No doubt about it, a contractor is one of the most important members of a real estate investor’s team. Most successful real estate investors have found a niche, and through trial and error (or great word of mouth luck) have established a rehab crew they trust that does good work for a good price. Once you have your “guy,” you’re likely to keep using them time and time again.
Trust is an important part of this relationship, as your contractor will often be quoting you prices you won’t always take the time to validate, as well as doing work you yourself can’t always ensure is up to code. More often than not, you’ll be trusting your contractor for design ideas, product installation, hiring sub-contractors, coordinating with the city for permits, ensuring the work is done correctly, staying on schedule, and keeping your project within a reasonable budget. To be perfectly honest with you, it’s a major component of the whole niche of real estate investing.
Having a great contractor can fill you with an amazing level of confidence that drives you to make moves.
Not having a trustworthy contractor can fill you with such apprehension that you may never pull the trigger at all.
If you haven’t been able to read between the lines by now, I’m planting the seeds here to make the point that if you want to get off your keister and actually start buying some houses, you need a system you can trust to hire the right people.
And I’m here to tell you just how to do that! Lucky you.
While I plan on releasing several more articles about how to hire the different members of your team, today I’d like to start with the good old rehab crew.
Now, to be clear, I’ll often use the word “contractor” when what I really mean is “person who builds, tears down, and installs stuff.” Not every job calls for a licensed contractor. I just found out that in the county where I’m doing my most recent flip, everything (and I do mean just about everything — from installing new toilets to replacing bedroom doors, ridiculous!) needs to have a permit pulled and be inspected by the city. If you live in a county like this one, you’ll have to pull permits in order to be in legal compliance. If that’s the case, a licensed contractor is necessary unless you’re doing the work yourself (in which case, just stop reading this now and go look up old Bob Vila YouTube videos or whatever you handy people do).
Now, not every project is going to call for permits, and therefore not every job will call for a licensed contractor. Sometimes a skilled handyman is even better, as they can do the work just as well but will usually charge much less. For the purposes of this system, it doesn’t matter if they are licensed or not when deciding who to hire.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
In order to execute this successfully, we are going to start by casting a wide net, then narrow down our options until we find a good fit for our budget and goals.
First off, if you’re looking for someone to do a job who you’ve never used before (especially if this project is out-of-state), we are going to start with referrals. The most important requirements in managing a successful rehab project are:
- The work is done well.
- The work is completed for a competitive price.
- The project is completed on time.
- The work you choose to pay for is worth the monetary value it brings to the house.
Considering that the overall most important factor is the quality of the work, we want to start by only accepting bids from people with a reputation for good work. This is accomplished by asking for referrals and doing some research of our own. Where do we get these referrals?
Sources for Referrals
My favorite place to start is with a good real estate agent. I’ve said it before, and I’ll say it again — when getting started (or anytime you’re buying somewhere that’s not your own backyard), the role of the real estate agent is simply the most crucial. You are basically a blind man, and the agent is your seeing eye dog. They’re that important. When I buy out-of-state, there is a lot I don’t know. I don’t know the neighborhoods. I don’t know fair market prices. I don’t know the school districts. I don’t know where the freeways are. I don’t know where the jobs are. I don’t know where the growth is moving to.
I could write books on everything I don’t know. This alone is enough to keep most from ever investing out-of-state. Want to know the secret for why I can pull the trigger and buy houses I have legitimately never seen in areas I have never been? I have people who can fill me in on everything I don’t know. THAT is why the real estate agent is so important.
Another role that a great agent can play is in networking with other agents and investors and finding out who is doing good work.
I ask my agent every single time I go to a new area if he/she can recommend me 4-5 contractors they know have done good work in the past for other clients, and I push them to actually make some phone calls and get me this info. This is the bread and butter of where my referrals will come from.
I also can ask other investors.
“But David, I don’t know other investors in the state I’m buying in.”
That’s OK. I didn’t know anybody on BiggerPockets before I started networking here. That’s the cool thing about the internet (which is what makes all of this possible, by the way) — you can connect with anybody, anywhere! Search the name of the city you’re looking at buying in and see who else on BP lives there who can recommend someone. Ask a question in the forums about who is known for doing work there. I have never spoken with any of them, but I know Andrew Syrios and Nathan Brooks are in Kansas City doing lots of work, and Chris Clothier does work in Memphis. If I was going to be buying in any of those markets, I can guarantee you I’d be sending them a message to their inbox and asking for any referrals they can give me. This doesn’t need to be so hard because you’re not alone in this. There are so many BP members you can use as a resource if you ask the right way. Take confidence in that!
Aside from BP, there is also good, old fashioned Yelp. Yelp is a great way to get reviews on contractors to see what others have to say about them, and I use it all the time to start my initial search.
In addition to these resources, you can also Google real estate investment groups in the area where you’re buying and email the leader. Ask them if they can recommend anyone who does good work in the area you’re buying who has worked with investors before. Contractors who have worked with investors are much easier to work with, as they know how important it is to us when it comes to getting the bang for our buck.
If you use these four sources I’ve just given you, you should have more recommendations than you will practically need to get started. Once we’ve got our applicants down, we move on to the next phase.
Call/email these contractor and ask them if they are available to do some rehab work on a house you’re buying/have bought (they will almost always say yes even if they don’t have the time). Give them the property address, tell them what work you want bids on, and ask them to include prices on any other work they think needs to be done. It’s easiest if you have a lock box on the property so they can go by at a time that’s convenient for them. Explain you are a real estate investor and you only want repairs that make financial sense for a landlord who will be renting the house out.
