Crisis Management: How I’ve Dealt With Rogue Contractors (& What I’ve Learned)

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You got it.

Contractor says one thing. The actual end product, or action, or quality of work, is very, very different. For instance, the contractor keeps talking about how little money he is going to make. Or, “I really should have had another $10k-$20k for this job.” Or my favorite, the Mr. Silent contractor — the one who won’t call, won’t text for days at a time. That really drives me crazy.

The past month or so, I have had to deal with these types of issues not once, but twice. Both on (relatively) large projects.

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Flip #1

First, lets talk about the bigger one. We will call it Flip #1. It’s a large project — $100k or so remodel — a big, beautiful house. The contractor started out doing pretty well, and then slowly started getting behind. And more behind. And more behind. And then all the sudden, we get a request for a draw, for a lot of money. Nearly all of which we had already paid in a previous draw, for work that was still not completed.

Let me reiterate. A lot. Of money.

Yikes.

So for several weeks I worked together with my partner on the deal to limp the contractor along and get the job to the finish line. This contractor milked us for several thousand more dollars, telling us problems and issues we had run into, and wham — the afternoon text message. He grabbed his tools (he had apparently been planning for several days or weeks to do this, seeing how fast he was out of there) and sent a message saying he left.

This house should have been on the market a long time ago, and instead of making more money and selling it on schedule, we had to scramble, call in the reserve GC buddy who happened to be available, and knock it out both within a limited timeframe and with a now extended (over) budget, over timeline, and unhappy partner.

This kind of stuff… it happens. It sucks.

But you have to deal with it, and you have to get a plan in place. Time is absolutely money in our business.

Related: The Ultimate Guide to Finding an Incredible Contractor

Flip #2

I have been running things myself, bringing in my guys and more sub contractors and a painter/handyman who worked for me. This house, partially neglected due to Flip #1 (not good either, but true), was also behind, but had a different situation. First, my painter, who was more interested in milking the clock than doing a great job, got talk after talk on working harder, doing a more thorough job, being careful and completing one task before starting another. I guess it didn’t translate. After he had been on the job a long time, the paint was still not complete and had many issues. He got fired this week.

In addition to the paint fiasco, the tile guy and contractor scheduled for the job decided to put me off for a week. Mind you, he was incapable of answering a phone call or returning an email or text message. Not just for a day — sometimes for a week. He was highly recommend, did great work on other jobs, was in budget with what we needed.

One week passed, and he had to finish up with one job to get to ours. Week two passed; we were behind, but from our understanding, we would have his guy on our job for several days, and he’d be ready to start mid-week. That never happened. I finally got him on the phone, got all the apologies, all the I-will-be-there’s, all the we-will-take-care-of-it’s. All of it.

And guess what? He didn’t show on Monday. Week three, behind. And tile guy was still nowhere to be found.

#callmesucker

Fixing the Problem

For Flip #1, the new contractor came in and happened to be available literally the very next week. We were able to get moving, make a ton of progress, and at least have a final timeline and general end budget. This house should be on the market here in about a week or so. I am so thankful to have that contractor, his guys, and the fact that he was willing to come into a pretty crappy situation and really make the best out of it for us (and for him).

FINALLY. We have the end in sight.

For Flip #2, the paint problem is solved. All the lights, faucets, toilets, and everything else is getting put back together. The house is killer. New hardwoods and hip Pottery Barn kinds of colors. I have found a new tile guy through a friend and home designer who can start next week. We’re now working on the framer/contractor to finish some bathroom framing and plumbing, and we are off and running.

This one is just a week or two from the finish line as well.

The End Result

On Flip #1, we don’t have a final tally, but it’s tens of thousands of dollars over budget. Yes. That one hurts. The one great positive in this is that the area where the house is located, we had a good mix of buying the house right (yes!) and an area that is super hot with little inventory and rising prices. So, although we did end up eating that large chunk of money, our listing price will actually end up being high enough to cover our overage and more.

