Question about Turn-key Flip contracts

Rehabbing and House Flipping 65.3K Posts 7.3K Discussions

Hello Guys

I am a new member to this forum and new to real estate too. I have a question about the flip projects.

Is that possible (or common) to sign a turnkey agreement with a contractor for the flip? So that they will provide all the materials and labors and get the project done for a certain amount with a specified deadline. If so what are advantages or disadvantages of this approach?

I think this will make it much easier for investor to know how much exactly his expenses will be and also saves him lots of hassles and expenses.
Also you can put a late fee penalty in the contract that if flip is not complete within deadline, for every day of delay there will be a fee that contractor will be charged.

What do you think about the whole thing? Is this good? Will contractors accept this type of contracts?

Im not sure what you are asking when you reference 'turnkey' and contractor in the same question about the renovation materials and costs. Are you asking about having two contracts with a turnkey vendor? One for purchase and one for renovation?

It is not common to buy a turn key property without it being renovatd first and probably unlikely that a turnkey company would sell you a property and then enter a contract for the renoavtions separately

Medium memphis invest logo 2015Chris Clothier, Memphis Invest, GP | 901‑751‑7191 | http://www.memphisinvest.com

thank you for your response Chris.

Turnkey contracts mean contractor will provide materials, labor, transportation ,.... and finish the entire job within a deadline.

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here are more details:

A turnkey contract is a business arrangement in which a project is delivered in a completed state. Rather than contracting with an owner to develop a project in stages, the developer is hired to finish the entire project without owner input. The builder or developer is separate from the final owner or operator, and the project is turned over only once it is fully operational. In effect, the developer is finishing the project and “turning the key” over to the new owner.

This type of arrangement is commonly used for construction projects ranging from single buildings to large-scale developments. Under a traditional lump-sum contract, the owner agrees to pay the developer to complete a project that is built to the owner's specifications. The owner is given many opportunities to make decisions throughout the project, and to make changes as needed. In a turnkey contract, the owner is generally left out of the building process entirely as the developer handles all decisions and problems related to construction.

A turnkey contract may also be used in the residential home building industry. With a turnkey agreement, a builder or developer completes both the construction and the finishes in the home before turning it over to the homeowner. The homeowner is often offered a chance to select finishes, including curtains, paint colors and carpeting.

Turnkey contracts offer many advantages over traditional building contracts. Because the developer still owns the building until the project is complete, he has financial motivation to complete the job as quickly and efficiently as possible. A turnkey contract also provides more time for an owner to seek financing and investors before he is required to pay for a completed project. These agreements also save inexperienced owners from making difficult construction decisions, leaving these decisions in the hands of the developer or builder.

Before choosing a turnkey contract for your project, it's important to understand the potential drawbacks of this type of agreement. The primary drawback is the lack of control the owner maintains over design and construction decisions. For some owners, this may mean the project is not perfectly suited to their needs once it is complete. For others, this drawback may be canceled out by the potential for cost savings and shorter construction schedules.

Some owners may choose a turnkey-plus contract, which leaves the developer with some financial long-term interest in the project. For example, a builder will construct a retail establishment for an owner, and the builder will receive a percentage of the gross receipts for a specific period of time. This may encourage the builder or developer to make construction decisions based on the long-term needs of the project, rather than just the short-term decisions needed to get the job done.

http://www.wisegeek.com/what-is-a-turnkey-contract.htm

It sounds like what you're looking for is a General Contractor (GC) to come in and take care of the renovation "soup to nuts" (what does that even mean :)...

This is quite common in this industry, especially for investors who don't have the time, knowledge and/or ability to find sub-contractors and personally manage them (the alternative to using a GC).

The benefits of a GC are:

- One guy does everything for a fixed price
- He takes care of all the materials
- He manages the contractors
- He manages the schedule
- He manages the budget

The drawbacks of a GC are:

- It's more expensive (generally between 7-20% of the total renovation costs)
- You lose control over the schedule, budget and contractors
- If you choose a bad GC, he could easily end up going over budget and schedule
- If you choose a bad GC, the whole project will go badly, not just one part of it
- You still need to manage the GC closely, at least until you have a good relationship and know how much you can trust him

I'm sure there are more pros and cons, but those are the big ones...

Medium lishproplogoJ Scott, Lish Properties, LLC | [email protected] | http://www.123flip.com

[b]this is exactly what I mean J.

So the GC is soneone who manages the entire renovation project .

