Question about Turn-key Flip contracts
Most Popular Reply
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
13yOriginally 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).
49 Replies
- Contractor · Brick, NJ · Member since 2011 · 86 posts · 12 votes13y
Originally posted by J Scott:
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?
Saw you post after I posted mine. I can't type fast on the ipad haha. What he needs to find is a happy medium. Don't go hiring the hack that cost you more in the end and don't go getting the top guy in the area. A GC that has great subs doesn't need to be there all the time anyway. He doesn't need to watch the plumber or electrician. He can trust the guy that hangs his rock and shackles it all. He just needs to come around a couple times a day and be able to be reached if a problem arises.
Again I think a GC that also does a trade is best. You don't need an over priced PM
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes13y
Originally posted by Steven Del Prete:
The guy charging you $50 isn't making money to put food on the table for himself.You've made my point for me, Steven...
The retail-level GCs aren't able to put food on the table for $50 per door, which is why they charge $100-200.
The investor level GC are able to put food on the table for $50 per door, because they are taking on more jobs, paying less attention to each customer/job, hiring more inexpensive labor, carrying less overhead (no office, no trucks, no PMs), etc.
There's nothing wrong being the $100-200 per door GC, but the fact is, if you're an investor paying $100-200 per door, you're generally not going to be making any profits on the deal. The extra $50 you pay for each task will quickly add up to $10K, $20K, $30K or more -- and there goes the profit.
This is why I'd rather pay an independent carpenter $25-35 per hour, having him install the doors for $20 each (he can do one or two an hour) and then paying a PM to manage it all for me. The carpenter is happy (he's making good money), my PM is happy (he's making good money), and I'm happy (I'm making good money).
The next best thing is to hire an investor-level GC who will charge $50 per door, but won't give me 100% of their attention, won't have a full-time PM on the job, won't have fancy trucks, etc. They'll require some extra management on my part, some extra stress and frustration, etc. But, ultimately the job will get done, get done well and I'll make a profit.
The least desirable option is the retail-level GC who will charge $100-200 per door, give me a stress-free project, but where I won't make any money in the end!
If investors could use retail-level GCs and still make a profit, I'd have a lot more competition, as this would be an easy business and everyone in the world would be doing it successfully...
- Contractor · Brick, NJ · Member since 2011 · 86 posts · 12 votes13y
I see where your at J Scott and the way you do it is smart. I was saying if the guy is coming to your house and only doing 1 door he will make no money. However if there are other jobs he can do he can make money for the day.
The guy sending out an employee to just do a door wouldn't make money at $50 and doesn't make much at $100-$200. But it's all you can charge for the task given the time do do it.
Now for a big job he shouldn't be pricing items at his top price as he would if he only came out for one task. If he is then move on to the next one.
- 13yAlex R.Bakersfield, CA · Member since 2013 · 128 posts · 7 votesOP
J Scott
I like to get more details about who are these PM, GC, investor level GC, Retail level GC and how is their duty statement (job description) different from each other ? (basic definitions)
The problem here is I live in a relatively smaller city (bakersfield) in California central valley and I am not sure when if there is really that many different options and different type of contractors available down here.
Maybe I should just do some research, then make an appointment witht few of contractors who pass the initial internet sceening test, show them the property and ask them for an estimate and the timeline of work.
This may give me a better idea which contractor to pick.
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes13y
You're getting some great knowledge and advice from experienced people here. Now, drive the area you want to work and stop at every house where work is going on. Talk to the contractors/workmen and tell them you need some contractors for rehab. These guys out there doing the work you need, are the ones you want to find.Talk to subs too, build a list. You'll get a pretty good feel for things. And if you want to watch them roll their eyes, and never talk to you again, ask them if they'll wait until when and if you sell your rehab, to get paid.
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes13y
Originally posted by Alex R.:
I like to get more details about who are these PM, GC, investor level GC, Retail level GC and how is their duty statement (job description) different from each other ? (basic definitions)If you ask them, they'll all tell you that their job description is pretty much the same. The difference is mostly in their pricing and their attention to the project.
Kind of like if you ask a high-paid nanny and a weekend babysitter what they do for a living -- they will likely both tell you that they take care of children. But it's probably safe to assume that they aren't equally skilled, aren't equally paid and won't provide the same level of care to your kids.
Basically, it's your job to find the GC that has the skills most like the high-paid nanny but as close as possible to the weekend babysitter prices...
