How do you pay your contractors?

Rehabbing & House Flipping
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How do you pay your contractors?

Robert TinkerPro Member
Rental Property Investor · Round Rock, TX · Member since 2019 · 251 posts · 159 votes

Just got my first deal. Now we are ready to renovate. Is it customary to pay contractors anything up front? Most bids came in asking for 50% up front and 50% upon completion.

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Brian Garrett
Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
7y

I wouldn't give a contractor 50% upfront and 50% upon completion especially if I've never worked with them. It's common for contractors to ask for some money upfront typically to cover the cost of materials. Then moving forwards payments should be on a draw schedule as they complete and sign off on stages of the rehab. It's important to have this documented and agreed upon (via contract) before you give them any money or they begin any work.

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  • Brian Garrett
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    7y

    I wouldn't give a contractor 50% upfront and 50% upon completion especially if I've never worked with them. It's common for contractors to ask for some money upfront typically to cover the cost of materials. Then moving forwards payments should be on a draw schedule as they complete and sign off on stages of the rehab. It's important to have this documented and agreed upon (via contract) before you give them any money or they begin any work.

    18Reply
  • Greg Dickerson
    Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    7y

    @Robert Tinker You should never pay upfront for any work. You could offer to buy the materials for them and pay them as soon as they are finished. Once you develop a relationship they will no longer worry about getting paid. I pay weekly after all work is complete. Make sure to get lein waivers signed before you release the payment as well.

    7Reply
  • David RobertsonBusiness Member
    Flipper/Rehabber · Kansas City, MO · Member since 2010 · 757 posts · 778 votes
    7y

    I agree with Brian, if I've never worked with a Contractor before there is no way I am giving them a 50% deposit.

    You should agree upon a Payment Schedule that pays the Contractor as the work is completed.

    The Payment Schedule should be broken down into Payment Milestones based upon major categories of work on the project (Demolition, Framing, Electrical Rough-in, Plumbing Rough-in, Drywall, Paint, Cabinetry, Tiling etc.).

    Where are you finding your Contractors?  Are they off Craigslist or are you getting them through referrals from other investors?  What's their reputation?  

    I wouldn't pay anyone off Craigslist a dime until they actually show up on-site and get some work done. 

    FlipperForce
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  • Robert TinkerPro Member
    OP
    Rental Property Investor · Round Rock, TX · Member since 2019 · 251 posts · 159 votes
    7y

    Great advice. Thank you everyone. 

    Think I'll purchase materials. Then have a couple of draws as work is completed.

    3Reply
  • Shawn Ward
    Real Estate Investor & Consultant · Los Angeles, CA · Member since 2016 · 620 posts · 386 votes
    7y

    @Robert Tinker We pay as the work is done:

    Demo is 1/2 way done, we pay 1/2

    Demo is complete, we pay balance

    Framing is 1/2 done, we pay 1/2

    Framing is complete, we pay balance

    And so on. Its the best way to keep your finances in check and to keep the contractor in line with getting money as they work.

    All the best!

    sjw

    7Reply
  • Matt M.
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    7y

    @Robert Tinker

    I ask for 1/3 at start up, 1/3 midway, final upon completion. Unless there are special orders like windows, etc then the initial deposit would be more. I would not work for someone who is only willing to pay for materials up front.

    8Reply
  • Shane Ward
    Albrightsville, PA · Member since 2018 · 118 posts · 79 votes
    7y

    @Matt Michaelson I agree. I don't know any contractors Thursday will work without money up front. During and after the crash (2008) contractors where getting stiffed left and right (I had a flooring business for 30 yrs) including me. Good contractors wont work without getting money to start a job. Breaking up the scope by projects is your best bet.

    4Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    7y

    I'll give two quick examples of how we are paying contractors for a flip we are currently doing:

    - we are using a painting contractor we have never used before and we gave him a 25% deposit

    - the HVAC contractor has installed upwards of 2 dozen furnaces for us over the years and since their services are in very high demand we pay a 50% upfront deposit. We are OK with this because of the track record.

    Keep in mind all of the above is written up in contracts with all of the work that is to be done, pricing, etc and even projected start dates for the projects.

    2Reply
  • Shane Ward
    Albrightsville, PA · Member since 2018 · 118 posts · 79 votes
    7y

    @Michael Noto I had a twelve page contract with pay schedules, deposits, warranties etc. with a company that someone I knew for 10 years was running and it took me 8 months to get half of what I was owed ($18k) as a flooring contractor. I would not work for anyone that said they would not take an equal risk as me. I'm out of the business now for those exact reasons. I am an investor now, but I also know investors are terrible to work for in general. If you are a good contractor you dont have to take more risk than the customer. If you dont trust your contractor, dont hire him.

    8Reply
  • Kenneth Bullock
    Specialist · Los Angeles, CA · Member since 2016 · 61 posts · 32 votes
    7y

    Depending on the Trade and relationship with the investor, it varies.

     As a previous Sub, HVAC-R contractor, and a current Sr.level tech, it's my experience that any contractor worth his or her weight, will not work for less than 25-50% up front, in my field (HVAC-R), the high end rarely covers material. 

    The materials and labor have to be paid, should the investor decide to change their exit strategy, or find them selves in a predicament, the burden should not have to be contractors, who has covered their end of the bargain.    

    When multiple inspections are required, multiple draws are understandable, but if a satisfactory service is provided by a contractor, they expect to be compensated in a timely manner, they have people and bills to pay too.

    Establish a relationship with a reputable contractor, see what their terms are, and get it in writing, in the form of a proposal read and signed by your self and or, your legal council.    

