
  • Teaneck, NJ
Replied Sep 9 2019, 17:14

Hello, 

I am a contractor licensed and insured in New York & New Jersey.  We normally ask for a downpayment whenever we sign a contract for a remodel.  This deposit is indeed for materials, permits etc...  So to answer your question; You should not be required to give a downpayment/deposit if you are buying materials.  I would be very careful with a contractor demanding a deposit before they start work. We also work with 203K construction loans which NEVER give a deposit.  With the 203K construction loans, we must start the work and get paid in phases.  The 203K loan officers will allow up to 3 withdrawals on the loan.  For example...  We finish a bathroom we can request an inspection, they come in inspect we get paid say 25%.  We finish a kitchen we do the same we get another 25%.  The remaining balance is paid once the project has been completed.  Feel free to message me if you have additional questions.  

Thank you, 

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Chris Anderson
  • Manville, NJ
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Chris Anderson
  • Manville, NJ
Replied Sep 10 2019, 05:21
Originally posted by @Alfredo Martinez:

Hello, 

I am a contractor licensed and insured in New York & New Jersey.  We normally ask for a downpayment whenever we sign a contract for a remodel.  This deposit is indeed for materials, permits etc...  So to answer your question; You should not be required to give a downpayment/deposit if you are buying materials.  I would be very careful with a contractor demanding a deposit before they start work. We also work with 203K construction loans which NEVER give a deposit.  With the 203K construction loans, we must start the work and get paid in phases.  The 203K loan officers will allow up to 3 withdrawals on the loan.  For example...  We finish a bathroom we can request an inspection, they come in inspect we get paid say 25%.  We finish a kitchen we do the same we get another 25%.  The remaining balance is paid once the project has been completed.  Feel free to message me if you have additional questions.  

Thank you, 

Doing work for an investor is different then working on a 203K loan.  Although you have to wait for payment with a 203K loan.  Your money is guaranteed by the bank.  Investors on the other hand are often over extended and can not make timely payments. I will always take a deposit unless I know the people involved.

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Replied Sep 12 2019, 21:48

Set up progress billing. A reputable and established contractor should have

1) credit with suppliers to order materials

2) the ability to go a couple of weeks without NEEDING money

3) a reputation that they value, and not risk losing over running off with a deposit.

As a NJ based contractor(Cabinets and Trim only) I may ask for a small deposit if I haven't worked with you in the past, and I don't have references for you that I trust. 

If I have one of those, I usually invoice after we complete the project and get paid on a 30 day net. If its more than a week or 2 project, I will probably set up some kind of progress billing. I hit a progress goal, I get a check.

My best advise is to hire 1 of 2 ways

1) a GC that subs the work to specialized contractors and over sees the project/payment of the subs They usually have good relationships with guys that can handle the terms I mentioned above and trust to complete the work

2) Hire the specialized subs yourself. The "We do it all" guys are the worst in speed, quality, price, & reputation.

ALWAYS get a copy of the VALID business License, and than verify with consumer affairs. And get listed as NAMED INSURED on both the GL insurance Policy as well as Workers Comp. The agent will issue you a cert with you named, and you will be notified if they default or cancel the policy. And issue them a 1099 which verifies their EIN# as well as relieves you from paying tax on the $ you pay them.

 And if they run with your deposit you will have all the info you need to file complaints etc.

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Replied Sep 18 2019, 08:20

As a contractor there is no real yes or no answer to this question. Each project or flip should be handled on a case by case basis. Experienced investors and contractors realize the work entailed on a rehab along with the amount of material it takes to get the job completed. Hardly is there any “one trip fits all” as far as materials go. Establishing a relationship and building trust is the only true way for either party to feel comfortable as both have been burned from untrustworthy individuals in this business. I personally have a standard pay schedule and if the investor feels they would like to pay for material, we come to a fair agreement and have them involved every step of the way until both of our concerns are met. 

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Replied Sep 20 2019, 12:11

I'm still planning and learning to be an investor.  But after enduring my first construction loan gut renovation, along with a couple of other partial ones, this issue has been one of my primary mental obstacles.  I know little about construction and actually have to force an interest in even learning.  I was employed with and carry insurance with a premier global property and casualty insurer.  I was surprised to learn that even they, with all of their resources,  maintain a limited rolodex of GC's to whom they turn for repair work. For instance, they only refer 2 in all of DC. When I attempted to contract with them myself,  their bid was very much higher than the other 2 I gathered. Like 300% or so higher.   But I could tell during the estimation and quote process that they intended to over deliver and maintain an apparently stellar reputation.  I'm interested to find if I'll be able to work with such a company profitably,  all things considered.  I can see where it would elevate my efforts and provide a great standard to follow as I gain experience.   The contrast between them and the small GC I employed on the aforementioned construction loan rehab-'-who was honest, well intentioned and took pride in their work yet lacked management and financial skills--was truly illuminating.  I imagine we're all trying to find a balance between the 2.  But I fear the consequences of my learning curve.  My thinking now is that it would be best to cut profit to work with a white glove outfit and learn that way.   I'll also mention that one such outfit informed me that insurers use an estimation software which provides standard rates for all phases of construction work. Both sides already know what a job is worth.  Has anyone heard or had any experience with that?  It seems so easy that I don't know why everyone isn't using it like MS Office. 

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Replied Sep 22 2019, 06:06

As an investor, there should be a major point to learn. Of the 3 parts to any project, you only get to choose a maximum of 2... Speed, Cheap, and Quality. If ANY contractor says they can get you all 3, they are lying. This plays into your relationship with the contractor - and I can tell you first hand that most investors don't want to sacrifice any of them. I loath when an investor wants to sacrifice quality.

I get the original question as I know what it feels like to have people skip out on your money/project and leave you hanging as I have been in both positions. I have been a contractor (or played the role of superintendent) since 2001. My initial starting requests were 25%, 25%, 50% - and only the overall price would change if the customer was buying the materials. It worked well (and still does if I don't know the person). I have been screwed out of funds by home owners and I have received "tips" from home owners so it all works out in the wash for me.

I prefer buying the materials (I get a military or contractor discount wherever I go) to sitting at the counter waiting on a call. I get the materials I need and am used to working with versus having to learn a new product that I can't guarantee. The fastest I have been out of the store with materials in hand when a customer had to be called for cc info was about 8 or 9 minutes. The longest was almost an hour before I just left to go do something else (they were in a meeting) and my time should be valuable too. Now, I have found the best to be an "escrow" type of account where I get a small deposit and turn in receipts before "refilling" that deposit. When the project is done, the deposit is returned unless otherwise agreed upon by the investor (which usually meant starting another project).

When it comes to work, weekly pay is best so I can pay who I need to pay. No pay usually winds up in finding another project that does pay (for me) - and I rarely don't answer my phone or call someone back (which is the first sign of someone ditching). It is all about a comfort level for everyone involved and it is usually uncomfortable until a couple months of a couple deals of working together. The biggest clue is watching how they talk about other contractors or investors. Multiple complaints usually means a red flag.