How Much do you pay a contractor

40 Replies

I am fairly new to the world of real estate and I am still trying to learn the basics on how to start a house flip! How do you go about paying a contractor? If I do a rehab of $30,000 does the contractor take a percentage of that $30,000? And should that percentage be including in my total rehab? 

I'm in the process of completing my first two flips at the moment.

Contractor 1: he buys majority of small material items (I bought floors, cabinets, appliances), does the work, then I use the draw money from HML to pay him.

Contractor 2: he wants $15k upfront for labor then I cover all material costs.

I'm new to this so I operated on their terms.  With flipping, always estimate that there will be more expenses than expected.

Originally posted by @Spencer Cornelia :

I'm in the process of completing my first two flips at the moment.

Contractor 1: he buys majority of small material items (I bought floors, cabinets, appliances), does the work, then I use the draw money from HML to pay him.

Contractor 2: he wants $15k upfront for labor then I cover all material costs.

I'm new to this so I operated on their terms.  With flipping, always estimate that there will be more expenses than expected.

 I would absolutely never hand any contractor $15k for services not yet rendered. Recipe for disaster.

@Jeff Cagle he actually wants 40% of rehab budget up front.  Since it was my first deal with him and I only had $15k, I sent him what I had.

I'm not disagreeing with you as I think that advice is generally solid, but when you find A+ contractors (which he is), I'm only slowing him down by not sending him money upfront.

I'll probably send him 50% rehab budget on my next flip using him he's that good.

Originally posted by @Spencer Cornelia :

@Jeff Cagle he actually wants 40% of rehab budget up front.  Since it was my first deal with him and I only had $15k, I sent him what I had.

I'm not disagreeing with you as I think that advice is generally solid, but when you find A+ contractors (which he is), I'm only slowing him down by not sending him money upfront.

I'll probably send him 50% rehab budget on my next flip using him he's that good.

There's absolutely no reason for it. You said you're buying all the materials on top of it, so it's not as if he's out money for materials. The only thing he would be out for is labor, which he isn't, because it hasn't happened yet. An "A+" contractor should be able to pay his guys for a short period of time before his next draw from you.. if not, he has operational problems, and I highly question your "A+" rating.

Originally posted by @Spencer Cornelia :

@Jeff Cagle he actually wants 40% of rehab budget up front.  Since it was my first deal with him and I only had $15k, I sent him what I had.

I'm not disagreeing with you as I think that advice is generally solid, but when you find A+ contractors (which he is), I'm only slowing him down by not sending him money upfront.

I'll probably send him 50% rehab budget on my next flip using him he's that good.

Thank you for your reply! And is 40% a little high? I though the typical pricing could be in between 15%-25% of the rehab cost.

I'm buying a SFR tomorrow. My contractor bid the rehab for 25k. I wrote him a check today for 50% of the rehab cost. Then I'll pay him the other 50% when he completes the job. That's it, nothing more. He did another rehab for me recently and it worked fine for both of us. He needs $ to pay all his vendors and materials up front.

@Jeff Cagle

This is why we read so many stories of people getting ripped off by contractors. I can’t for the life of me understand what makes people think they can just hand someone this amount of money and there not be any issues. You lose so much leverage over the contractor it’s not even funny. I have NEVER paid up front. I flip and I own a contracting business. I Never ask for money up front and I never pay up front. What happens when something is done wrong and they’ve already been paid? You think a piece of paper or a handshake will force the contractor to go in their pockets to fix it?? Uh no. What happens if something is done wrong and you haven’t paid yet? You can bet your a** they gonna fix it because you have the power of leverage with the money, they will spend the extra on labor to correct any issues. If your contractor can’t front the money for the labor to make it to the next draw, he isn’t a contractor, he’s a jack leg. My honest opinion.

@Oscar Moreno

Yes, my contractor gives me an estimate for everything and that includes his cut. He calculates labor, materials and his time to organize the whole project. This has worked for me and he’s done two rehabs in the past for me. He knows if he gives me a good deal and gets it done quick, I’ll keep using him. And I f he doesn’t, then I’ll be using someone else for the next house I buy. He pays his workers $150/day which is a lot in the Dallas area, but he says he keeps using only the best workers that he likes. He does some work himself like tiling showers. He’s very good at that! But he hires pretty much everything else out and checks in every day. He’s currently rehabbing 3 houses at the same time and has plenty of workers to help him. If you need a great honest contractor in the Dfw area, I highly recommend him. He also works for Open Door for their flips. 

I tell him to make the houses rent ready and cut him a check for half the quote up front. He knows my wife gets pissed if I spend any of my personal time going to the site to work or spend time. He makes the process so seamless and non stressful. Keeping things simple and easy for me is what I want. Time with my family is more important than running back and forth to the site and Home Depot to try and save a buck. If the home purchase price plus his rehab estimate work for me as far as making money, then I pull the trigger and do it. But the key is finding someone you trust and not wasting my time away from my family trying to tie up loose ends. 

Some people may say I’m crazy for handing him half the money up front so he can pay for his workers and material, but it works for me and him. Getting complete rehabs in 3 or 4 weeks on time works for me. And he comes back to fix things for free when issues of the house come up. He stands by his workmanship, but occasionally things happen. 

@John Morgan I work my contractors the complete opposite. New contractors and I agree to draws but NEVER more then 10% of the work completed. After trust is gained between me and the contractor, I pay them 100% as soon as work is complete and inspected. It is much easier for a contractor to place a lien on a property then finding one who has taken your money and ducking your calls.