Maybe I should just do some research, then make an appointment witht few of contractors who pass the initial internet sceening test, show them the property and ask them for an estimate and the timeline of work.This may give me a better idea which contractor to pick.
That will work, as long as you're talking to the right GCs. If you call the guys out of the yellow pages (or with the fancy websites), you'll likely get the guys who charge way too much.
You want to find the guys who are accustomed to working with investors, and the best place to find them is to talk to investors directly. Go where the investors go, seek them out and ask them for references for GCs and other contractors. Also, ask them who to stay away from (they'll know).
It may take months or years before you find someone who meets your needs and also gives you reasonable prices, but they're out there...you just need to find them.
- Contractor · Brick, NJ · Member since 2011 · 86 posts · 12 votes13y
J Scott is right about talking to people who already use them. They may or may not want to tell you but it's simple to ask. As far as fancy sites making them charge more? That makes no sense. You are on the right path of calling around and meeting them in person. Ask for references and talk to them. Do your research and find the company you want. You might have to go through a few on some projects until you find the right one as you will with realtors and so on.
- Contractor · Brick, NJ · Member since 2011 · 86 posts · 12 votes13y
Originally posted by Alex R.:
That's a good way to put it
- 13yAlex R.Bakersfield, CA · Member since 2013 · 128 posts · 7 votesOP
And if you want to watch them roll their eyes, and never talk to you again, ask them if they'll wait until when and if you sell your rehab, to get paid.
Point taken but i also don't want to pay them all upfront so I came up with an arrangement like this:
% 20 upfront to start the work and purchase necessary materials
% 30 after the first phase is done (you define what will be included in this phase)
% 30 after the second phase is done (you define what will be included in this phase)
% 20 upon completion of project minus any penalty fee for each day passed the deadline. for a $100,000 i am thinking of $ 30 / day late fee penalty so me as the investor will not lose any money and also the contractor is more motivated to finsih the job on time.Also having a general contractor who does the entire thing for a fixed price will save you lots of time and headaches; even though it maybe a bit more expensive but in the long run I think it is well worth it.
Am I thinking correctly here ?
- Contractor · Brick, NJ · Member since 2011 · 86 posts · 12 votes13y
I don't think $30 is much motivation. Two week late and its a tiny $420 mean while you could have sold the property and not have those extra weeks of holding cost. Also what if the contractor finished early? Any bonus?
As far as those percentages go, they seem fare. Anyone who pays full prior to completion is just asking for trouble in terms of time frame and more.
- 13yAlex R.Bakersfield, CA · Member since 2013 · 128 posts · 7 votesOP
Steven
$ 30 / day equals to $ 900 a month and for a $ 100,000 property i think it will more than cover the mortgage + holding costs + quiet costs as well.
The idea of setting a bonus reward also seems lucrative and fair.
But I also had the feelings that $ 30 / day penalty might be low. So what do you think would be the better numbers for Late fee AND early completion bonuses (Price / day). throw in some numbers
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes13y
Originally posted by Alex R.:
Also having a general contractor who does the entire thing for a fixed price will save you lots of time and headaches; even though it maybe a bit more expensive but in the long run I think it is well worth it.Keep in mind that rarely does a fixed price remain that price throughout the entire renovation...
As the renovation gets underway, the GC may find surprises that were previously unknown and will want to charge for those surprises. Likewise, you'll likely change your mind several times throughout the project with respect to design decisions, finishes, etc. All of these things will result in changes to the price, and if you're not careful, the GC may try to take advantage of you.
Here's the first example that comes to mind:
In my very first house, the GC agreed to put hardwoods on the main level. He didn't know that under the old flooring was particleboard (not plywood) and the particleboard was crumbling and destroyed. To install the hardwood, we had to replace about 1000 square feet of particleboard with plywood, which added significant cost.
Now, you might be thinking -- he agreed to a fixed price, he'll just have to eat the cost! While that may sound good in theory, in real life, that's not going to happen. Many contractors will sooner walk off the job before they agree to eat a $1000 cost overrun, especially if it was something that wasn't easily foreseen.
