Contractor Contractor Contractor........

[Kumud Shrestha]

I have been watching interviews, listening to podcasts and reading articles after articles and books after books on Real Estate Investing. However, I can't seem to find anything on contractors. 

Brandon is awesome, I have read all his books and watched lots of interviews. I think he is a real smart guy with ton of experience. But I wish he would talk more about contractors and the problem people have with them and how they tackle these problems. 

In my humble opinion, no matter you are doing the flip or BRRRR, it all boils down to Contractor and how well you manage them.

Find deals, no problem, finding finance no problem, But finding good reasonable contractor ...PROBLEM yes huge problem, at least that had been my biggest problem for last two projects. 

So, I had this awesome deal through MLS. Purchase price $150,0000 ARV at $250,000.00. You are talking $100,000.0 to play with. In the beginning I though I could easily make $30,0000.00.

Here is my analysis and calculation:

Purchase price : $150,000.00

ARV: $250,000.00

Holding Cost : $6000.00 ( for six months- 4 months for Rehab and 2 months for sell)

Rehab Cost: $40,000.00

Closing cost at both end : $5000.00

Commission: $12,500.00

You look at these numbers,, They look great right ? Well I thought so too..

HOWEVER... Nothing went according to plan.. 

After 8 contractors and 10 months I was looking at taking a loss.. But the deal as I said was so good that I made only few thousand dollars  on this deal. 

And I also realized that each time you fire and hire a new contractor you lose money because the payment to previous contractor is gone and the new guys wants money. 

So, the moral of the story is Contractor can  make or break your project. 

I would appreciate if anyone can give me feed back as to how they find the contractor and day to day how they deal with them, I would certainly appreciate it very much. And yes, Brandon and David if you guys happen to read this please talk more about this issue that nobody wants to talk about. 

[David Burkholder]

Leave some meat in the deal for the contrctor. If you try to wholesale a property at 90% ARV it wont work because there is no meat in the deal for the end buyer.

The same thing applies for contractors.  If you don't leave enough money in the deal for them to put food on the table, you are going to have problems.    A contractor needs to pay his bills and feed his family.   If you pencil your project too tightly, he will have to run multiple projects at a time to pay his guys and eat.  And we all know that when multiple  projects are going, the best paying projects get the best guys and the most attention.  

The advice on youtube to buy all the materials and only pay $25/hour labor is a recipe for disaster.  There is not enough meat on the bone for a contractor to run a legal/legit business at that price.     You get what you pay for.  If you pay chicken sh*t prices,  you will not get chicken salad.

[Greg Dickerson]

@Kumud Shrestha 

Some of the best ways to find contractors is to talk to architects, designers, engineers, realtors and other investors.

Also check MLS for flip properties and new construction specs for sale.

Make sure to get references of 3 or more current project in process, 3 or more recent past clients, and visit some active job sites in progress to see how they look. You can tell a lot about a contractor by how clean and organized the site is and the quality of the subs a well. You also want to talk to the subs to make sure they always get paid on time by the builder.

Make sure to get check license status and for complaints with the state and get proof of insurance sent directly by their insurance company to you as named insured.

You are leader so it’s your job to give everyone what they need to be successful. The leader sets the pace of the pack.

When it comes to managing contractors you need to understand they are a vital part of the team. You need to be easy to work with, establish a clearly defined detailed scope of work, lay out clear expectations of what you want done and when and hold them accountable to the goals. This is how you set the contractor up for success helping them be more profitable and avoid issues which will put you on the top of their list.

After several projects you should be able to build a database of costs so you can set and control the budget. You tell the contractor what you are willing to pay. Be fair and reasonable.

You need stay ahead of them on the cashflow. Do not pay in advance for work not complete. A good contractor will not need a deposit to get going if you pay them upon completion of each phase.

[Will Barnard]

Your $150k purchase plus $40k rehab with an exit of $250k is a 76% deal. Not bad but nothing to get overly excited about either, especially at that exit price. 
bottom line, either you underestimated the rehab costs or had bad luck hiring your contractors. Your written contract with any contractor is one of the most important aspects of that transaction, make sure you protect yourself in that contract and have penalties for delays, and bonus money for early completion. Time is your enemy in a flip. Time is your friend in a long term hold.

Finding good contractors is not easy as you have to weed through 80% of the crap to get the 20% worth their salt. Referrals from other developers and builders, flippers, investors in your area, etc is a good start. 