If he is going to do a good job, i think that extra 7-20% of the total renovation costs is well worth it.

That's a big if

Don't think flipping is that easy and the term turn-key when applied to flips is definitely a misnomer.

Expect to make decisions about what renovations should be done, expect to be on site making sure things are happening, expect to be the one controlling costs and not over renovating.

Be careful, some GC's can sense blood in the water and many times they don't have any motivation to control your project costs. Why would they? The more work they do the more money they get paid.

With a budget set and both you and the GC agreeing on the job to be done and the number you shouldn't have much of a problem going over except for things you or him can't see. Once started its easy to tell if he is going to try and add change orders to make money and you can just get rid of him if its happening. To save money your can try and find a GC that does a certain trade. That way he isn't just making money from the project but from real work he is doing.

" Be careful, some GC's can sense blood in the water and many times they don't have any motivation to control your project costs. Why would they? The more work they do the more money they get paid. "

Glenn

that is the whole point of my question. My thinking here is first you do a Thorough investigation of what renovation / repairs are necessary and then invite the well-established conbtractors to bid.

And then you finalize a list of repairs with details, schedule, …. For a “FIXED amount” and also a late fee.

This way you make it crystal clear for them that “what needs to be done”, in “what frame of time”, the reward “how much they will be paid for “ and also the potential penalty “how much they will lose for any day of unfinished job over the deadline.

I think this is a fair and balance approach for both the contractor as well as the investor.

I am not sure if anybody is doing a flip this way though.

No there are many people doing flips this way. As you do more volume it is the only way to do flips.

The approach works - I was merely outlining the things that you have to look out for, especially when you first start.

To sum it all up everyone here is agreeing with you that it's a fine way to do flips as long as you hire the right guy. You need to build a team around you and your contractors are part of that.

The problem with this plan is that everything depends on the contractor. Everything. Now if you have a contractor who you completely trust by virtue of a successful track record in working with you, great.

But... if you're just starting out and don't have much experience in hiring contractors and have no existing relationship with one, the odds are very good that you'll be burned. I would be very leery of going into a flip with an untested team and little to no experience of your own.

Contractors are a funny bunch. You'd think that they'd be motivated by the fact that you owe them money. But you'd be surprised. They're more motivated by making sure they have a string of jobs lined up so there's always a paycheck lined up. That means that they'll drop your job for another one for a few days or a week or two (or more) so that they can keep the funds coming in. Or they'll just drop your job for one that pays more if you don't cough up more funds.

Besides, no contractor is going to let you go too long without paying him. Most will set milestones that once they hit, you pay. In the beginning, things go quickly and all is well. It's once you get near the end that it's easy for the contractor to move on to other jobs. Penalties won't matter because the contractor will just move on. The amount of money left on the table for them isn't enough to bother with. Meanwhile you're pulling your hair out because you're losing money every day and bringing someone new on will cost a bundle.

I'd much rather give my job on a handshake to a contractor that I know and trust than give it to a stranger (regardless of his references) using the most airtight contract in the world. Most new investors spend their time looking for potential properties. Where they should be spending their time is finding the right team for the job.

Where do you guys live that you all get burned? Who have you dealt with that does such things? The key here is reputable companies. Don't go hiring unlicensed people. Don't go with ones that have no references. Don't go choosing the lowest price as they will try to add change orders. Make sure they have insurance.

It's mostly common sense on hiring the right company. To say they will leave you job at the end for other paying jobs is crazy? Here's an idea, take them to court. When you win you can get anything it cost you in taking them to court.

It makes no sense for a contractor to not do what he promised. Each job he does he makes a new person happy. That person tells their buddy, family ect and then that company is getting jobs on referrals only mostly. Once you start ripping people off its not long until you lose everything and end up in court.

Do your research and find the right company. No need to be scared off from all these stories. They are just what can happen if YOU fail to do what you should in finding the fit YOU need.

Rant over sorry

I completely agree with Steven and disagree with what John Mireles said here.
First of all, you should always do the homework and research enough before making a deal with anybody. For me it’s not only about a deal itself but more importantly what person (or company) I am dealing with. So if a person with no or bad reputation offers me the best deal in the world, he certainly is not going to earn my business no matter what he is going to offer.

On the other hand, we are living at the age of communications and information “flows”. One maybe able to screw the first client, or even the second one but it wouldn’t be long before he messes up his reputation so bad that nobody will do business with him anymore.

