Rehabbing a Rental Property Using a Contractor

8 Replies

So I agreed to a binding deal last Sunday on what would be my first investment property.  It's a single family home in the neighborhood I've lived in for the past 4 years, and knowing what I know about the real estate market, I think it's a pretty good deal.  I've got the home inspection coming up on Friday, which I'm hoping will reveal a lot about the condition of the house.  Walking through on my visit, I could tell there will be some work to be done (new windows, foundation work, some cosmetic stuff, etc.).  I plan on doing some of the lighter work myself, but I'll be hiring a contractor to do the bigger things like window replacement and foundation work.  My question is, "how's the best way to pay a contractor?".  I haven't settled on a contractor yet, but you always hear those contractor horror stories about paying them a sizable amount up front, then you never hear from them again and they're nowhere to be found. I was hoping the BG Community would have some advice on how to not become one of these stories...

I've only worked with one contractor and he "required" half when the service was scheduled...but i never paid him until the job was done..i guess he forgot to collect the deposit. There was also a little trust there because he was the friend of an associate of mine . I would ask around about any contractor I hire. Get references from people they have done work for. If everything checks out buy your own materials and pay half up front/half at completion. 

There's a lot of ways to structure the payments for contractors and I'm sure each one will have their preferred way. A common way is to do a weekly payment based on the percentage of the work done. This means you would need a detailed scope of work and would need to be able to accurately determine how far along they are with each task- percentage wise. This isn't always accurate for various reasons but it's still a common way. The contractor should be able to summarize this for you but obviously it's good to double check them. I'm working on a project right now (non-residential) and we will be structuring the payments so they get 50% of the money for a particular task once its started and then the remaining when that task is 100% complete.

You could specify that you'll pay a mobilization cost which is up front but it is not to exceed 10% of the total job- that way they can't really take your money and run.

 I had a contractor work on my personal residence we worked out 3 equal payments. We did the first third at the very beginning.  A third in the middle of the project and the final third when the work was complete.  

That was a big selling point for his crew along with the other work I had seen them do. 

Good luck to you. 

How do you know it needs foundation work? Could it just be some rotted framing? In reference to paying contractors, it varies depending on the job. For rental rehabs especially, they are very quick no longer than 2 weeks max but typically 1 week. It makes no sense to have multiple draws on a 1 week rehab, so I typically do 50% upfront and the remaining after completed. If it's a large renovation that will take months, then I have no problem with doing 10% upfront but not for a rental rehab.

@Adam Martin

I would never ever pay someone very much up front, especially not half. If they need half up front, they're probably not a good contractor. I've used this type of scenario before when dealing with new contractor relationships - let's say the job is to be $3,000 and should take 2 weeks.

I'll agree to give them one days work upfront $300 on the morning of the first day AT the job site. Then, say $600 at the end of day 2. $600 at the end of the week. The following week I'll give $600 on Monday, and balance due on Friday. 

This way, neither party is really more than a day or two up on the other one. And in that first week you'll get to check in to make sure the project is going smoothly.

Once they become familiar with you, the following jobs should be paid on weekly draws, with you always one week ahead. So the same scenario would look like this:

End of Week 1 - $0

End of Week 2 - $1500

End of Week 3 - $1500

That will depend on how your contract is written. But the absolute best way to pay a contractor, and most of them can except it, is by a credit card. Most of them can run it right through their smart phone. And it gives you legal protection that a check or cash does not give you! Never ever ever, ever, ever pay for a job until it's completely done and walked through. I don't care how good you know the guy, never ever! LOL. It'll save your friendship!

@Mark Gallagher it sounds like you are hiring day laborers/handymen whereas Adam Martin is actually hiring contractors. As a contractor, I would never accept payment on a daily basis. I cannot schedule my crew and or buy materials in a timely manner when I work on a day to day basis.

The same way clients deal with giving contractors money and them running, contractors have to deal with clients not paying them. I have dealt with doing the work and the client being satisfied but still not paying me. I like it how people always talk about contractors screwing over clients but never vice versa.

@Adam Abdel-Hafez

No, I am not talking about day laborers. I am talking about expedited draw schedules for new contractors that I work with. 

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here