[Steven Lowe]

Originally posted by @Kumud Shrestha:

8 contractors?  Wow.  Why did you go through so many?  That's usually an indicator that you're hiring cheap labor, they are doing a bad job, and you're firing them and starting over with another cheap contractor, wash rinse repeat.  Am I correct or if not what happened?  

[James Wise]

Originally posted by @David Burkholder:

Leave some meat in the deal for the contrctor. If you try to wholesale a property at 90% ARV it wont work because there is no meat in the deal for the end buyer.

The same thing applies for contractors.  If you don't leave enough money in the deal for them to put food on the table, you are going to have problems.    A contractor needs to pay his bills and feed his family.   If you pencil your project too tightly, he will have to run multiple projects at a time to pay his guys and eat.  And we all know that when multiple  projects are going, the best paying projects get the best guys and the most attention.  

The advice on youtube to buy all the materials and only pay $25/hour labor is a recipe for disaster.  There is not enough meat on the bone for a contractor to run a legal/legit business at that price.     You get what you pay for.  If you pay chicken sh*t prices,  you will not get chicken salad.

 I've seen countless investors get shredded in this business because they try hiring cheap labor. It's a never ending cycle of bad juju man.

[Will Barnard]

Originally posted by @James Wise:

Originally posted by @David Burkholder:

Leave some meat in the deal for the contrctor. If you try to wholesale a property at 90% ARV it wont work because there is no meat in the deal for the end buyer.

The same thing applies for contractors.  If you don't leave enough money in the deal for them to put food on the table, you are going to have problems.    A contractor needs to pay his bills and feed his family.   If you pencil your project too tightly, he will have to run multiple projects at a time to pay his guys and eat.  And we all know that when multiple  projects are going, the best paying projects get the best guys and the most attention.  

The advice on youtube to buy all the materials and only pay $25/hour labor is a recipe for disaster.  There is not enough meat on the bone for a contractor to run a legal/legit business at that price.     You get what you pay for.  If you pay chicken sh*t prices,  you will not get chicken salad.

 I've seen countless investors get shredded in this business because they try hiring cheap labor. It's a never ending cycle of bad juju man.

It’s the old adage, you get what you pay for. 

[Victor S.]

Just like you would vet your tenants, vetting contractors is paramount as well. Will also mentioned detailed contracts, penalties, clear RAA, etc. I think there needs to be some sort of an escrow service established that would shield both the customer and the contractor. Say, you have a large job that a normal contractor would require an advance for. It's great and all, but doesn't protect you from them doing a quick one on you. You would then deposit this advance into escrow and the contractor would have to provide some sort of proof on where these funds would go/went (they could purchase materials equal to said amount and present the invoice as proof). It could still go sideways with either party reneging, but that's where a solid contract comes into place. At the end of the day, nothing is guaranteed, so you have to do your best in protecting yourself, aka risk management.

[Jay Chang]

You don't necessary need to lose money each time you fire a contractor. By keeping 10% of retention of the contract value and carefully reviewing the progress payments, you can save enough money to fire and hire a new contractor.

Obviously this is not recommended. 

Before you hire a contractor, make sure you ask for references and tour the projects that he's currently working on. Vet them out!

Good luck.

[Bryan Devitt]

Most investors I meet with as a contractor eventually tell me that would love to work with me... if I can do it for $xxx because that is their lowest bid so far, but this is just the beginning and they'll give me 10 jobs like it every year. Most end up never going past deal 1, if that one ever gets completed. You might as why but the above posts already pointed it out, good labor isn't cheap and cheap labor isn't good. If you want it done right the first time, quickly, hire a good team. You will make more in the long run with "expensive" contractors than you ever will with the cheapest bid. The few investors we deal with that are successful are so either learned the hard way and worked through it or knew enough from the start that $5k in "savings" will cost $10k+ in fixing their work and additional carrying costs when a 1 week job takes 6 

[Steven Lowe]

Originally posted by @David Burkholder:

Leave some meat in the deal for the contrctor. If you try to wholesale a property at 90% ARV it wont work because there is no meat in the deal for the end buyer.

The same thing applies for contractors.  If you don't leave enough money in the deal for them to put food on the table, you are going to have problems.    A contractor needs to pay his bills and feed his family.   If you pencil your project too tightly, he will have to run multiple projects at a time to pay his guys and eat.  And we all know that when multiple  projects are going, the best paying projects get the best guys and the most attention.  

