Contractor payments - do they expect some upfront payment?
Member since 2023 · 11 posts · 1 vote
I will be rehabbing my investment property (property manager will oversee) and am wondering if contractors expect some upfront payment (e.g carpet layer to buy carpet, cabinet maker for kitchens). I currently have a small outstanding mortgage with a non-bank lender and if they provide me with funds to rehab, they require that all work be 100% complete, on-site and installed and inspected by them before funds are released. Do most contractors expect this or to be paid something upfront? Are there more flexible lenders available (non-bank) who will provide the funds in a different manner?
@Chris Merchant On smaller , quick in and out jobs thats not a problem with most contractors . But when the dollar amount of a job increases a contractor would definatly require a deposit . Large and small contracting business have funds , but there is no logical reason for a contractor to use their funds or credit to finance a customers project . Its a foolish business practice unless there is a very good relationship already established .
I am running 4 to 6 jobs at a time , that could be $125K to $300K of materials and labor I am covering out of my business account . This isnt a good use of funds , that same money should be earning money for the business .
We do offer financing options to the customer .
The only contractor I pay in advance is for countertops (50% up front for material). From survey to finish carpentry, all others get paid as the work gets done.
Thanks Terrell. I will more than likely be using my property manager's preferred contractors, so given they will have a working relationship, hopefully payment on completion will be satisfactory to most.
Thanks Terrell. I will more than likely be using my property manager's preferred contractors, so given they will have a working relationship, hopefully payment on completion will be satisfactory to most.
I can answer this from two perspectives...as an investor myself and the owner of a lending company:
AS AN INVESTOR: I think it depends on the contractor and the relationship you have with them. For our investment projects, we'll typically pay for materials directly ourselves and let the contractor pick them up from the vendors. A while back, we needed to find a second contractor as the one we had was so good he was just too busy for us to scale with. We tried a guy out and he took out money and spent it on personal expenses instead of putting it toward the work. He wasn't paying his employees and subs. It became a real mess and we lost a great deal. We learned the valuable lesson to control payments on contractors that we don't have a long-standing relationship with. That being said, we have a GC that we would hand our wallets to because of a long-standing relationship.
AS A LENDER: Fix and Flip loans usually will finance about 70% of the As Repaired Value or between 75%-90% of the purchase price plus between 80% and 100% of the rehab costs, whichever is less. They will set aside the money for the rehab and pay it out in a series of draws...usually no more than three or four. You'll complete a a portion of the work, then they will send someone out to make sure you did it. They will then wire you that portion of the "draw". You will put of the cash for that portion and then be reimbursed for that portion. It's a pretty common type of loan that we do all the time. I was a banker for years before becoming an investor myself and we've flipped scores of properties. That type of loan is exactly how we personally scaled. Just be careful not to overextend. I do see that get people into trouble. Go in with a good plan, a solid scope of work, a well-informed idea of your exit strategy including an understanding of the As Repaired Value, and you should do well.
Good luck to you!
Thanks Richard. I'll have to get VERY creative on how the end result is going to be achieved.
I can answer this from two perspectives...as an investor myself and the owner of a lending company:
AS AN INVESTOR: I think it depends on the contractor and the relationship you have with them. For our investment projects, we'll typically pay for materials directly ourselves and let the contractor pick them up from the vendors. A while back, we needed to find a second contractor as the one we had was so good he was just too busy for us to scale with. We tried a guy out and he took out money and spent it on personal expenses instead of putting it toward the work. He wasn't paying his employees and subs. It became a real mess and we lost a great deal. We learned the valuable lesson to control payments on contractors that we don't have a long-standing relationship with. That being said, we have a GC that we would hand our wallets to because of a long-standing relationship.
AS A LENDER: Fix and Flip loans usually will finance about 70% of the As Repaired Value or between 75%-90% of the purchase price plus between 80% and 100% of the rehab costs, whichever is less. They will set aside the money for the rehab and pay it out in a series of draws...usually no more than three or four. You'll complete a a portion of the work, then they will send someone out to make sure you did it. They will then wire you that portion of the "draw". You will put of the cash for that portion and then be reimbursed for that portion. It's a pretty common type of loan that we do all the time. I was a banker for years before becoming an investor myself and we've flipped scores of properties. That type of loan is exactly how we personally scaled. Just be careful not to overextend. I do see that get people into trouble. Go in with a good plan, a solid scope of work, a well-informed idea of your exit strategy including an understanding of the As Repaired Value, and you should do well.
Good luck to you!
Thanks Doug. I appreciate your dual perspectives. A dodgy contractor is the last thing I need right now.
