Should I provide a deposit to a contractor for out-of-state work?

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Should I provide a deposit to a contractor for out-of-state work?

Brady Lamprecht
Rental Property Investor · Firestone, CO · Member since 2017 · 30 posts · 8 votes

Here is a fairly basic question I've got concerning out-of-state investing and I'm looking to get people's opinion concerning hiring a contractor to work on a project with me.

I recently read @David Greene's book on titled "Long-distance Real Estate Investing" and I'm starting to take action on what he suggested.  I found an REO property that is ~100k undervalued that was recently foreclosed on in early December.  An agent in the area I'm researching referred me to a contractor who apparently has a good name (has been working for 30+ years with his ageing father) and from talking with him on the phone, seems to be okay with working within my requirements as an investor.

That being said, there is obviously no trust between us yet and he is hesitant to spend any time on this project without some type of deposit from me beforehand.  I completely understand where he's coming from.

At this point in the game, I'm just looking to get a very basic idea of what needs to be fixed, repaired, and taken into consideration for coming up with an ARV to know whether to move forward of not. He suggested a $500 deposit from me which would then be applied to the work should I decide to proceed.

That sounds reasonable to me but I'm also considering offering him that amount split between two payments as I really have no idea if I can make the numbers work or not and would prefer to not sink too many costs into something that might not work at all.

Suggestions on how to proceed?

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Don Petrasek
Real Estate Agent · Westlake, OH · Member since 2014 · 186 posts · 165 votes
8y

@Brady Lamprecht you didn't mention what area of the country you're in, but here in Cleveland good contractors (and even some of the bad ones) have twice as much work as they can handle and are booked out 2-3 months....based on what I've seen on BP, this is the case in many areas.  So a contractor asking for a deposit to cover their time is very reasonable....$500 is not excessive when you consider that it would probably cost you $300-$350 to get a home inspector in to do the same thing & that amount wouldn't be credited to the project.

No I don't pay a deposit or extra cost for every estimate I get, but I've got established relationships with people who know that I follow thru with work & quick payment + don't call them until I have something locked down (after I own the property).......I see a number of posts on BP where new investors are expecting contractors to evaluate properties for them before they purchase- for free- that's not realistic.  

Haven't read the book you mentioned, so not sure if it covers this but what a lot of long distance investors forget to consider is the extra cost that comes with managing a project that you can't personally get to (or at least get to often).  You need to pay people to look out for your interests and establish contractor relationships where that will happen as well.  Seems like you are on track with that....but don't get caught up over a few hundred dollars on a property that undervalued, you may be tripping over dollars to get to pennies as they say. 

Good luck with your project.

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  • Nathan A.
    Investor · Morgan Hill, CA · Member since 2017 · 18 posts · 6 votes
    8y

    I would not pay a deposit. I'm not really sure what it is for.  Contractors should be willing to provide a free estimate and proposal. That's just the cost of doing business in construction.

    0Reply
  • Jonathan Smith
    Moseley, VA · Member since 2016 · 115 posts · 60 votes
    8y
    Brady, sounds like he doesn’t feel you are serious and doesn’t want to do the estimate for free and have you turn and go with another contractor. I would not pay a deposit but would tell him that you would pay $100 or whatever you feel comfortable with for a estimate to show you are serious about the project. If he has been in business for 30+ years It is not about the money but about his time and what that is worth. He is seeing if your serious and being out of state doesn’t help the situation from his point of view also.
    1Reply
  • Charlie DiLisio
    Investor · Lake Worth, FL · Member since 2014 · 378 posts · 184 votes
    8y

    Brady, I can see this from both sides as I am a contractor and there are so many tire kickers out there I understand his concerns and yours.  It sounds like you have gotten a good reference from the agent and that is great.  Many rehabbers get the ballpark and then use handymen to save money which makes sense with some work but not with the important stuff.  Too many horror stories from out of state people who get unqualified, unlicensed people to save money.  Up to you but I am prone to go with vetted people who will watch out for your interests.  Also be careful you don't get sued for negligence and accidents for uninsured people.  I do get a policy for my rehabs and recommend you do as well.  Good luck.

