All Forum Posts by: Aaron McGinnis

Another investor got a contractor to say that he would do the rehab for $40k or $50k. That investor will lose money on the deal.

Our contract (which is for large, multi-faceted projects) says that final payment is due upon substantial completion.

We define substantial completion in a few different ways...

* The final building inspection has been passed (This is a big one, and we are pretty strict about it)

* The space is ready for its intended use with no work being required that is ongoing or requiring of regular access (This keeps someone from denying us payment over a single door knob or a minor paint touch up or something like that)

* In instances where the homeowner has moved out of the space, re-occupation may constitute substantial completion (This is more for when we deal with homeowners. In a full renovation of a house, my view is that if it is good enough for you to decide to live in, it's good enough for me to get paid... in most cases)

* In instances where the house will be for sale, the sale of the house shall constitute substantial completion (This prevents us from trying to get payment out of someone who no longer owns the house... never had this happen, but I'm paranoid about it)

When we deal with subcontractors, and their work has to be inspected, I'm pretty strict that they do not get paid until they have passed their final inspection. The only time I fudge that is when it's a trade I've worked with for a long time and I held THEM up... like an electrician who can't finish because I didn't have a light fixture ready for them or something like that.

Building a house to the specifications of your end buyer without the end buyer paying for everything is setting you up for a world of hurt. What if they decide that they don't like it, or just want to walk away a week before you're done with a house that is tailored to them and not to the general market? (Or overpriced for the market? Or.... insert any number of bad outcomes here) ... bottom line is that you're left holding the bag and 100% of the liability for the house until they decide to buy it from you.

The smart way to handle this is to get them a construction to permanent (A "C-P" loan)  financing loan, sell them the land, and build the house getting paid by the bank in draw intervals. 

If they can't get qualified for a C-P loan, odds are they won't qualify to buy the house on the back end anyway.

To do this you'll need to have detailed plans and specifications for the bank to appraise based on and then sign off on. (Which you were going to do anyway... right? right?) and then build to those specifications exactly.

To clarify... who owns the land right now?

Deborah -

I may be able to help. Please feel free to reach out to me.

Investors don't understand how construction be like it is, but it do. You're in the right, here.

Consider the following... How will this growth affect YOUR business?

Getting a single large client can be great - but that person will quickly realize that they have you by the proverbial short hairs and can really jerk you around if they want to.

Also, if you grow quickly and suddenly need to add people, getting paid after work is done can really create a cash crunch if you need to meet a weekly pay roll, or if you're suddenly consuming 500% more gas, consumables, materials, etc... Think about your cash flow situation and how a sudden increase in work may create a cash flow crunch for you.

Also, if you've never had employees before look into the insurance requirements in your state - worker's comp and general liability can be very expensive. In Georgia, the need for worker's comp kicks in after you hire your third employee... and let me tell you, the rates are a real gut check.

Personally, I'm not a fan of getting paid after work is done. The ability for a client to simply not pay you is enormous, and (at least in Georgia), it's unbelievably hard for a contractor to get money out of a non-paying customer. 

Consider the attorney approach - have the client pay for a certain number of man-hours up front and then bill for materials as they are consumed (Hopefully on 30 day accounts. If you don't have them, GET THEM.)

In other words, pay me now for XX hours of work, and we'll send you weekly audits showing how many hours were used and for what purpose. When we reach the end of our hour bucket, we will bill you for another XX hours... and so on, and so forth. At the end of each week, we'll give you invoices for materials and you reimburse us for them.

(Alternatively, bill in advance for $X,XXX dollars to be spent on materials, and then provide receipt tracking for materials bought against that bill, billing additional as needed)

The problem I've seen over and over again is that investors will turn contractors into unwilling lenders with none of the protection (Deeds) or benefits (Interest) afforded to a real lender. A simple analogy is this - would you extent this investor a loan for $XX,XXX with no real assurance that he will actually pay you back? Because when you work and then bill later, that's exactly what you're doing. 

Or, to use the old J. Wellington Wimpy cartoon line, "I will gladly pay you Tuesday for a Hamburger Today"

Something to bear in mind is what you can do with the points. If you get a personal Sapphire or Sapphire Reserve card with Chase, and xfer your business points to that card, you can get a heck of a lot of value out of the points for travel.

You want the contractor to become a short term lender. Why would a contractor agree to that?

Dominic -

I run a design build business; I've been where you are... having books that are weeks to months out of date is horrible and can spell disaster as you make decisions based on bad and untimely data.

What we've done, after years of trial and error and tons of money lost on bad solutions, is the following -

* Off set accountant who does monthly reconciliations and statements, year-end taxes (We run on basis of completion, which I recommend you switch to immediately)

* Off site book keeper who does day to day data entry

* Quickbooks on a server on the internet so everyone can log in remotely

* Paychex handling weekly payroll

Don't pay an accountant to do your data entry, it's usually way too expensive and not necessary... don't pay your data entry person to do your monthly reconciliations and statements (They don't know enough, typically). I think it's also good to have data entry and reconciliations handled by separate firms, as it will provide a degree of cross-checking.

We use CRI Accounting for our accounting, and they do a fantastic job. The important thing to get when looking for an accountant is a firm that already knows your industry and has the capacity to really solve your problems. We went through about 3 different 'accountants' prior to just buckling down and hiring a real firm. If I had just done it the right way from the beginning I would probably have saved myself about $50,000 in fixing bad accounting errors over the past 10 years. Not to mention the agony of having made some terrible decisions based on inaccurate/bad information due to bad accountants giving me bad information or no information.

For office help, we use Mytasker.com. We have a virtual assistant there who does the following jobs -

* Quickbooks Data entry
* Run payroll
* Handle all aspects of insurance certificate upkeep
* Run monthly insurance reporting (WC/GL)
* Update payables/receivables into a weekly list for me
* Pay vendors/subs at my direction
* Order office supplies
* Order materials for jobs
* Order dumpsters and portapotties
* Post images to social media
* All the oddball jobs that take time but don't take a lot of thinking

We previously had a full time employee doing this, and actually had a hard time keeping her busy. Our VA does this in about 40-50 hours a week, and reduced my cost for this work by 90% (Not "to 90%"... "by 90%")