Dallas, TX · Member since 2019 · 3 posts · 0 votes
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.
I would absolutely never hand any contractor $15k for services not yet rendered. Recipe for disaster.
@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.
That sounds eerily familiar. I had an apartment complex I painted for that had the attitude that a company should float them for 6 months without payment. They absolutely refused to pay contractors/suppliers because of this attitude.
Problem was, when they finally did pay it was never in full.
Lucky for me I found this out before starting work, priced it 5x higher than normal so I would hit the $7500 threshold quickly to get out of small claims. When we foreclosed on the lien it was very entertaining.
A customer who feels they shouldn't finance someone beneath them is exactly what contractor is listening for to disqualify you as a client, Or a smart contractor with kickass lawyers is waiting for.
For 3 years I made quite a bit of money taking on clients like that. It was a great learning period on contractor law for me.
Nobody has an issue getting paid by me.. which is one of the many reasons that the guys doing work for me have been doing it for years. Your story (as far fetched as it sounds but that’s another discussion) is one more example of why contractors DON’T need a bunch of money up front. You have the mechanics lien as a remedy if you aren’t paid. The property is there as security. I’ve got a portfolio spanning the western United States and worth millions of dollars. I’m not hard to find. The average contractor, on the other hand, is lucky to own a pickup truck and their tools. Good luck collecting that judgement. Yes there MAY be a bond, if required in the state in question but they’re often woefully inadequate particularly if the contractor decides go out with a bang and burn multiple parties in the process.
You’ll noticed that the proponents of the “pay a lot of front” strategy in this thread fall into two categories: The contractors themselves, and relatively inexperienced investors who haven’t done a ton of deals. Even Russian roulette goes fine 5 out of 6 times. Everyone else, who’s been knee deep in it for a long period of time, knows exactly why it’s a terrible idea.
There has to be a happy middle road when it comes to money.
That's just how it is. Any new client/contractor relationship should be kept on a short leash. But both parties need to keep skin in the game. As the relationship grows, the leash can be let longer.
Its a risky game, and both parties gotta protect themselves because there's a ton of bad people on both sides of the fence.
When the balance tips to favor one side, nothing good happens. I've worked for guys who have 10 properties and guys who have 10,000.
That's why I am always listening for cues that I am about to not get paid. And the investor should be doing the same by monitoring work progress and having a rep check in from time to time.
Too many times have I been burned for tens of thousands of dollars. Eventually you wise up and learn to spot the cues in advance.
Ego on the client side is a huge turn off. I'm not impressed by millionaires. I have worked for alot of them who don't have $500 to spend. Thats how they got to be millionaires in the first place, by not paying for anything. When someone start talking that game, or how it should be an honor to work for them, you already know their blowing smoke. Many of us contractor charge extra for that honor, lol
I guess it depends on your relationship with the contractor and how many active projects you have with them.
For my flips I usually cover materials upfront (with proof of purchase) and a small percentage of the stage they'll be working on.
For example, if the contractor begins with the tear down and plumbing I'll pay a percentage of the labor and once they finish I'll pay off that part of the project before he begins putting down floor or painting or w.e it may be.
I personally suggest you never pay a contractor everything upfront. Also that you set realistic timelines for each stage of the flip and the order in which they will be completed so you can hold your contractor accountable.
The reason some contractors need money up front is because they're poor at cashflow management. Chances are, their craftsmanship is poor as well, because they know you aren't going to be satisfied with the work performed.
I pay one of my contractors just labor and pay for the materials over the phone when he checks out at Home Depot. That’s fine with me. My other contractor I pay for the project and he factors in labor and material in his estimates. He finds material way cheaper than Home Depot so that saves me a lot of $. I’m not particular picky about colors of tile and paint. He always seems to make the rehabs look amazing. He’s fast and efficient and does excellent work at a very cheap price. It usually takes him 3 weeks to completely rehab my properties. I pay him 50% up front and we’ve never had any problems.
Sorry for the late reply but as an agent, my answer will always be to have a lawyer look at anything that you may be confused about in anything you're signing unless you're considered an expert in that field. I know it's not what people like to hear but your idea of common sense and contract law are typically going to be 2 very different things.
If materials are involved I might have a different opinion. You pay when the work is completed. I have a great painter that I subcontract a lot of work to. He told me: pay me when I’m done with something, it will keep me focused on getting the job done. He specifically didn’t want to be paid upfront. From my experience as an architect, investor, contractor, subcontractor (I have worn all of these hats), the best way is to pay for work the moment it’s completed. Don’t expect the contractor to finance your project. Simply break the payments down into small chunks. If 10% of the job is completed in a given week, pay 10% of the job right then.
@Oscar Moreno 40% is ridonkulous. When a client gets all their own materials I need enough to cover 1 week of pay up front and then I get a check at the end of eve6week to cover that week of pay. Don't pay me and my crew isn't there Monday and I used the deposit to pay them but I would NEVER ask for that much up front for any job that took longer than a week. It should be broken down into checks every week or two
@Jeff C. I'll eat my words. I've been putting a lot of thought into my comment recently and believe I'm wrong. An A+ contractor wouldn't ask for as much money upfront. I still believe you should pay for materials and/or a small draw upfront to begin labor. But I think a true A+ contractor would finish jobs much faster than mine.
Since I'm new to this game, do you find solo contractors and hire them or do you find reputable companies with a big online presence? In the next 24 months, I'll more-than-likely be in position to start taking on 3-4 at a time so I'd like to start networking with the best contractor options I can find.
@Jeff C. 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.
If its a set project, like tiling a bathroom, I typically try to buy materials, if its a new vendor that I have no experience. If its someone I work with regularly, I typically try to buy materials, but usually do whats the easiest. Pay half or a third up front, and then the remaining at the end.
If its a bigger project, say a kitchen upgrade, or a flip. We will try to buy the materials, and then do a series of draws. (Usually every couple of weeks). Keep even with paying for what work has been completed. That way if you need to hire someone new you aren't out any money.