The more trust you put in the GC (and the less time you spend at the project), the more risk you have of the GC overcharging you for lots of these types of issues. Even with a GC, you'll need constant oversight and attention until he's proven to be reliable and honest.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Originally posted by Alex R.:
Champak ShahYou 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 ?!!!!I hate to burst the bubble of innovation, but we did this decades ago. A seller has a problem property he can't sell, you agree to go in a fix it with an agreement to sell, when the property sells the seller gets his money and the liens are paid under the agreement. Basically, that's it, but it's not really basic when you set the agreement up, let the contract for repairs, agree to materials, get permits, list the property, vary the price in selling and closing the deal. But, yes, and it is somthing I advocate for newbies who are low on money, as I did earlier today in another thread about financing a franchise..... :)
- Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes13y
Until you have more experience and a team around you why not focus on assets that are already leased up and rehabbed. This is 90% of what I deal with, no rehab required. The contractor issue is such a nightmare I avoid it as much as possible.
And flipping is easier as there are no surprises. You can show current pictures, you already have rent amounts and leases. It's safer, faster and just as profitable. - 13yAlex R.Bakersfield, CA · Member since 2013 · 128 posts · 7 votesOP
J Scott
That's where the 5% contingency plan, comes to the picture since the contractor undountedly will add some kind of contingency for unforseen construction costs. Whether it is for vandalism, construction site theft, leaks, termites , bees and other issues that you couldn't know at the begining at the start of the project.
A good recommendation I hear is to incorporate a 5% contingency. For example if the rehab was budgeted at $10,000, you would add another $500 for your contingency
Not a major issue when handled correctly IMO.
- 13yAlex R.Bakersfield, CA · Member since 2013 · 128 posts · 7 votesOP
Originally posted by Bill G.:
I hate to burst the bubble of innovation, but we did this decades ago. A seller has a problem property he can't sell, you agree to go in a fix it with an agreement to sell, when the property sells the seller gets his money and the liens are paid under the agreement. Basically, that's it, but it's not really basic when you set the agreement up, let the contract for repairs, agree to materials, get permits, list the property, vary the price in selling and closing the deal. But, yes, and it is somthing I advocate for newbies who are low on money, as I did earlier today in another thread about financing a franchise..... :)
Hello Bill and thank you for your reply.
I wonder How did you pay the seller for that project. Was it a fixed price or a percentage of eventual selling price or you set a profit and expenses for yourself and paid the difference to the owner ?
Each of these methods have their own cons and pros.
For example if you promise the seller a fixed price and then later on house sells for less than expected then your profits will be marginal or you may end up losing money.
Meanwhile if you can sell it for a much greater amount than expected , seller might want to take a cut of your profit beyound what was agreed upon.
How did you go about this ?
- 13yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Alex R.,
I applaud you for looking for novel way to approach renovating your project and to your follow up question, IF you can find someone who will renovate your project and agree to get paid at the end of the job, then sure - give it a shot. I think J Scott has given you a more than thorough run down of what real life application is like. Doesn't mean that you shouldn't ask an certainly doesn't mean you shouldn't look, but time and experience are really the only two things that are going to help you here.
Most everyone that has responded has said that it would be difficult and not very likely that you will find a GC contractor to take you up. They are coming from a side of experience. But, over time, you absolutely can develop a relationship where you set the budget, the time frame and the expectation and the contractors follow your lead. Unfortunately, that only comes with time and only comes after you have earned the right to operate that way.
Best of luck over there in Bakersfield -
Chris
- Landlord · San Diego, CA · Member since 2012 · 129 posts · 49 votes13y
Sorry Alex but I kinda chuckle when I read your posts. You're just so naive and innocent about this whole process. There's no way it would work in the real world. Not with the people you'll be hiring.
The first thing I'd recommend you do, if you don't already, is learn "construction Spanish." Things like: "Quiero tombar este parede." "Cuando puede empezar?" "Pinta este parede este color." You're in Bakersfield so the workers you'll be dealing with will definitely be speaking Spanish.
The way you're going to find people is by hiring one guy and then he'll bring in his amigo or hermano. Hire a painter and his "amigo puede hacer el techo." (His friend can do the roof.) And so on. That's how you'll assemble your crew.
You'll be surprised at how cheaply they can get things done. They work hard and they'll do good work - these are the same guys doing the actual work for the bigger GC's but you're hiring them directly. BUT, here's where things can get tricky. You have to directly manage their work. Some guys won't show up after a few days. They'll ask for pay when you don't expect it. You'll have to pay for all the materials since they never have cash. You'll probably even pay for their lunches.