    1Reply
  • Don Petrasek
    Real Estate Agent · Westlake, OH · Member since 2014 · 186 posts · 165 votes
    8y

    @Brady Lamprecht you didn't mention what area of the country you're in, but here in Cleveland good contractors (and even some of the bad ones) have twice as much work as they can handle and are booked out 2-3 months....based on what I've seen on BP, this is the case in many areas.  So a contractor asking for a deposit to cover their time is very reasonable....$500 is not excessive when you consider that it would probably cost you $300-$350 to get a home inspector in to do the same thing & that amount wouldn't be credited to the project.

    No I don't pay a deposit or extra cost for every estimate I get, but I've got established relationships with people who know that I follow thru with work & quick payment + don't call them until I have something locked down (after I own the property).......I see a number of posts on BP where new investors are expecting contractors to evaluate properties for them before they purchase- for free- that's not realistic.  

    Haven't read the book you mentioned, so not sure if it covers this but what a lot of long distance investors forget to consider is the extra cost that comes with managing a project that you can't personally get to (or at least get to often).  You need to pay people to look out for your interests and establish contractor relationships where that will happen as well.  Seems like you are on track with that....but don't get caught up over a few hundred dollars on a property that undervalued, you may be tripping over dollars to get to pennies as they say. 

    Good luck with your project.

    5Reply
  • Andrew A.
    Cleveland, OH · Member since 2016 · 62 posts · 68 votes
    8y

    Estimates should be free in or out of state.  

    0Reply
  • Jeff CopelandBusiness Member
    Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
    8y

    I completely agree with @Don Petrasek. One key difference between an amateur and a professional is one works for free and the other doesn't. 

    Good contractors (and professionals in any field for that matter) have more work than they can handle and have to choose their jobs wisely. 

    The contractor who has no work to do, and is thus willing to run around providing free estimates for out of state investors who are "thinking about" buying a house they've never seen, is probably not the contractor you want running the show in your absence.

    Copeland Morgan LLC4.770 Reviews
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  • Mike McCarthy
    Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    8y
    I’ll agree with the others in that the contractors time is worth money. O would happily pay $100-500 for a thorough inspection, scope of work, estimate, etc. it’s a good investment to ensure you know what you’re buying. If he discovers unforeseen issues and the deal falls through, he’ll be happy his time is paid for and will be happy to work with you on the next project. Depending on what he’s doing and giving you in return, figure out what an appropriate cost would be. Whether it’s a deposit or paying him for his professional time, it’ll be money well spent.
    2Reply
  • Valerie Hiscoe
    Investor · Richmond, BC · Member since 2013 · 316 posts · 133 votes
    8y

    Make sure that you're both clear on expectations. For example, do you want to just find out if the floors, kitchen and bathroom need to be done or do you want a detailed scope of work, for example, remove and replace 2nd floor toilet, replace 2nd floor vanity, re-plumb sink for double sink vanity, etc, and then you need to decide whether or not you want a ballpark repair cost like $50-65k plus materials' - or do you want more of a breakdown of work to be done and with or without cost of materials. The time involved varies a lot.

    Good luck

    0Reply
  • Brady Lamprecht
    OP
    Rental Property Investor · Firestone, CO · Member since 2017 · 30 posts · 8 votes
    8y

    Thanks everyone! I think I'll see if he would be willing to just do a rough estimate for portion of that deposit and then if that is in line with the numbers I need to make the deal work, I'll go ahead and ask him to do a detailed SOW report. 

    I appreciate all of the feedback.

    0Reply
  • Matthew Paul
    Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
    8y

    What you are looking at is having a experienced contractor basicly do a home inspection and a scope of work .  $ 500 is more than reasonable .    You will get a lot more practical info from a contractor than a home inspector . 