I would never start a job for free. But I am not gonna ask for a massive deposit either. $5-$10k upfront gets it going, personally I like chasing the carrot and keeping cash flowing. But I won't wait around long for that carrot either, try to play games and I'm headed  to the courthouse to file a lien, and start the process. I try to see it from both sides as there are definitely alot of bad contractor out there. But there are alot of bad investors too. 

Good contractors in my area are hard to find. Once trust is established between contractor and investor, it’s not risky to pay them a big chunk upfront. My contractor actually found me this rental I just bought today off market. And found me a tenant willing to pay $1,900/month when he’s done with the rehab next month. I scratch his back, he scratches my back. And we both win and make money. Pinching pennies and nickel and diming everything doesn’t lead to deals and good relationships with people that we deal with in this industry. Keep it simple! 

If you're giving a deposit for labor only and not materials that is a problem.  It won't end well.  Oh you may skate for a job or two or five but as sure as the sun rises and politicians lie it will end badly. 

How badly it ends is directly correlated to how much money you gave them........There's actually a scientific formula somewhere outlining this.....

@Jeff Cagle An A+ contractor shouldn’t have to pay for an “investors” work to be completed. Too many times “investors” want something for nothing and from personal experience they don’t seem to think paying a contractor on time is very important. I would never take a job without a percentage up front.

@Oscar Moreno Always do you due diligence on your contractors as you would do with your properties. Make sound judgements, I’m also in the Dallas area and I would never recommend paying all of the contracted amount up front. However, it is idiotic to think that someone is going to purchase materials and provide labor without any form of payment upfront. My advice is to figure out a completion schedule with a fee associated and pay draws upon completion of each phase up to the contracted amount.

Originally posted by @Deavin Cox :

@Jeff Cagle An A+ contractor shouldn’t have to pay for an “investors” work to be completed. Too many times “investors” want something for nothing and from personal experience they don’t seem to think paying a contractor on time is very important. I would never take a job without a percentage up front. 

No problem. Then you aren't my guy. A "business owner" is expected to be able to bare some cost of doing business. A business that's so stripped that it's unable to pay its own daily labor costs is one breath away from death and apt to disappear at any moment. Not the kind of entity that I want to have a big chunk of my money up front. No hard feelings toward anyone who doesn't want to work on my program. Those that are on board will get hundreds of jobs. We'll all be alright.

I see this posted a lot and it's always the same responses: 'don't pay upfront' or 'if you don't pay an initial draw, you'll get bad contractors' and both of those are valid but local market knowledge is good.

The best way to handle this, I feel, is to get a quote, as what the draw covers (most will ask for money before starting a job no matter what people say on here). If it's just materials, offer to buy those. If it's material and labor, then that's where the sweat can come in a little regarding that contractor. A pretty common breakdown is 40% upfront and 60% at completion around here. For small jobs, a couple thousand or less, they shouldn't really need anything up-front most of the time. Trust helps and there's no way to build it if you're not letting them work and then you paying on time. Make sure the paperwork is solid before you start and do t be afraid of a down payment. If they're good, great: you'll have some lenience and goodwill for a long-term partnership!

Been down this path many times.  For General contractors that want a good chunck of money upfront typically, start the job at their leisure, do shotty work, or a combination of the two.  Not saying this is the case for all, but this is from my personal experience.  

I Always buy material, so once they get going on the job i pay approx 33%, 33%, 33% till the job is finished up.

It takes time to find the right contractors, its the toughest part of the flipping business.  Spend as much or more time interviewing contractors as you do looking for the next flip.  Trust me on this one!

Most contractors will be garbage and don't know their numbers. Don't lump the whole job into one thing, but also don't piece meal the job. If I bid a whole house remodel for someone and the client asks me for a breakdown; most of the time I'll break down where their money is going but then they pick and choose our estimate and try to break it down and find someone to do it cheaper.

Good work isn't cheap and cheap work isn't good. I have no interest in working with other investors on their flips unless it's new construction or major flips with excellent margins. Any reputable contractor isn't going to let you dictate how they get paid. We take 50% down, 25% when we're halfway and the other 25% when we're done and that's non-negotiable. 

If you're worried about the contractor walking away, tell them to break up the job and only pay them for each section. Some lenders will only reimburse you after you've paid them or after the work has been completed in full. For the record, we do some major flips, huge rehab projects, and previously have managed hundreds of investment properties. I know it's tempting to get the cheap guy and to try and control the job but if your contractor is letting you guide him like a puppy, he's inexperienced.

As for how much do you pay them? You pay them 100% of what they bid. If you're grabbing a rehab loan and you say you want $30k to remodel the place before you have an estimate to do so; you're doing things backwards. Grab your estimates first unless you have a lot of experience estimating what a remodel should cost. We still get things wrong and we've done a bunch. 

@Jeff Cagle

Hello,

I am a field supervisor in Kansas City for a nation wide property management company we have a portfolio of 1500 plus houses in KC. All of our contractors pay for materials and labor out of their pocket and we pay them within 30days usually in a couple weeks. If your contractors cant do at least a $10,000 budget without a draw I would find another. If they are large projects I would get the house to paint ready then give a draw it’s the last 10% of a project that takes time. The industry standard is for a contractor to do $1000.00 worth of work per day its closer to $750.00 for us. Find three contractors to give you detailed scopes of work pick the one in the middle and verify work with other customers better yet go to a project and check it out.

Hope this helps.

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