Most contractors want to be paid upfront. I only pay for material upfront, and pay labor in milestones. Make sure you have a solid contract for the payment schedule.
I will be rehabbing my investment property (property manager will oversee) and am wondering if contractors expect some upfront payment (e.g carpet layer to buy carpet, cabinet maker for kitchens). I currently have a small outstanding mortgage with a non-bank lender and if they provide me with funds to rehab, they require that all work be 100% complete, on-site and installed and inspected by them before funds are released. Do most contractors expect this or to be paid something upfront? Are there more flexible lenders available (non-bank) who will provide the funds in a different manner?
We have very close relationship with my contractor. So the way we work is we pay 40% upfront, and the rest of payment I can pay it anytime I like, even like 3-6 months after financing is done. But we have trust both way, they put their expensive equipment in my storage all the time and they act as guardian to my home and my rental whenever I am not available, it's more like a close friend.
Depends on the job, depends on the contractor, depends on the relationship. Are you lining up vendors and GC'ing it yourself? That can be a pay as you go type deal. Are you in bed with a firm that has GCs, crews for demo, framing, sheetrock, flooring, etc and have a big list of subs for the mastery work like plumbing and electrical? Cause that will require money upfront.
I have great relationships with a contractor in Philly and one in Pitt. They do a lot of rehab work for my clients. The way the rehab funds work in the Hard Money space is that the funds are escrowed and drawn upon - For Completed Work Only!
For example, a client of mine closed on 2507 Salmon Street in Philly yesterday. It was a 265k purchase, the contracting budget came in at 195k, it's appraised to be worth 675k when done. But now that the loan is closed, but any work is yet done, that means the borrower has to front something to the contractor for them to get started and then they can apply for draws and work off of those, the investor gets their "first in" money back at the last draw. That's why you need to be a lot more liquid than you. think. Yes, this is a great deal, but the investor has to lay out 80k+ for about 7 months to get that 200k+ gross profit. We have him scheduled to net profit 115k on a sale or cashflow $400/month and keep this asset which will be worth 1 million+ in about 5 - 7 years.
You need money to grind the wheels of the real estate investment industry. If you are liquid and can dance, then it's all about finding winning teams to work with.
@Jacqui Dolan They almost always require some money upfront. At least for materials, sometimes for labor. You should never pay more than half of the total cost though.
We are currently doing a reno on our condo. We paid 30% up front, then 50% of the total cost once 50% of the job was done, and the final payment will be paid after walkthrough and punch list is satisfactory.
We got lucky on our first experience, I feel. I called multiple contractors and this was the only company that showed up to view/measure the space, provide a quote, and answer my many questions. So, we went with them as our only option. They have been fantastic.
They made a mistake which created some water leakage and damage in my condo. I called them and spoke with the owner. He owned it, apologized, and fixed the problem at no cost.
Most Contractors will request money up front. Should you pay it? Depends on the trade.....
Think about it......it makes perfect sense for a Contractor to not want to pay out of his pocket for materials that will be installed in your house (and immediately become YOUR property). And he will have to pay his crew on Friday.....
So a good Contractor will ask politely for enough to make sure that they are not underwater on your project. A tile guy will want enough to buy the tile, plus to pay his crew the next Friday. Same with cabinets and counters. Other trades like framing/electrical/plumbing are more labor intensive and will not require as much $$ from you to feel comfortable.
OTOH, if a Contractor asks for percentages, particularly large ones like 30/40/50%, then you need to stop and figure this out. And maybe find another Contr....
But this should all be spelled out clearly, in writing, before you sign a contract and start work.
is this because you have established relationships? i've done a few successful remodels and everyone requires a deposit. as @Bruce Woodruff said.
so new investors are constantly told "never pay up front..." but what established contractor is going to take a chance on a brand new investor?
is this because you have established relationships? i've done a few successful remodels and everyone requires a deposit. as @Bruce Woodruff said.
so new investors are constantly told "never pay up front..." but what established contractor is going to take a chance on a brand new investor?
Any Contractor with a few years experience should and will expect some amount of $$ as soon as - not before- they start work. It is not even legal in most states, to get more than $1000 max before starting work.
The customer must have some skin in the game.......why would any businessman carry a customers project (for more than a few days)
The only exception would be (maybe Terrells case?) if I knew the customer really well and/or they were a repeat customer.
For all the grief that Contractors get on this forum, people never realize that the customer is often the one that ends up causing all the problems and not paying what is due.