    1Reply
  • Cara Lonsdale
    Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
    8y

    If it were a home inspector, you could expect to pay anywhere from $250+.  Essentially, this is what you are asking of the contractor.  You want him to go through the property and tell you what needs to be done.  While I agree that estimates should be free, that is not what you are asking him to do, and he should be compensated for his time and efforts.  There is a value there.

    My suggestion would be to offer to pay him the $250 that he can KEEP.  Then if you decide to go forward with the deal, you start from scratch.

    1Reply
  • Kuba F.Pro Member
    Real Estate Investor · Los Angeles, CA · Member since 2013 · 2k+ posts · 694 votes
    8y

    You should expect to pay professionals for their work.  I just don't like the word deposit as it implies commitment, and you should be getting multiple bids before committing to one contractor vs another.  Also $500 seems a little steep but I don't know your market.

    I wrote this blog post (informed by my remote flips) on the subject of getting a pre-offer estimate last month:

    https://www.biggerpockets.com/blogs/8814/68805-how...

    and in your case it seems like paying for an estimate is the way to go.

    The way that I estimate remotely is I have my agent walk through the property with their phone on FaceTime or Skype while I record the video going through every room top to bottom roughly going by this checklist and narrating what they see:

    https://www.biggerpockets.com/files/user/kubaf/fil...

    I then replay the videos while I itemize all of the fixes.  That gets me a close enough estimate to get me to the offer stage and to be able to bring multiple contractors out for bids at which point I'm happy to pay around $300 for an estimate.

    1Reply
  • Matthew Paul
    Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
    8y

    Free estimates , arent really free .  That time is passed on to each and every customer  and built into the price 

    0Reply
  • Brady Lamprecht
    OP
    Rental Property Investor · Firestone, CO · Member since 2017 · 30 posts · 8 votes
    8y

    Well, I finally received a very detailed SOW from A contractor (not the one I was referring to originally) and am going to pay him for his work.  I've run the numbers on the deal that I currently investigating and now am crossing my 'T's and dotting my 'I's and about to put an offer in.

    The question I have now is, during the due diligence time between going under contract and the actual closing taking place, should I hire an inspector to do essentially the same thing as this contractor has done or not?  I've seen what inspectors do from the purchase of my primary residence 5 years ago and I can't honestly tell a difference between that report and what my contractor just provided.

    @Cara Lonsdale From your profile page, you seem to have a lot of experience under your belt in this area so I'm wondering what your opinion is.  I know that the report created for my primary residence had disclaimers that I couldn't come back sue for items he might have overlooked so while the additional cost isn't a lot in the long run, I don't know what the added benefit would be.

    0Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes
    8y

    You guys who think that all estimates should be free or are free are totally nuts. That's not how the biz works my friends. You are all in la la land. For perspective note that I  own a construction company with sales in the $2M year range. So we do a pretty decent chunk of biz. Let's paint this picture as to how this plays out.

    Some random investor from halfway across the country calls b/c they are "thinking" about possibly buying this property. They have no idea who type of work needs to be done but know that if somehow it all works out & they could make a killing on it they will buy it. So they want a contractor to go out & draft a bid. Do you guys have any idea the amount of time & effort it takes to draft a bid of this size? We are talking about something undervalued by $100k & foreclosed on. This is a 1 in 100 shot of turning into a paying job for the contractor. 

    @Brady Lamprecht If he didn't value his time enough to be compensated you should run the other way. Legitimate contracting companies are usually scheduled out several months in advance. If a contractor really is that good they are often hard to hire. Anybody who would be willing to take this flyer on you is desperate & I mean DESPERATE for business. Ask yourself what is the reason they are so desperate for business? What the guy is asking for is compensation for his time. Just like your home inspector is asking for. 