Google the name or address of a business and most of the time something comes up that gives you an idea of what type of people they are. And if no information is available, then perhaps that is a red flag right which indicates they may not be the right choice for your project.

Also to say that “It's once you get near the end that it's easy for the contractor to move on to other jobs.” is relatively unwise. If you know how to play the game by the rules and play carefully nobody can mess with you. That’s why you should never pay them in full upfront and always subject the last pay to completion of the project. In that case even if they want to move to the next job before getting this one done (which is highly unlikely of a well-reputed business) then you still have a good portion of project complete and can assign the last part of the work to somebody else for a reasonable price.

I don't disagree with what you guys are saying... but it's all too easy to go with a cheaper route when money is tight. For my latest project, my go-to A+ contractor wanted to charge $12,000 for my fence. Sorry, but that was way out of the budget so I had to got to plan B (that being myself, a handyman and a laborer). Because I know what I'm doing and I have a good team, it all worked out fine - for 1/3 of the quoted budget.

It's just all too easy when you're new to the business and money's tight to go with the low priced guy who doesn't have insurance or maybe doesn't even have a contractor's license. It's tempting to go with the guy whose quote comes in a 1/3 or even half of the established contractor. When money is really tight, as it often is with a flip, having a crew who can get the job done on a minimal budget is often the difference between a nice paycheck or eeking it out to break even. Cheap though is often way more expensive in the long run.

Cheap though is often way more expensive in the long run.

nicely said and put

Welcome to BP.

I agree with a lot of what @John Mireles has to say about contractors. It's naive to think contractors will hit deadlines and will make you the priority and will hustle to get their last check.

There's a reason many contractors are self-employed.

As you complete some projects, I'd love to hear if your contractors perform as you expect. If they do, you'll need to share some of your tricks.

Something missed here --It is not Wholesale or Flipping --the way you describe here --it is Fix and Sale -- First you have to take title to the property and have to pay all cash -- or take loan to buy the property --then contractor can come in and do all renovations --then what is the exit strategy ? --many investors buy AS IS to get at discount price --and many Rehabbers like to fix themselves -- that leaves only half the buyers --other investors who want to rent out and hold it --then why not just wait few more weeks and sell to the end buyer ( Owner occupied) at higher price --of course less than retail, and make more money -- you have to make sure to get 15 % to 18 % return on your investment --- how much interest are you going to pay contractor --if you do not sell as soon as he finishes the work -- make sure to do the numbers --for interest , carrying costs and profit.

Champak Shah

You just gave me a good idea: To pay the contractor AFTER house is sold and pay them a fair interest until it does.

This will motivate the contrators to finish the job fast, because they know the sooner the job is finished, the sooner they will get paid for it. So no room for goofing off and wasting time here :D

Another Point:

--It is not Wholesale or Flipping --the way you describe here --it is Fix and Sale --

I like to know what is the difference between Flip and Fix-Sale. Aren't they the same thing ?!!!!

Alex,

From my experience, that idea will NEVER work. Many GC's hire subcontractors who are living pay check to pay check. These guys will never do a job with the end payment somewhere in the far future.

The best contractors can "float" a job for a few months but nothing in the timeframe you are suggesting.

In theory, everything you have suggested is great and all. In reality, finding a competent and reliable GC is much harder than you are suggesting.

In theory, everything you have suggested is great and all. In reality, finding a competent and reliable GC is much harder than you are suggesting.

Glenn

... and I am making it even more stringent by saying find a contractor who is competent AND accepts payment after property is sold. but what if I somehow manage to do this ? at least I should try

I have to agree that I don't think any contractor would do that. If they had the money to float the whole rehab they might as well get private money to fund the house and do it all themselves.

Originally posted by Alex R.:
I completely agree with Steven and disagree with what John Mireles said here.

Unfortunately, after you do a few jobs, you'll likely change your opinion...

Here's the problem...

If you hire a retail GC who has decades of experience, hundreds of happy homeowner clients, a BBB rating of A+, contractors as employees, a full-time project manager (or multiple PMs), etc, there is no doubt you can find someone that you are describing. But, these retail GCs will generally cost between 2 and 3 times as much as the guy you're going to need to hire in order to get your flip done for a price that will allow you to resell your property and make a profit.

So, yes, these guys are out there -- but if you use them, you generally won't be successful in this business.