This is a blessing, but this doesn’t happen very often. We got lucky. We would have still come out of the deal making money if the prices hadn’t gone up that much, but it wouldn’t have been much compared to the investment of capital and time.

What a great reminder to make sure you remember you make the money on the BUY, not on the sale.

For Flip #2, we are actually going to end up (likely) pretty darn close to our budget. Through some design choices, value engineering a bit on some fixtures, good negotiating on prices from our contractors, and sub-contracting versus having a big crew out, we will do ok.

Food for Thought

I don’t know exactly how many flips I have done. I know it’s 20-30, maybe more. I’ve had a few go a bit sideways on me, but not so many problems all at once like the past few weeks.

You must keep a calm head about you as best you can. Sometimes I do well at this, sometimes not.

Be able to make quick decisions, but not rushed ones. Keep the entire project in mind, understand what all the players are involved in a deal — with GCs, partners, bankers, private money, etc.

Dealing with this kind of stuff is downright terrible — but things do happen. None of us like to face the fact that the deal isn’t going quite right. Or what we might have done a better job on. Or that the guys we hired didn’t do what they said they would do. Or that the quality of work we paid for wasn’t there.

Why Are These Projects Back on Track?

  1. We kept cool heads. We processed the situation and made decisions.
  2. We called in experts we knew who could come in and fix the problems — on a budget and on a timeline.
  3. My partner and I, although sometimes very uncomfortably, worked together to problem solve.
  4. We weren’t afraid to execute, fire, change, more around, and figure out a solution.
  5. We didn’t dwell on the failure. We got our heads around the problem and found the steps to take ourselves, our projects, and our wounded pride to the finish line.

I pride myself on being a skilled, seasoned investor. In fact, I have another deal that sold this week for full price before even hitting the market. We will likely make 5-4% higher than we anticipated on the deal. But just because we know what we are doing doesn’t mean we don’t have more to learn, and that we can’t put better processes in place, or find better contractors, or have a more detailed method in place dealing with contractors.

In the future I have will much more stringent methods for draws, accounting, and timelines with my GCs on large projects. For now I am not having any in-house employees, but rather hiring in companies that come in and handle from beginning to end, whether that be tile, carpet, or a painter.

Related: 3 Types of General Contractors (& How to Choose One for Your Project)

It’s been a lesson in management and style. It’s about when to nitpick and when not to.

Real estate investing is no joke. It has changed my family’s life forever. My wife can stay home because of it. Sooner than later, we will have our entire monthly budget covered by passive rental income. And our business continues to grow with amazing partners. But there are always going to be bumps in the road — sometimes small ones and sometimes ones that feel like a mountain.

Stick it out. Get yourself out of bed (sometimes even at 4 a.m. if that is what it takes) and get the job done. Don’t make excuses, make results. Your partners will thank you, respect you, and ultimately, you will get better at your craft, make more money, and have a long, prosperous business in real estate.

What are you dealing with right now? And what have you done to help save your deal, or your relationship, or your partnership? And what will YOU do differently next time?

Let’s talk in the comments section below!

About Author

Nathan Brooks

Nathan Brooks is a dad, husband, worship leader, and real estate investor in the Kansas City market. Foodie. Coffee addict. Crossfit junkie.

26 Comments

  1. Curt Smith

    HI Nathan, Great topic and big problem point for landlords and especially flippers I agree.

    This boarders on having problems with labor law that your contractor is acting as an employee. This works better for small rehabs like what I do. Of course have your contractors sign an Independant Contractor agreement. Just says they are a contractor and not an employee.

    I buy all materials and have delivered to site.

    I create a punch list that;’s very small chunks of work and I agree on price for all chunks. At my level of rehab I give the price and don;t even ask. I say are you ok with this price, going down each bullet point…

    I pay nothing up front, maybe $100.

    We agree on a date for each bullet.

    If more than 5 days for a chunk I come back every other day to inspect work in progress.

    At the date agreed I come back and inspect for completelness and quality. If a problem no pay. They will fix. I come back and if all ok I pay for just that chunk.