    1Reply
  • Cara Lonsdale
    Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Brady Lamprecht:

    Well, I finally received a very detailed SOW from A contractor (not the one I was referring to originally) and am going to pay him for his work.  I've run the numbers on the deal that I currently investigating and now am crossing my 'T's and dotting my 'I's and about to put an offer in.

    The question I have now is, during the due diligence time between going under contract and the actual closing taking place, should I hire an inspector to do essentially the same thing as this contractor has done or not?  I've seen what inspectors do from the purchase of my primary residence 5 years ago and I can't honestly tell a difference between that report and what my contractor just provided.

    @Cara Lonsdale From your profile page, you seem to have a lot of experience under your belt in this area so I'm wondering what your opinion is.  I know that the report created for my primary residence had disclaimers that I couldn't come back sue for items he might have overlooked so while the additional cost isn't a lot in the long run, I don't know what the added benefit would be.

     You should always get a home inspection.

    However, it sounds like you did! If it were my project, and I had a detailed SOW that went over all the systems in the house needing attention, I would be satisfied with the contractor's SOW, and not hire a home inspector (because they basically DID your home inspection).

    Being out of state, if you have any doubts or questions (about the contractor's abilities or the items he mentioned), the home inspection would just be confirmation that your contractor is on track.  Sometimes that is worth the peace of mind too....and how much could it be to give you that peace of mind....and extra $250-300? However, if given the choice to do only 1, I would take a fully licensed GC combing through the property rather than a home inspector.  Sorry to seemingly give you 2 answers.  But it really comes down to how confident you feel in what the contractor gave you.

    0Reply
  • Rick Pozos
    Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
    8y

    It sounds like you need a local person to be your partner. I see 10 to 20 trips to check on things because the contractor says this happened or that happened. Lots of cost over-runs because you are not there to see what he is talking about so you just have to go by what he says.

    Get someone local who you know and/or trust to be a partner. Maybe you could find someone on the forums who will take 10% or 25% or even 50% of the profit as compensation at the end of the deal. I would be very motivated to keep costs down and do what it takes to sell the property and make you and me some money!!! Just make sure your new partner is someone who is experienced and can get the deal done for you.

    0Reply
  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    8y
    Originally posted by @Nathan A.:

    I would not pay a deposit. I'm not really sure what it is for.  Contractors should be willing to provide a free estimate and proposal. That's just the cost of doing business in construction.

     I find it awesome that some investors pay for home inspectors and there is no telling if the deal will fall through or not. Cost of doing business can also be true to investors both time and money -- going to the site and looking for deals.

    0Reply
  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    8y
    Originally posted by @Brady Lamprecht:

    Well, I finally received a very detailed SOW from A contractor (not the one I was referring to originally) and am going to pay him for his work.  I've run the numbers on the deal that I currently investigating and now am crossing my 'T's and dotting my 'I's and about to put an offer in.

    The question I have now is, during the due diligence time between going under contract and the actual closing taking place, should I hire an inspector to do essentially the same thing as this contractor has done or not?  I've seen what inspectors do from the purchase of my primary residence 5 years ago and I can't honestly tell a difference between that report and what my contractor just provided.

    @Cara Lonsdale From your profile page, you seem to have a lot of experience under your belt in this area so I'm wondering what your opinion is.  I know that the report created for my primary residence had disclaimers that I couldn't come back sue for items he might have overlooked so while the additional cost isn't a lot in the long run, I don't know what the added benefit would be.

     The only difference between a very detailed SOW and an inspection is the inspection report will reflect that a unit (i.e. water heater) will have the lifespan (8 out of 10) and other similar suggestions.

    0Reply
  • Jackson Sandland
    San Francisco, CA · Member since 2016 · 56 posts · 10 votes
    6y

    @Brady Lamprecht Never ever pay for an estimate. You should be researching quality contractors. Choosing at the least 3. Vet them. Vet them again. Compare estimates. Also, know the laws governing the contract that the contractor would provide in your state, and ensure you have everything in place that should be in the contract as required by law. Make sure everything is explicitly clear as to what is expected. 

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