Are contractors to be trusted?

24 Replies

My main worry as an out of state investor is if I want to get a property at a discount, the property would needs to be in some form of distress. I would then need to rehab it so that I can rent it out as a buy-and-hold.

My main question is how can I prevent myself from getting "taken to the cleaners" by the contractors that I will need to hire to rehab the place? I know I need to get 3 bids, but even then, how do I know the contractors are using the materials they had promised to use and not just the cheapest materials to increase their profits?

Once again, any help from the investing community would be great!

Thank you,

Crystal

Either don't rehab out of state or hire someone you trust to manage the rehab.  Really that simple... 

J Scott said it best! You or someone you trust must be there or it will not work!

@ J Scott

Btw, so that you know Scott, I'm a big fan of yours and I purchased your book on Amazon and it's coming this Friday.

This is the house in question.

https://www.redfin.com/TX/Houston/4731-Clover-St-7...

The bank wants $54,000 and the contractor says it needs $65,000 to get it to be rent ready. The ARV is $120,000. There doesn't seem to be much of a spread after factoring into account the rehab costs in my opinion.

Also, the contractor said the copper in the electrical have been stripped out and would need $18,000 to be installed in.  That that a fair estimate?  

I just feel his rehab estimates are a bit high.

Any feedback would be greatly appreciated.

Thank you,

Crystal 

@Crystal Chang

 I agree with J. You need someone on the ground to make this deal happen. Even if this price was fair, you have little to no way to hold these contractors accountable via site inspections. Nor do you have the in person presence to confront them if they go sideways on you.

I highly suggest you find a partner or find a deal that's within driving distance.

But I live in California though.  It is almost impossible to find anything that will cashflow around my area unless I put a 42% downpayment.

Is that property in Sunnyside?  That's murder capital. Girl, I would steer clear especially as an out-of-state investor!

"Sunnyside, Houston, TX is the sixth most dangerous neighborhood in the United States and the most dangerous neighborhood in Texas."

The rehab would need to be less than half of what you're being quoted. Anything more makes the deal weak. If you assume a 5% discount to sell it quickly, you're now at $114k. Subtract 10% for transaction costs. You're now at $102k. Subtract 25% profit margin (I only do 30% or more). You're now at $72k. Subtract your holding cost (8k?) Subtract purchase of $54k. You're left with $20k for rehab. Anything more doesn't work.

@Crystal Chang

You know there's also bad contractors right where you are so you do your due diligence just the same. I'd check them out on BBB, ask other BP investors, etc. Good luck! 

As an investor myself and wife of a contractor maybe you want to visit Angieslist and get bids.  Always check for licensing and Insurance.  Do the walkthrus with your "free" quoters, once you get the bids and you've investigated and have made a final decision, don't sign any contract before materials are listed, how long before job completion and include in their contract NOTHING is DONE without discussion with you and you get a change order or any changes!  Pay a small deposit upon signing contract and you can always go to home depot etc to ask them about products and such.. Halfway through give 50% minus the money paid down and don't pay again until after final walk through and corrections have been made.  Hope this helps..gl

Ms crystal it goes back to trust we work with clients out of state but it works best if you have a project manager to act on your behalf to manage the project. YOu can pay for material and just get a labor price and have it dropped off and request that pictures be taken .I am a contractor and the bid you had I would get a second bid at the end of the day the contractor is out to make the highest profit he can the same way you do , so if he can charge 18K for a 14K job he will the same as a flipper charging 120K for a 100K home and can get the price.Laurn there are also alot of bad but alot of good contractor also , name of the game with a contract is building a relationship with the better the relation ship the more you will get out of him sometimes you will get better #. I do it all the time we change our mark up on some clients project do to the relationship .

If the price is 54k & the rehab is 65k that takes you to $119k for a home that's worth 120k.

You would be in a much better position if you just purchased a home in "turnkey" condition. Not saying it has to be from a "turnkey" provider just a home in really nice shape.