    3Reply
  • Mark Fries
    Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    @Robert Tinker

    This has always been a very murky question... There's just as many bad investors looking to screw contractors as there is contractors looking to screw investors.. You just gotta find a common balance..

    3Reply
  • David RobertsonBusiness Member
    Flipper/Rehabber · Kansas City, MO · Member since 2010 · 757 posts · 778 votes
    7y
    Originally posted by @Mark Fries:

    @Robert Tinker

    This has always been a very murky question... There's just as many bad investors looking to screw contractors as there is contractors looking to screw investors.. You just gotta find a common balance..

    I agree, but I don't think 50% upfront on potentially a $50k+ remodel is common balance.

    If a contractor wants a little bit of money upfront to cover materials purchased that's fine, otherwise I think it's completely unreasonable to expect an investor to hand a contractor they've never worked with before 50% upfront (which is likely 5 figures $$,$$$).

    I think a common balance is to pay a small deposit upfront then to setup a Payment Schedule that pays the Contractor as the work is completed. 

    I had a Contractor ask for 50% upfront on a remodel that was mostly labor (I was providing all of the finish materials).  Why did the Contractor need 50% upfront on a mostly Labor contract?

    What is this 50% deposit used for? On a $50k remodel why does the Contractor need $25k upfront? 

    FlipperForce
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  • Mike Crissy
    Investor · Fort Lauderdale, FL · Member since 2017 · 12 posts · 4 votes
    7y

    I ask them for a list of all the materials needed and I order them online at Home Depot for contractor pick-up. If it is a contractor/handyman I know and trust I recognize that on friday he might need to pay some of his labors and I will give him a couple bucks. But, I agree if it is somebody new that you have never used do not give them any money I'm sure we have all learned that lesson.

    1Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y

    I never pay for work until it is completed. I then pay the day I get the invoice. I am not sure why a contractor should need payment up front. Any good contractor has terms with a supplier on materials, so they are not not paying for the materials for at least 30 days. If you are paying them up front, that is already a 30+ day float. Ultimately a contractor can put a lien on your property if you don't pay them, but an owner has little recourse if someone runs off with their money. When people want too much up front, either it means they don't trust you or they have money problems.

    6Reply
  • Matt M.
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    7y

    Wow some of you guys are brutal! Just know, that we contractors don’t always know and trust you guys the same as you may not know and trust us. I’ve ended up working for free before. It sucks. And then there’s the guys that pay you when they feel like it.

    I’ve had to put a lien on a house before. Turns out they hired me to fix it up so they could try and sell before foreclosure, and then they filed bankruptcy. So yeah, I lost money there. Just remember, At least where I live, it’s illegal for a contractor to stiff a homeowner, but not illegal for a homeowner to stiff a contractor.

    My main plumber/HVAC guy is owed tens of thousands of dollars by homeowners and investors. That would put me out of business, so yeah, I want $ up front, whether it’s for materials or labor, or to put food on the table to feed my kids. My truck, my tools, my insurance, my expertise cost $.

    6Reply
  • Jared Smith
    Rental Property Investor · UT · Member since 2018 · 80 posts · 14 votes
    7y

    @Shane Ward

    Where might I find a contract to piggy back off of?

    0Reply
  • Shane Ward
    Albrightsville, PA · Member since 2018 · 118 posts · 79 votes
    7y

    @Jared Smith When I had my flooring store I used an attorney. Depending on what you are doing you're contract should be project specific.

    1Reply
  • Christina I.
    Member since 2018 · 27 posts · 19 votes
    7y

    @Robert Tinker

    The BP podcast episode 314 covered this topic really well! I actually saved the episode so that I can always go back and reference it. It covers all aspects of dealing and managing with contractors. I highly recommend giving it a listen!

    9Reply
  • Jared Smith
    Rental Property Investor · UT · Member since 2018 · 80 posts · 14 votes
    7y

    Thank you Christina and Shane!

    0Reply
  • Anthony Dadlani
    Investor · New York City, NY · Member since 2013 · 1k+ posts · 269 votes
    7y

    We typically pay our contractors on a draw system once a third party inspector has approved the work. Usually contractors request their draw after substantial work is completed. Never in advance. Too risky. 

    Best of luck in all your endeavors

    1Reply
  • James Canoy
    Kingston, NY · Member since 2017 · 252 posts · 138 votes
    7y

    @Shane Ward how would I get to the point of being able to trust the contractor without having a track record.

    0Reply
  • Shane Ward
    Albrightsville, PA · Member since 2018 · 118 posts · 79 votes
    7y

    @James Canoy How is contractor supposed to trust an investor. I've on both sides and screwed both ways but I still pay guys and give them a deposit to show I'm serious and that I dont Intend to screw them.

    1Reply
  • James Canoy
    Kingston, NY · Member since 2017 · 252 posts · 138 votes
    7y

    @Matt Michaelson

    I’m want to make my contractor happy but protect myself as an investor. What would be the best way to do that?

    0Reply
  • Peter Shafik
    Member since 2018 · 65 posts · 25 votes
    7y

    @Robert Tinker Hi, I’ve heard and followed Mark Furgeson on Insta and in one of the bp podcasts. He mentions paying 25% up front (assuming you trust the contractor) 50% half way (or 75% of the way) then the remaining 25% once they finish. Hope this helps.

    1Reply
  • James Canoy
    Kingston, NY · Member since 2017 · 252 posts · 138 votes
    7y

    @Shane Ward oh I agree. I’m asking a real question as a new investor. What do you think would be optimal for both parties?

    0Reply
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