Investor · Chantilly, VA · Member since 2014 · 73 posts · 13 votes
I've got a property that requires a pretty major rehab (asbestos siding, and needs new electrical, plumbing, HVAC, walls ....). I have a general contractor that I think will do a good job. I wanted to do the work as cost plus. He is fine with that but wants 30% of his estimate up front. That could be $30K or more. It's not that I can't fund it that way, it just seems like I'm giving him an awfully big chunk of money without having anything to show for it.
I understand he needs funds for supplies, etc and that gives him a bucket to work from, but does he really need that much? I guess I'm worried that if I give him the funds, I have no way of holding him accountable for those funds. Yes, I can refuse to give him any more money, but that is still a lot of money to potentially lose if something goes wrong.
What are your thoughts on how much to give a GC up front?
Property Manager · Bixby, OK · Member since 2015 · 52 posts · 13 votes
11y
I may be biased because I work in primarily commercial work, but if a GC asks for money up front its an automatic decline. I am not opposed to draw at pre defined milestones but money up front is a red flag for me. If they dont have a 15 to 30 day line of credit for materials, its a good sign they're cash strapped. I know it seems hypocritical for investors seeking OPM to have this mentality, but it's an important consideration.
I've got a property that requires a pretty major rehab (asbestos siding, and needs new electrical, plumbing, HVAC, walls ....). I have a general contractor that I think will do a good job. I wanted to do the work as cost plus. He is fine with that but wants 30% of his estimate up front. That could be $30K or more. It's not that I can't fund it that way, it just seems like I'm giving him an awfully big chunk of money without having anything to show for it.
I understand he needs funds for supplies, etc and that gives him a bucket to work from, but does he really need that much? I guess I'm worried that if I give him the funds, I have no way of holding him accountable for those funds. Yes, I can refuse to give him any more money, but that is still a lot of money to potentially lose if something goes wrong.
What are your thoughts on how much to give a GC up front?
What did you hear from his references? I know you called at least 5 or 6 and spoke to them and asked lots of questions, additionally you did google searches for his name and company name right? You searched to see if there were any judgements against him right? You got proof of general liability insurance and workmen's comp for his employees if he has them right? If you did all this you should have a high level of comfort with him by now and there should be no need to be worried about your deposit. If you didn't do all this, then you're not ready to hire yet.
If you found him in front of home depot like so many suggest here, you probably need to start over.
Investor · Chantilly, VA · Member since 2014 · 73 posts · 13 votes
11y
@Account Closed Thanks! Its good to know that other GCs are following a similar pattern. I was hoping to use a cost plus contract to keep better control on the costs. I would pay the GC as work is done and he presents the receipts for the work -- rather than in big chunks where it is harder to see what I've paid for, It seems like giving him a big chunk of money up front kinda defeats that purpose.
Property Manager · Bixby, OK · Member since 2015 · 52 posts · 13 votes
11y
I may be biased because I work in primarily commercial work, but if a GC asks for money up front its an automatic decline. I am not opposed to draw at pre defined milestones but money up front is a red flag for me. If they dont have a 15 to 30 day line of credit for materials, its a good sign they're cash strapped. I know it seems hypocritical for investors seeking OPM to have this mentality, but it's an important consideration.
Contractor · Phoenix, AZ · Member since 2013 · 42 posts · 25 votes
11y
As a general in phoenix i take between a 20-30% deposit from new clients on all residential projects. I tell investors if you want good pricing we complete your rehab with your money not mine. In addition to that I use milestones in my schedule I provide to my client for progress payments based upon completion and the last 10% is not paid until the punch list is signed off. I agree with @Mike F. that if you have checked into his references, contractors license, length of time in business and done your online research on him and the company you shouldn't worry about your deposit.
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
11y
Well, T &M can get out of control, if not managed properly. I'd be more inclined to buy the materials myself, at least the bulk of them. I've done contracting, not so much for the private sector, but never got money up front. For typical rehabbers though, I might not want to front a ton of material costs, in addition to labor costs, though. Most contractors doing this work won't be set up for performance and payment bonds.
Investor · Chantilly, VA · Member since 2014 · 73 posts · 13 votes
11y
@Mike F. yes, I have done a fair bit of background checks/research and have a project manager that has seen his work on other projects. He is license, bonded and insured. I am contractually requiring this as well as workman's comp. although I haven't seen proof of WC. So, I do feel fairly comfortable with his work.
I just worry that if you give someone a big chunk of money then where is their incentive to perform.
Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
11y
When we work with our GC we give him 50% upfront and then two 25% percent payments as he hits certain milestones. We sign an agreement stating exactly how everything will go down regarding the project.
We feel comfortable doing things this way because we have a 5 project track record with him so there is trust there.
I definitely understand the apprehension considering it sounds like your relationship with the GC is a newer one.
Investor · Chantilly, VA · Member since 2014 · 73 posts · 13 votes
11y
@Rick Baggenstoss and @Brandon Siewert Thanks for your input. I have a GC in MD that doesn't take any money upfront and that is great. This is too far away to use them. So, I'm trying to build a team off of referrals. I just don't know what the norm is and thought I'd ask. It is starting to look like there isn't really a norm.
Investor · Chantilly, VA · Member since 2014 · 73 posts · 13 votes
11y
@Michael Noto Thanks. It is precisely the newness that worries me. Did you have that 50/25/25 relationship and were you comfortable doing that on the first project?