The advice on youtube to buy all the materials and only pay $25/hour labor is a recipe for disaster.  There is not enough meat on the bone for a contractor to run a legal/legit business at that price.     You get what you pay for.  If you pay chicken sh*t prices,  you will not get chicken salad.

Not only that but you are going to get unlicensed people doing the work of licensed professionals.  Think a licensed plumber or electrician is going to take on your project for $25 per hour when a typical electrician or plumber easily makes $100 per hour?  Don't cheap out on labor.  It won't end well for anyone involved and you'll just end up paying for others to re-do the work and fix all the mistakes anyways.

[Kevin M Finley]

While most of the posts here are pointing in one direction- payments. I guess I'll offer a differing point of view. 

Around here, it doesn't matter how expensive or cheap the labor is, it just does not exist. There is such a massive shortage of good contractors that the bad ones are the only ones that can get to a job... and will charge what any top of the line contractor will. 

Do your research and get references. Solid references. Follow up on those references. 

[Account Closed]

I have had the same EXACT issue. The old contractor kept adding change orders and ran it up so we found a new one and everytime we started from scratch, the last payment to the old contractor didn't count and we had to start fresh. It's crazy how much a good contractor makes a difference 

[Kelly Ellis]

@Kumud Shrestha

I am a Florida Licensed Contractor & Realtor. I got my licenses initially for my husband and I to grow as Investors. Now we are doing a lot of remodel work for Investors. We love working with people who have the same mindset as we do. We are learning so much in the process. You have to find a contractor that is an investor themself. Just this week a settlement issue came up with a triplex that we are totally remodeling from the studs. We as the contractors felt like it was a punch to the gut. We treat all our investor’s projects as if they were our own. The more trusting and easygoing our investors are with us the harder we want to work for them and give them that return on their investment. It really comes down to morals and integrity. Talk to their previous clients. Figure out how many change orders they threw at them. Do some digging. In the long run it’s worth it.

By the way the settlement issue is a minor hiccup that is already being resolved. Our investors didn’t panic and handled it by looking at the numbers and discussing their options with us. If I didn’t have to feed my family I would work for free for this kind of experience and education. Best of luck to you!

[Mark Fries]

@Kumud Shrestha

I would venture to say that you are actually causing the problems and not the 8 contractors...

[Brian Pulaski]

Originally posted by @Account Closed:

I have had the same EXACT issue. The old contractor kept adding change orders and ran it up so we found a new one and everytime we started from scratch, the last payment to the old contractor didn't count and we had to start fresh. It's crazy how much a good contractor makes a difference 

What kind of change orders were being added? With a solid scope of work and contract change orders are easy to either avoid or agree to. 

[Account Closed]

They added that they wanted to redo insulation, he never mentioned it up front but during the project wanted to redo all of the insulation and gave us a bid of 15K. Also redo the siding for an additional 4,500. He mentioned all of it after we sent our wire and when we said no we want to continue the project as is, he essentially went missing and dodged us. Very frustrating

[Brian Pulaski]

That does sound frustrating however the owner controls the scope and if you tell him no, the answer should be no (there are exceptions in regards to safety, etc). With that said any change order that large for future projects I would have it in your contract that you can bring in additional contractors to provide quotes/perform the work. His $15k insulation job might be a $5k insulation job he plans to rake you over the coals with. 

[Crislie P.]

@Greg Dickerson how do you check if there’s any complaint of the contractor in the state?

[Greg Dickerson]

Originally posted by @Crislie P.:

@Greg Dickerson how do you check if there’s any complaint of the contractor in the state?

You can check the status and look for complaints with the state licensed board. Some States issue licenses at the city level, 

[George W.]

You'll go through another 8 contractors if you don't understand that good craftsmanship is expensive. Also investors as whole need to stop trying to estimate rehab costs themselves. Also when some wholesaler who's not licensed by the state to do anything special says the rehab will cost 40k you shouldn't even listen to that because they have no acutal idea what it will cost & most don't care about your best interest. Get a real estimate from a contractor. 

that being said there are plenty of bad contractors out there but they are easy to avoid with a basic contract and good judgement on their character. 

Last note when you burn through 8 contractors there's a good chance some of them know each other and will tell 10 other contractors about you being a pain to work for.  

[Steven Lowe]

Originally posted by @David Burkholder:

Leave some meat in the deal for the contrctor. If you try to wholesale a property at 90% ARV it wont work because there is no meat in the deal for the end buyer.