Now, the contractors will start emailing you back their bids. Nine times out of 10, they will give you a very general quote that says some of the big ticket items that will be done, then lists a price for the whole job. Furthermore, most will not give you a timetable for when they will be completed and will be planning on paying for the materials themselves. This will be included in the price they gave you.
At about this point, you can expect to experience either heartbreak at how much more they want than you expected, shock at the feeling of being ripped off, or complete rage that they would try to rob you this way.
Try to fight off those feelings. It gets better.
Once you’ve collected bids from each one, make a note of who got you the bids back in the timeliest manner. This is a good sign in the sense that it shows they value your time, actually want your business, and are less likely to be so swamped they can never get to your project.
Once this is done, email them back thanking them for the bid. Tell them you are interested in hiring them, but your “partners” (or yourself if you prefer) need to see an itemized list of the work that will be done and the price they will be charging for the work. This is very, very important. Here’s why.
The contractors want to be as general as they can so you don’t know how much money they are actually spending. They may be charging you $3,000 to pay for the tile, grout, and backer. In actuality, it comes out to $2,600. They aren’t necessarily trying to rip you off, it’s just in their best interest to be as general as possible and make a little extra where they can.
It is in YOUR best interest to have things as specific as possible.
The Battle Over Specificity
I’ll say this again. The contractor is going to try to keep things general. You need to fight to make them specific. This is your challenge. This is your quest. This is where you must take up your Spartan shield and spear and stand against the Persians. If you can find victory here, you can control the relationship from this point forward.
Now, many of the contractors will lose interest at this point and stop replying. That’s OK. These were the poseurs, and you wanted to weed them out anyway. They are losing interest because it’s becoming clear they can’t control you, and they have to work for your business. Many contractors get so busy, they adopt the attitude you are lucky to have them show up to do the work at all. These are not the people you want to hire, ever. These are the people nightmare stories come from and give real estate investing a bad name.
The good contractors will reply with an itemized list of the work they plan to do, and the price they will be charging for each job. If you’ve gotten this far, you are doing really, really good. Here’s why.
- You can now compare contractor against contractor and see exactly how much each one is charging you versus the other. Score! If you have two to three people still sending you itemized bids, the one who is overcharging will quickly become apparent in comparison to the other three. If two are charging you around $600 to tile the bathroom floor and one is charging $1500, you can tell right away something is up.
- You can much more easily see what work is worth spending your money on. If you can replace the countertops with granite in your kitchen for $2,000 (like a bid I recently got on a rental I’m upgrading) it will likely make sense to do it. If the cheapest bid for those same countertops is $15,000, you might want to skip this upgrade altogether.
The Final Step in Making Your Choice
Once you can see what you’re actually paying for, the last step is to send them another email and tell them you will pay for the materials yourself and they do not need to pay out of pocket for that. Ask them to remove the cost of the materials from their bids and only include the price for their labor.
I freaking love this part.
This is where you find out exactly who is honest and who is full of you-know-what.
When they remove the price of the materials, you know EXACTLY what they are going to be making. You can also see which one of them is offering you the best price against the others because the scope of your work is itemized and easy to compare. By this point, you should have a really good idea who wants to earn your business and who was just looking for a sucker to make money off of. The honest contractors will still be in the game, with nothing to hide, showing full transparency. If they are willing to do that, I am feeling much, much better about trusting them with my project. Once I see who is giving me the best prices, I can search out their reputation and see which one I feel most comfortable with. It’s really that simple.
Closing the Deal
The last thing I recommend is to never pay your contractor for the job up front.
- It allows them to take your money and run.
- It de-incentivizes them to complete the project on time.
I want the opposite. I want to actually incentivize them to complete the project on time.
At this stage, you ask the contractor how long they believe it will take them to do the job. Let’s say they tell you six weeks. I would then say, “OK, I will give you seven weeks, just to account for any unforeseen circumstances.” If the contractor agrees he could get the job done in seven weeks, we are almost in business.
The last step is to get a signed contract spelling out the terms of the work. Lucky for you, you already have an itemized bid of everything they said they’re going to do! Take this bid, add some more detail to it for clarity’s sake, and include the timeline for the scope of work to be completed. Mine say something like this:
“Contractor agrees to complete the work in 7 weeks from (start date). If work is completed in less than 7 weeks, a 5% bonus will be paid to the contractor. If work is not completed in 7 weeks, a 5% reduction in agreed upon price will occur. If work is not completed after 8 weeks, an additional 5% reduction in agreed upon price will occur.”
Send this to the contractor, have them print it and sign it, and you’ve got yourself a contract!
Paying for the Materials
When the rehab crew is ready to start, tell them to go to Home Depot (or whatever store you agree upon) and pick out the materials they will need. Have the representative at the store call you, pay for the materials with your credit card, and boom, you’re in business.
As far as managing the project and making sure you don’t get taken advantage of, the short answer is to find a trusted source (that blind seeing eye dog of a real estate agent perhaps) to check in on the process and make sure everything is being done that should be. The details for how to do that will be the subject of another post, but this should be plenty to get you started and eliminate much of the risk that comes with hiring a contractor you don’t know for the first time.
Systems build confidence. Multiple layers of protection provide security. I’ve given you both just now. It’s always going to be scary trying something new for the first time, and you’re going to make mistakes. That’s OK. The more you do it, the better your system will become. I had to overpay for a lot of projects before I learned the things I’ve just shared with you here.
Always remember that a good contractor will do wonders for your confidence, and any effort spent picking one out will pay dividends when it comes to feeling comfortable buying more property.
Have any questions about finding a top-notch contractor? Any tips you’d add?
Leave your comments below!