    I find this process encourages speed and quality. And you are not at risk of having too much cash out that the contractor could walk with.

    I mention the above for the folks hear who do smaller, <$15k rehabs where its hard to keep contractors working quickly and keeping contractors from running of the the typical $1/3 of the total.

    I NEVER pay $1/3 up front. I pay some gas money $100 at most and have short pay chunks, 3-5 days at most.

    One thing you didn't cover is paying such that they are incentivized to work fast and with quality on a large rehab? I solved this on my small rehabs.

  2. Larry Russell

    Excellent post with great advice. I’m going through something similar now. Things are not moving as fast as I would like due to an increase in pricing without any justification. Putting together a new action plan by interviewing new contractors and GCs.

  3. FRED GROH

    AS A INVESTOR ,LANDLORD AND FORMER CONTRACTOR…
    I NEVER PAY 1/3 UP FRONT NEVER ,I BUY THE MATERIAL
    AND PEACE THE DRAWS OUT THE SAME WAY
    WHEN I WAS A CONTRACTOR I WAS FINE WITH THAT AS LONG
    AS THE DRAWS AND WHAT WAS EXPECTED IS AGREED UP FRONT
    BUT AS CONTRACTOR OR INVESTOR YOU HAVE TO HAVE YOUR OWN
    COMPANY GUIDE LINES THAT MAKE YOU FEEL COMFORTABLE NEVER
    BREAK THAT GUIDE LINE…/WHEN I GET AN EXCUSE I SAY THAT UNFORTUNATE
    SIMILAR STUFF LIKE THAT HAPPENS TO ME ALL THE TIME .THAT’S WHY I HAVE TO STICK
    TO OUR COMPANY GUIDE LINES..PS NEVER SAY MY OR MINE ALWAYS THE COMPANY
    I DON’T WANT TO THINK I HAVE A CHOICE TO CHANGE THINGS ON MY OWN

  4. FRED GROH

    ONE MORE PS FOR INVESTORS WHEN YOU FIND THE RIGHT CONTRACTOR
    YOU BETTER TAKE CARE OF HIM …DONT BEAT HIM UP ON PRICE REMEMBER WHAT YOU GOT..
    YOU CAN TAKE YOUR CHANCE ON A BETTER PRICE AND TAKE A BIGGER CHANCE THAT THEY
    CANT PERFORM.THE DEVIL YOU KNOW IS BETTER THEN THE DEVIL YOU DONT KNOW

  5. Jeffrey Vandagriff

    Great article! Do any of you make them sign completion agreements? I would ask them when a fair date for completion would be, then go 2weeks after that date. I start a penalty structure such as -$100/day for every day past due. I would also add incentives for early completion. The structure could be exponential both ways.

    • Don Nelson

      I do this, but often when the ETA is coming up they just say they’re sorry but can’t do it on time. The only way this works is if you still hold enough leverage (i.e. money) on completion. I’ve found that most of the time if I hold that much back, it KEEPS them from completing it because they won’t or can’t spend their own money to get there. Quandary…

      • Nathan Brooks

        Don, we had that same issue … so I don’t do that. But instead we talk through it at that point and discuss in detail what that timeline to complete is. I also have a good idea of what they pay their guys and what we might need to negotiate if the time goes over, so the guys get paid to do the rest of the work, but hurts a bit for the contractor if they are over their time, and “not making money” on their guys for a few days.

      • Curt Smith

        Don, see my process in the first reply. I’d never get to the point of paying half and them being behind. Most folks will have this problem if you follow the 1/3 process. They rarely keep up to their own dates.

        Get dates in writing,blue tape that punch list to a wall in the kitchen. I use my phone’;s camera and free document scanner app, docuscan, and create a PDF of every punch list and every check I give contractors.