The same thing applies for contractors.  If you don't leave enough money in the deal for them to put food on the table, you are going to have problems.    A contractor needs to pay his bills and feed his family.   If you pencil your project too tightly, he will have to run multiple projects at a time to pay his guys and eat.  And we all know that when multiple  projects are going, the best paying projects get the best guys and the most attention.  

The advice on youtube to buy all the materials and only pay $25/hour labor is a recipe for disaster.  There is not enough meat on the bone for a contractor to run a legal/legit business at that price.     You get what you pay for.  If you pay chicken sh*t prices,  you will not get chicken salad.

 This is very well said.  Most investors don't understand how much risk there is on the part of the contractor.  It doesn't even need to be a situation where the contractor is not being paid well.  They have to make hay while the sun is shining, as the saying goes.  Construction is a seasonal business.  Most contractors will run multiple projects at once because the margins these days aren't good enough to allow them to just do one at a time.  

Investors also need to be realistic about rehab costs. Banks and HML's are not helping in this regard either because lots of them have no idea what it really takes to complete a rehab project. They will often put the financial burden back on the contractor.

What I mean by this is, as an example, a bank might expect a GC to do the work, buy all the materials, and get reimbursed later.  IE, the contractor is expected to front the money for your project and get paid back.  That means interest free, non recourse, short term, 100% financing without any money down or a safety net for the lender.  Imagine going to a bank and asking for those terms!  

For those who would point to a mechanic's lien and lawsuit as a "safety net" for the contractor who does the work but doesn't get paid back, it's very expensive and time consuming to have to sue someone to get your money.  

It's important to have very honest conversations in the beginning before you start the work.  Understand that just as the investor is risking a lot, so are the people who are doing the rehab.  Sometimes this can be scary for investors.  They may think they can get over on the dumb contractor who didn't put it all in writing.  Or the contractor may feel pressure to lowball the job because if they don't, they won't get it.

Honesty on both sides is very important.    

[Steven Lowe]

Originally posted by @Account Closed:

I have had the same EXACT issue. The old contractor kept adding change orders and ran it up so we found a new one and everytime we started from scratch, the last payment to the old contractor didn't count and we had to start fresh. It's crazy how much a good contractor makes a difference 

 Do you mean that the new contractor had to go back and re-do some of the work?  

[DongHui Patel]

Quote from @Victor S.:
Just like you would vet your tenants, vetting contractors is paramount as well. Will also mentioned detailed contracts, penalties, clear RAA, etc. I think there needs to be some sort of an escrow service established that would shield both the customer and the contractor. Say, you have a large job that a normal contractor would require an advance for. It's great and all, but doesn't protect you from them doing a quick one on you. You would then deposit this advance into escrow and the contractor would have to provide some sort of proof on where these funds would go/went (they could purchase materials equal to said amount and present the invoice as proof). It could still go sideways with either party reneging, but that's where a solid contract comes into place. At the end of the day, nothing is guaranteed, so you have to do your best in protecting yourself, aka risk management.

 Victor - do you have a sample contract you could send me? 

[Mario D.]

We always run the license against the state for anything to come up, confirm W9, insurance, and business license before we work with anyone. Lots of riff raft out there right now though. Referrals and spending a little bit more is worth it right now. Market is changing so we will see more of these "iffy" contractors exit the market. We use the Dopl database and state websites to check anything on them.

Also when we have a "clean up" prject we do not pay until the new contractor hits 25% of completion or change our contracts to make sure they actually start on some work, not protected all the way but at least and option. We also have liquidated damages in there depending on the size of the contract it helps.

[Sebastian Hernandez]

The best contribution I can add is to make sure that you review the contractors track record by looking at prior work, visiting a jobsite, and getting referred to a current client so you can ask them questions. Obviously, make sure the contractor has an active license and insurance policy for GL and WC. Make sure that when you embark a project there is a detailed scope of work document and a contract so that you and the contractor fully understand the project. 9/10 issues can be avoided when the scope of work and expectations are clear to everyone.  

Now, a very good contractor will NOT be your lowest bid. As you stated, a contractor can make or break your deal, so make sure you hire the right one by following the steps mentioned above and most importantly, understand that a top contractor will cost you more in the short term but less in the long run. The mistake many investors make is that they overpay for the property and cheap out on the renovation budget.