Beginner Investor, Paying the Contractor

16 Replies

When using a contractor to go in to estimate repairs on a property, how do you pay the contractor for their estimate? Is this an expense as a new investor you must be prepared to cover OOP until you’ve done a few deals and saved a reserve for estimates? Are estimates expensive?

Thanks

@Quincy Baker

I personally would offer to pay for an estimate if you have not purchased the property yet; if you have purchased it, you 100% need the work done but if you are just deciding what to offer on a property, I would offer to pay since the next time you call, they may not come out since all good contractors are busy these days. Once you have done a couple deals with them; it is a different story but think of how many new investors they get calls from to estimate properties that are never purchased.

@Quincy Baker

Hi Qunicy! 

I'm not sure if you've talked or met with any contractors already, but if you truly mean the estimates (and not the actual work itself - like "how do I pay the first portion of the work until my first draw from an HML?") those are FREE.

You would usually NEVER pay a contractor for their estimate- they are 'bidding' on the work as in submitting a 'bid' to you to gain the job. A contractor's bid or estimate to you is part of their overall 'application' if you will. You would never pay an employer to submit your resume right? Same logic here : )

Along with this bid, you should ask about them being licensed, bonded, insured and for past client references - and make sure to call those references up.

Do not go with the first bid you get, simply because it's the first one, and truly shop around. Make sure that your contractor seems knowledgeable yet isn't going to 'take over' your project, i.e.. "Yeah, don't worry about the kitchen, I've got some ideas on what I can do" - that won't work as their 'ideas' can cost you a lot more than necessary and you never want to give 'creative license' with your checkbook or timeline. 

Know what you want, how much you're willing to pay total (as it pertains to your 'all in' totally invested mark with purchase, rehab, closing, and holding) and stick to it. 

Make sure to also be very clear with your contractors about your timeline- if it's two weeks to get flooring ordered and installed, it two weeks period. Absolutely any changes to this (like backordered product) need communicated to you immediately (as in them calling you from the big box store they are trying to place the order in or builder's supply house etc) 

- In that call you make a quick shift to similar product/price that's ready to rock and roll with now (I would never suggest a product delay as a viable reason to cost more in holding costs). 

As for paying a contractor- some contractors will have enough capital to cover materials up front (usually anyone doing enough jobs has this kind of funding available), some however do not and it's okay to be asked to pay for the product/materials upfront - especially if you're ordering anything custom that costs more (again, either buy the materials yourself or ask for an itemized receipt at order, not upon delivery). 

But usually never pay for work upfront/give advances- that's how you get your job 'spiked' (they will start your job and move onto the next, finishing yours when they get around to it)

But no, never usually ever paying for an estimate! If you're asked to pay for one, I would suggest moving along to another contractor. 

Having said that, be ready with what you want in mind exactly, know your city ordnances about permits and those timelines, ask for copies/proof of information on being licensed/bonded/insure and be crystal clear on how much communication you expect.

Once you've found a great contractor to work with- you've made a friend for life in a working relationship! I hold a great deal of respect for upstanding and honest contractors as my father was one for 30 years and that's how I got my 'real estate' start, gowning up on the job site. 

Hope that helps! 

 

@Anna Laud Hello Anna WOW! You've provided a wealth of information! Thank you. I do want to clarify however, that I'm referring to obtaining a contractor estimate on repairs to aid in my ARV calculation for wholesaling, in which case I will not be the person carrying out those repairs, but I would like a close estimate of what those repairs will cost to determine my MAO. Since I wouldn't be the one brining the contractor the work (unless the buyer chose), I feel it ethical to compensate the contractor for their time and services rendered, but wondered if this was simply an OOP expense to me as an investor? Which of course can get pretty pricey over time with each estimate.

@Quincy Baker

You bet! Okay well this is a different situation then as you're not actively looking to hire, but hiring now as more of a consult. 

You're right, it is not as fair or ethical to use their professional estimate if you're not actively looking to hire them, and it should be based on more of a 'consolation fee' approach. 

After you've done enough of these, you will begin to get the idea of what rehabs in your area will cost on average and you'll know quickly, "okay this full kitchen rehab will be about $30K" and just add in these rehab needs until you've got a total going for all rehab areas accounted for. 

After enough time or experience you wouldn't need to keep hiring these 'consults' out. 

I would never (and it doesn't seem like you are) go into this with the promise of work, and be fully transparent with any contractors why you're hiring for the consult (ARV purposes).

I would anticipate most in state/area investors that you're working with to have their own 'boots on the ground' in established working relationships with contractors already, and not likely to move forward with a new contractor with or without a bid.  

But yes, based on your 'why' I would agree it's more legitimate to offer compensation as a consult fee more than a bid for work = )  

 

@Quincy Baker I know plenty of in demand contractors who absolutely require payments for a bid and if they get the job it will be applied to the total cost like a deposit. As a wholesaler I would look to make a relationship with a few that would take a “bid fee” if you will so all parties are clear on what it is that is being provided. But a blanket statement to never pay for a bid isn’t a rule I would follow. Every company is different and many busy, reputable contractors want to be paid for their time (and deservedly so) as time is money. There absolutely are guys who will give free bids who are solid, but if they require payments it often shows they are in demand and have no time waste. See what is common in your market and make sure the free bid guys are legit in the eyes of your state/county/town. Many are but just as many may not be...

@Quincy Baker

If you own the property most estimates will be free. If it’s a property you do not own I would offer them money for them to do a walk through with you and get you a estimate

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you