A 65k rehab is a huge job. You could go over budget and your also loosing lots of rental income due to the home being under renovation for a lengthy period of time.

Lastly, if you purchase a home that does not need all of this work you will be able to leverage much more of your money.

I am a contractor in Austin.  Texas does not require a license to be a GC.

If you are intersted in this property, you need to get at least one more bid.

Also, you definitely need someone to oversee the project.  "Trust but verify".  You want to know the work is getting done.

Austin is 3 hours from Houston.  If it was closer, I would offer to help as a consultant if your deal goes through.  I have a GC friend in Houston who might be available as a consultant.  He is in commercial, so doing the work is not in his company's wheelhouse, but having him check the work is easy to do.

Originally posted by @Crystal Chang :

@Lauren Lockett

Thank you!

 Crystal,

I personally looked at that house and the area. I live in Houston. I will not touch Sunnyside with a 7 foot long pole!

As a investor/contractor in the Austin area, my experience is as follows: I have done more work for customers who have already fired one or more contractor(s) on the current project. Get references, check website or Facebook page to see what the contractor is doing. There are good ones out there. However, you may find they are also very busy. Tip: Contractors who are also REI's themselves may better understand your criteria and manage costs more effectively.

Originally posted by @Subho Banerjee :
Originally posted by @Crystal Chang:

@Lauren Lockett

Thank you!

 Crystal,

I personally looked at that house and the area. I live in Houston. I will not touch Sunnyside with a 7 foot long pole!

I do not live anywhere near Houston and have never even been close to Houston. But based on the copper wiring being missing, I would have to agree with Subho here. Imagine the scenario where you have the renovations completed and it's vacant waiting on a tenant - the copper thieves are going to strike again ...

Doesn't sound like a deal at all to begin with, throw in the neighborhood issues, I'd run. 

J. Scott is right as well as others, you need boots on the ground getting away from your home. 

On another note, contractors, instead of charging what some job is actually worth for management, labor and materials, there is a predatory nature of bidding in what the value will be after they are finished, instead of bidding a job, they are bidding in on a value basis, which they are not entitled to. They didn't buy the place, carry the financial risks and issues of ownership, they have no skin in the game as an owner and simply not entitled to the owner's equity forced into a property by their contributions......which already has a value range. 

So, anytime you see a bid that brings an owner to little or no equity from a job, they are probably bidding on your value, not their work, just say next!

I have taken or purchased properties sight unseen, I'm a risk taker in many ways, but I'd never do rehabs out of state, just too much brain damage to be on the safe side. :)

This is a painful life lesson most of us learn early on. 


~~ Never trust anyone when it comes to money. I include friends and family in that statement as well. 

Are contractors to be trusted? No. How to do something from out of state? Must have babysitter.
Contractors will charge you for things they never done and you have no chance to check :((( and you will pay twice more compare with a guy who watches them EVERY day and could argue on every detail. I could not - so I am trying to stay away from any big projects because I do not want to babysit contractors. But if it happens - you need fully detailed scope of work with all possible details and a trusted babysitter :)))

Get someone on the ground that can coordinate the rehab for you that you can trust.

The bottom line with doing anything at a distance is at some point you are minimally going to have to take a small leap of faith in someone.

If you plan to buy and hold, you shall search for a good property manager. He could be your project manager to manage the rehab, then manage your house later.

Originally posted by @Derek G. :

This is a painful life lesson most of us learn early on. 

So true. Majority of contractors tend to be hacks, and have their own money troubles. Not to dissuade you, there's a chance you meet a good one.

The only way we will ever trust a contractor is:

a) We've done business and I know they can perform (Common)

b) Turnkey rentals in other markets from reputable wholesalers with their own trusted contractors (I went this route when starting)

c) They have skin in the game (Rare)

d) You or a trusted project manager babysits them like a hawk, with a finger on the fire button (Don't ask how I know)

Every other case will result in frustration. Even if things go right, something will go wrong.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.