I would never accept any money before starting the project, that was my rule. But once I was onsite with my crew, and subs, and tools going, and safety fencing/porta potties going up, etc.....the customer had better pony up some money. Or everybody disappears immediately.
Most Contractors will request money up front. Should you pay it? Depends on the trade.....
Think about it......it makes perfect sense for a Contractor to not want to pay out of his pocket for materials that will be installed in your house (and immediately become YOUR property). And he will have to pay his crew on Friday.....
So a good Contractor will ask politely for enough to make sure that they are not underwater on your project. A tile guy will want enough to buy the tile, plus to pay his crew the next Friday. Same with cabinets and counters. Other trades like framing/electrical/plumbing are more labor intensive and will not require as much $$ from you to feel comfortable.
OTOH, if a Contractor asks for percentages, particularly large ones like 30/40/50%, then you need to stop and figure this out. And maybe find another Contr....
But this should all be spelled out clearly, in writing, before you sign a contract and start work.
yep that's the reason. They always wanting something in front especially for large project. If project cost is 50k why they have to spend 20k in front this is our home not their home.
This is more realistic in doing business. Just think from contractor point of view. But on other hand I make a deal with them that I would pay til ful within 6 months after project completion LOL.
I am a contractor , I get a deposit , and draws . I never gamble my funds on a customers project . I can be the bank , but the customer will pay for that . Money is the fuel that keeps the machine working . Change orders are paid up front . As a contractor , I will tell you that you are not paying for materials and labor . You are paying for a finished product .
I am a contractor , I get a deposit , and draws . I never gamble my funds on a customers project . I can be the bank , but the customer will pay for that . Money is the fuel that keeps the machine working . Change orders are paid up front . As a contractor , I will tell you that you are not paying for materials and labor . You are paying for a finished product .
I am a contractor , I get a deposit , and draws . I never gamble my funds on a customers project . I can be the bank , but the customer will pay for that . Money is the fuel that keeps the machine working . Change orders are paid up front . As a contractor , I will tell you that you are not paying for materials and labor . You are paying for a finished product .
maybe my method is different than yours but we typically only pay for labour, materials they purchased at HD with their or my card so I just reimbursed the bill. For customer like me it is win win situation.
@Nicholas L. I don't pay contractors a deposit, except counter tops. I do buy most all materials except countertops, trade rough-ins, HVAC, guttering, maybe a couple other things I am forgetting. I do immediately make payment on work completed. Never had a contractor ask me for a labor deposit and I don't plan to ever pay one.
I am a contractor , I get a deposit , and draws . I never gamble my funds on a customers project . I can be the bank , but the customer will pay for that . Money is the fuel that keeps the machine working . Change orders are paid up front . As a contractor , I will tell you that you are not paying for materials and labor . You are paying for a finished product .
maybe my method is different than yours but we typically only pay for labour, materials they purchased at HD with their or my card so I just reimbursed the bill. For customer like me it is win win situation.
And I won't work for customers that insist on purchasing materials. It's not about the money, because I would rarely make much extra. It's about the control, timing, schedule, who's responsible, delivery, assembly, etc, etc....
most here want 10-25% to confirm the job, whether you're scheduling a day or a month or 6 months in advance.
I believe the legal limit in PA is 1/3 so that's pretty hefty...
most here want 10-25% to confirm the job, whether you're scheduling a day or a month or 6 months in advance.
I believe the legal limit in PA is 1/3 so that's pretty hefty...
So on a $100k job, they expect you to give them $25,000 just to get on their list? That's BS. Keep looking, there will be someone that is serious and honest...
Yes, I'd probably negotiate for something lower on a 100K job. But everyone good is booked up... I had to call several dozen on my last project just to get 2 quotes!
Yes, I'd probably negotiate for something lower on a 100K job. But everyone good is booked up... I had to call several dozen on my last project just to get 2 quotes!
I need to un-retire and move there!
I am a contractor , I get a deposit , and draws . I never gamble my funds on a customers project . I can be the bank , but the customer will pay for that . Money is the fuel that keeps the machine working . Change orders are paid up front . As a contractor , I will tell you that you are not paying for materials and labor . You are paying for a finished product .
maybe my method is different than yours but we typically only pay for labour, materials they purchased at HD with their or my card so I just reimbursed the bill. For customer like me it is win win situation.
And I won't work for customers that insist on purchasing materials. It's not about the money, because I would rarely make much extra. It's about the control, timing, schedule, who's responsible, delivery, assembly, etc, etc....
Correct, I never buy my own material, except when it's special like type of flooring model and colour.
I do not even actually even check the material contents that they just purchased, I just trust them. It is easier that way.