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Rehabbing & House Flipping

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Jeffrey Stasz
  • Investor
  • Charleston , SC
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160
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Paying for estimates is smart business

Jeffrey Stasz
  • Investor
  • Charleston , SC
Posted Jan 5 2020, 19:24

I am GC and a developer. Here is why you should be paying for your estimates (this is really for larger/multi-system projects). 

A common assumption among investors is that estimates from a General Contractor should be free. Truth is, many of the better builders charge for bids (pre-construction) or disqualify anyone asking for an estimate from more then one builder. Moreover, the first thing a consultant or coach will tell a builder is to stop providing free estimates. So here, in no particular order, are some reasons you should expect to pay for estimates and actually seek out builders that charge for a bid. 

Contractor Quality: Flippers are notoriously bad clients. Engaging a builder in a pre-construction agreement will help prevent you from being disqualified by the contractor. This will open up an much higher caliber builder and the difference between good builders and bad ones is significant (just search "bad contractor" on the forums if you don't believe me).   

Accuracy: Creating an accurate and detailed bid is a serious time commitment and requires a depth of professional experience to get right. Investing in pre-construction enables a contractor to commit the resources required to get it right. 

Risk Mitigation: Requesting free estimates is usually an indication that the lowest bidder will win the job. So, some contractors will purposely provide the low bid to win the job and then use a process of change order management to increase fees along the way. While an accurate SOW can mitigate these risks the likelihood of an investor beating a contractor at change order management is very very slim. It is almost impossible to write an SOW that captures all of the assumptions, conditions, and necessary activities to achieve a desired outcome and it's pretty unlikely a contractor is going to write that document for you for free. Paying for a bid, gets you an SOW and budget written by a professional that fully understands the nature of the project. It will not be the cheapest option but it will also insulate you from major cost overruns. 

Relationship/Truthiness: We've all met the wholesaler or real estate agent that says a place needs 80 or 100k of work to complete when the real cost is closer to 250k. Sometimes it's due to ignorance or inexperience. But it's also a result of self-interest. Agents and wholesalers are paid to close deals, naturally, their repair estimates are numbers that make the deal work not numbers that get the project done. Paying a builder a consulting fee eliminates that conflict. Yes, the builder wants to secure the construction contract tendered after pre-con, but they also know they will be held to their pre-con number. Finally, paying a pre-con fee allows you to kick more tires without burning out a relationship. It's not reasonable to expect a contractor to come out and bid on 10 jobs that never happen for free. However, engaging that builder as a consultant adds a valuable resource to your team. 

I hope this helps you all be more successful this year.