The guy you're looking for probably doesn't have employees (he hires all contractors), he doesn't have a PM (he manages himself), he should be insured and licensed, but he likely doesn't have any additional frills (no nice truck, no office, no heavy equipment), he likely doesn't do a ton of retail work, etc. These guys don't look as good on paper, don't have the same type of experience, don't provide the same level of service, but can provide pricing that is reasonable and will still allow you to make a profit.

And, despite all their flaws, they can still be an awesome asset to your team, if you manage them well, don't give them too much control and nip any problems in the bud immediately.

Trust me, I didn't want to believe that this is the way it was when I first started, but I quickly learned the truth. After 100+ rehabs across multiple states for both myself and other investors I work with, I've met many dozens of GCs, and every one I've met that does work for investors at a reasonable price has their drawbacks. That's how they get their reasonable prices -- they either have lots of jobs going on (in which case they don't spend enough time at the property, miss their schedules, aren't reliable, etc) or they hire low-priced labor (in which case the job is lower quality than you probably want).

Here's an example -- if you ask most retail GCs how much they charge to replace an exterior door, they'll probably say $100-200 for the labor. Then ask them how long it should take -- they'll say 30-45 minutes (if they're good). Do the math -- these guys are getting $200-500/hour for basic carpentry work. Most of that money is going to their insurance, their nice trucks, their offices, their marketing materials, etc.

Now ask a GC who does work for a investors the same question -- they'll likely tell you it's $50 or so to replace the same door in the same amount of time. The savings comes from not having all the overhead and also likely from accepting thinner margins (which they make up for by scheduling too many jobs and giving you less attention than you probably expect).

Again, you probably don't believe it (based on your quoted comment above), but that's the way it is. Personally, I overcame this issue by hiring a full-time project manager that does the non-technical parts of the GC job -- scheduling, budgeting, hiring/managing contractors, procuring materials, etc. And then use high-quality subs for the work. The money I save on the GC goes to the PM, the higher-quality subs and into my pocket. If you ever start doing multiple jobs simultaneously,I highly recommend this approach.

Oh, and you'll never find a reasonably priced GC who will float the costs until after the rehab. The good ones don't need to (they can get other work that pays on time) and the bad ones can't afford to (they need your weekly checks to pay their rent).

Medium lishproplogoJ Scott, Lish Properties, LLC | [email protected] | http://www.123flip.com

Originally posted by Ed O.:
Welcome to BP.

I agree with a lot of what John Mireles has to say about contractors. It's naive to think contractors will hit deadlines and will make you the priority and will hustle to get their last check.

There's a reason many contractors are self-employed.

As you complete some projects, I'd love to hear if your contractors perform as you expect. If they do, you'll need to share some of your tricks.

When someone agrees to a job and signs a contract with an agreed on end date how is it naive to think they would do it? I understand things happen and unexpected things can change it but you can't say they won't meet it unless its a crazy timeline anyway.

What exactly do you mean by "there's a reason many contractors are self employed"
All contractors a self employed. It's their own business. Not sure where I are heading with that statement?

Clear and simple ways to find a good contractor.

- Make sure they hold the proper state licenses and insurance
- Don't hire someone that does this "on the side"
- how fast do they respond to you?
- Do they guarantee their work?

And so on. As I said before its best to hire a company that does some work themselves and doesn't just hire everything out. I think if you find a finish contractor that is also a GC you will save on $ and they will be better with timing. You save money because they aren't just adding a number on top of the job but they are actually doing work to be paid for. They do all the finishing touches like hanging doors, trimming the home, and little things like door stoppers, knobs, toilet paper and towel holders ect. They are better with timing as they are responsible for all the loose end at the end of your job.

Originally posted by Steven Del Prete:

When someone agrees to a job and signs a contract with an agreed on end date how is it naive to think they would do it? I understand things happen and unexpected things can change it but you can't say they won't meet it unless its a crazy timeline anyway.

Read my long post above...

The trade-off is often cost. There are plenty of GCs that will do everything they promise, on-schedule, on-budget, without oversight and at a high quality. But, any investor who is paying the price of those kinds of GCs probably isn't making any money on their deals, as they're paying so much for labor.

And the ones that can get the job done for a price that will allow the investor to make a decent profit -- they are relying on volume to keep afloat, which means they are overbooking themselves and not spending the same amount of time at the project as the retail GC who is charging more.

Think about it -- why would a GC who could charge high prices to a retail homeowners choose to do the same number of jobs for investors at a lower price?

Medium lishproplogoJ Scott, Lish Properties, LLC | [email protected] | http://www.123flip.com