Contractor · Temecula, CA · Member since 2015 · 190 posts · 36 votes
11y
I'm a contractor in Pa, in business for 25 years, depending on the job, it can be very hard to keep a job moving along without a good deposit. I usually ask for materials plus 1/3 of the labor on or before start up day, unless there are special order materials that need to be at the job when it starts then if the materials take three weeks to arrive then that money needs to be paid three weeks before I start the job. Keep in mind Home Depot requires 100% paid up front and you don't even know who is doing the work till the start up day. I would never spend my money on custom or special order materials, we do have risks trusting customers with our time and money too. I learned this working for other high end companies who nerver let the customers get behind the job with payments and leave a small balance on the end of the job. Do your due diligence make sure your contractor is trustworthy, licensed and insured a has good references. Good luck, I hope all goes smoothly.
Investor · Chantilly, VA · Member since 2014 · 73 posts · 13 votes
11y
@Nick Stango Thanks! I don't want to be the problem. I really want to keep the GC happy as I hope to be throwing more work his way -- if this goes well.
Contractor · San Antonio, TX · Member since 2013 · 647 posts · 205 votes
11y
Definitely make sure he's insured/bonded, licensed, etc. My in-laws live in NoVa and got owned to the tune of about $20K by a contractor who pretty much messed up his entire scope of work, violated his own contract through-and-through, then threatened to take THEM to court (I had no idea of any of this until later :-/ ). The court thing was obviously pretty bogus, but it just goes to show. The big thing, in my opinion, is either keep your draw until each benchmark has been completed OR ensure you have solid legal recourse (i.e. the bonding, etc). NoVa is strict on a lot of things, be sure to use that to your advantage.
Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
11y
@Joseph B. For our first project we did 4 25% payments with a signed agreement, but we were working with someone who was a personal referral so we felt confident we would not get screwed.
Investor · New York City, NY · Member since 2015 · 122 posts · 67 votes
11y
I'm a GC in the northeast and 30% is my standard deposit. Here in NYC, which I consider to be a pretty tough environment, the Architects we work with consistently approve deposits of 25% to 30%. When I've asked potential clients who balk at the concept of a deposit if they would prefer to cover my business line of credit costs, they seem to get the point. Commercial money is expensive, and I think an unnecessary additional expense. Think of it this way, as soon as I bring material in to your house and perform work to install it, I own part of your house against which I can file a lien if I'm not paid. Doesn't it make more sense that you pay for and own 100% of your project. On another note, I have had the GC side of the experience where I have provided materials and performed work in the client's best interest and haven't received payment for an extended period of time, in one case not at all due to a weak contract.
If you have carefully vetted a potential contractor, and if you have a fair contract, there shouldn't be too much to worry about.
Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
11y
Real estate is a lot like other business ventures. You do your due diligence into the project itself and the people that are going to work for you. After that this business will require you to take a leap of faith into someone at some point. Trust your process and research and you will do what you can to mitigate your risk.
My rule of thumb is to never give a GC more upfront cash than you can afford to lose without losing sleep.
Tons of good GC's run into marital, financial or other life issues that can cloud their judgment and their actions, the the party with the money in hand usually wins.
Contractor · Temecula, CA · Member since 2015 · 190 posts · 36 votes
11y
Exactly Joseph, you definitely don't want an unhappy contractor working on your job, customers that think they know how to run a contractors business better than the contractor usually have a unhappy contractor working for them, Either way the contractor should always be polite and curious and understanding and be able to explain the method to their madness when a question arises, but some may have a short fuse, especially if you see a case of beer in the back of the truck that might be a red flag. LOL
Thanks! That is a good point. I'll need to work through the SOW to make sure it is detailed enough to be able to have legal recourse if this starts to turn out not as well as I would like.
Investor · McKinney, TX · Member since 2012 · 588 posts · 224 votes
11y
I agree, a detailed SOW helps resolve disputes. Also making sure you leave some money due upon completion.
also how are you paying. Credit cards gives you some security in that you can dispute charges and possibly get some money back. If you are paying via check, little chance of getting money back if they bail.
Contractor · Columbia, SC · Member since 2014 · 241 posts · 68 votes
11y
Paying a contractor upfront always irritated me. Mainly because as a commercial grading contractor we would have to float the project sometimes for 45 days before we saw a penny. Do you have any idea how much fuel a small fleet of heavy equipment and dump trucks can burn in 45 days. Not to mention payroll, overhead, and most vendors had net 10 terms. I'm jealous.
Contractor · San Antonio, TX · Member since 2013 · 647 posts · 205 votes
11y
@Joseph B. NoVa is one of those places where the high regulatory environment can actually work to your benefit, but ABSOLUTELY make sure those permits get pulled. They do not mess around up there; ideally, I'd include "apply for all appropriate permits and inspections" or some variation thereof into the contract on the contractor's side, and make sure you check them. Would be no fun to get stuck between a less-than-ideal contractor and the County when it comes to light that all the paperwork wasn't straight (this happened to my in-laws too; not cool). My personal rule of thumb going forward, after having a truly horrific contractor experience, is to try to envision some of the worst that can happen and include protection from it in my contract. Best of luck!
Thanks again. I appreciate the insight. I'm happy to stay out of his business as long as the results (quality of work and cost) stay in line with my expectations.