        Not enough done per the punch list, NO PAY. You have to be in their face with punch list in hand. Point out defects and lake of progress…

  6. Don Nelson

    Great topic on this one but frankly, I was a little bummed. You didn’t really answer the big question of how not to get yourself in trouble. You said (from number two), “We called in experts we knew who could come in and fix the problems — on a budget and on a timeline.” But you never said HOW you knew them, WHERE you found them, WHAT the terms were, etc. It leaves me hoping I get “lucky” which I never do…I have the same contractor problems and when trying to implement more strict standards, I either end up paying literally double for the crew, or ending up with the same problem. Would really be helpful to solve this particular issue, as it is the PRIMARY problem in my business. I’ve tried many things…I guess I’ll just keep looking.

    • Nathan Brooks

      Don …

      I have gone through many guys, talking with them, getting referrals, going onto job sites, buying beers. We ask for great referrals from guys we know. We look on facebook and see what peoples work looks like, and how many people are interacting with them …putting up great comments, and wanting work done.

      My 2-3 big contractors I work with on jobs that are say $30k plus, carry at least 1/3 or more up front until we hit a certain point, payment at that point, and keep moving forward. With the smaller ones, I’ve started paying materials, and giving a few hundred dollars up front and paying at the end.

    • Curt Smith

      Hi Don, Join the local REIAs, all of them if more than one. Then work with referals from other investors. This really the best way to find the best investor friendly contractors.

      The Other way, is to go to HD/Lowes/Sherwin Williams at 7AM, Yes 7AM, not 8AM or 9AM, and talk to all the contractors who are picking up materials at 7AM. These are the go getters, not the ones shlepping in at 9AM.

      Have a box of doughnuts. Honest!!! Contractors KNOW what a guy holding a box of donuts wants, and they are happy to give you their name. Chat them up, ask about what they love to do, get them bragging about their favorite job. 🙂

      • Curt Smith

        I only do remote rehabs in small towns. So referals is not an option and my HD trick is tough since I’m over an hour away. I post craigslist ads in the gigs section. I give a VERY detailed punch list with PRICES. I ask for referals in any reply.

        It’s not hard to sort the replies into toss, call back piles. You’ll be calling very few actually. Then it’s chemistry and meeting them at the job site and observe what they say and do.

        I actually have very good luck culling 30 replies down to 2 choices and so far all have worked out for rental grade lipstick rehabbing. And my chunk/pay method as in above works well with lower level workers.

  7. DL Martin

    Devastating article.

    Veteran house flipper in a huge metropolitan area is essentially on a never ending “find a sub contractor” treadmill, even after 20-30 projects.

    Really makes me doubt the “work on my business NOT in my business” mantra that I read again and again on Bigger Pockets. Systems! Processes! Repetition! LOL!

    DL

  8. Darren Sager

    Great article Nathan. We don’t often talk enough about putting systems in place and constantly having to put redundancy systems in place as well to make sure all goes well. It’s the never ending story about what we do. Just when you think you’ve got it all set, one contractor slips up and process starts over. I try to always have options and I’m always looking for more. It’s not a one and done scenario. It’s more like the never ending story.

  9. Curt Smith

    Anyone solve paying contractors with pre paid debit cards? My main business bank is an internet bank, Everbank. Love that bank and web site. My contractors hate checks from Everbank. I KNOW you’ve had problems paying with checks. Yes yes the bigger (and more expensive) contractors have no problem taking checks as long as they are good. The smaller and more rural you do rehabs the bigger paying is a problem.

    I’ve started looking into the MIRAD of debit cards out there. Green dot, Wallmarts blue card etc and many MANY others. Green dot is dead because it won’;t let you move cash from your card to a contractor’s card more than $1k total per month. Dead! Walmart’s blue card runs on green dot’s network so that is dead too.

    Anyone find a card that has higher than $1k / mo cash xfer? Low fees? I can move cash from my bank to the card anytime day or night or weekend? This really is a problem needing a solution.

    So far the best solution is Walmart to Walmart transfer. I have to drive to a walmart, pay $10 for up to $900 xfer to another walmart. I txt the contractor a transaction code they go to the walmart and they walk out with up to $900 in cash. This solves the contractor’s problem of cashing your check too. Yes yes I harp at folks I hire that they need checking accounts… I can’t solve all the world’s problems…

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