This fancy formula of incentives and penalties and yada yada won't work at all. They'll do most of the work and then want to get paid on Friday so they can bring home the money to la esposa y su hija. Whether they'll show up on Monday is anyone's guess. The good ones do. Some you just find out about the hard way.
Sure you can hire the contractor with the F250 and his logo on the door. However, when you get a quote for $8,000 to replace a roof but the amigo of Roberto can do it for $2,000, guess who you're going to go with?
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Agree to a price, at which they will sell, you have to know what the reab will be, a contractor could give a bid price, then if the ARV is good, after settlement costs, you have profit. Many of these were slightly over payoff, distressed properties and borrowers, minimal repairs, but where greater profits were possible you can improve the property and sell it. Timing is important, season to sell and carrying costs.
Some were done as owwer occupied, depends on repairs and update needed, coordination and work hours need to be solved, not a great way for anything major, necessary if the family can't move.
I'd say to this is not so much a real GC type deal as a couple good and reliable guys, they can always get more help as needed. Depends on the work required.
After I did the first "owner held" deal there was a learning curve, things to iron out are the agreements, making sure you can secure the deal (deeds in escrow, hint, hint) so they can't back out, solid numbers on payoff, closing costs, accrued interest/payments to carry and who pays, materials and labor, power of attorney if needed, insurance and commissions if any. This is a good way to do wholesale daels that can't sell.
All it amounts to in theroy is partnering with the seller, fix it and flip it, partners get paid....pretty simple. Just CYA and help the owner at the same time.....Good luck
- 13yAlex R.Bakersfield, CA · Member since 2013 · 128 posts · 7 votesOP
Originally posted by John Mireles:
Sorry Alex but I kinda chuckle when I read your posts. You're just so naive and innocent about this whole process. There's no way it would work in the real world. Not with the people you'll be hiring.The first thing I'd recommend you do, if you don't already, is learn "construction Spanish." Things like: "Quiero tombar este parede." "Cuando puede empezar?" "Pinta este parede este color." You're in Bakersfield so the workers you'll be dealing with will definitely be speaking Spanish........
This is no laughing matter john and I kinda know what I am talking about. Let me give you an example to make it crystal clear:
I needed to replace my car passenger side signal lamp. A call to the dealership and they quoted me $ 85 for everything. I declined. Instead I went online: Purchased the part for $ 12 (took me 5 minutes or less) shipped free to me in two days (I have Amazon prime membership)
I took the lamp to one of those amigos who in the past replaced my car stereo for a fair price with good quality and asked him if he can do this too. He said yes and asked for $ 20 which I negotiated it down to $15.After it was done and working I paid him a tip of $2 (No kidding) and now it works like a charm.
All in all it cost me $12 + 15 + 2 = $ 29 versus Dealership $ 85. Magnify these numbers 500 times and the same story may be applied to a flip project. :) - Contractor · Brick, NJ · Member since 2011 · 86 posts · 12 votes13y
@John Mireles if that's just labor it's easy on what you should do as long as you pay him to a company name and make sure he has a license and insurance. You don't want him falling from your roof if he doesn't or worse is illegal.
If your buying him lunch and he never has money he must be sending all the cash home and not paying any taxes and such and hurting the economy.
- 13yAlex R.Bakersfield, CA · Member since 2013 · 128 posts · 7 votesOP
Originally posted by Steven Del Prete:
@John Mireles if that's just labor it's easy on what you should do as long as you pay him to a company name and make sure he has a license and insurance. You don't want him falling from your roof if he doesn't or worse is illegal.If your buying him lunch and he never has money he must be sending all the cash home and not paying any taxes and such and hurting the economy.
As the saying goes If You Think Safety/insurance Is Expensive Try Having An Accident
- Contractor · Brick, NJ · Member since 2011 · 86 posts · 12 votes13y
Originally posted by Alex R.:
Originally posted by Steven Del Prete:
@John Mireles if that's just labor it's easy on what you should do as long as you pay him to a company name and make sure he has a license and insurance. You don't want him falling from your roof if he doesn't or worse is illegal.If your buying him lunch and he never has money he must be sending all the cash home and not paying any taxes and such and hurting the economy.
As the saying goes If You Think Safety/insurance Is Expensive Try Having An Accident
Well said
Join the conversationCreate a free account to reply, vote on answers and follow this thread.