One of the biggest complaints I hear among fellow investors is how difficult it is to find a good contractor. Even contractors recommended by other people seem to fall short.
Someone thought they were great, though. So, why don’t they work out?
There are a lot of bad contractors out there, but the reality is, there are a lot of really excellent ones out there as well. So, if you can’t find one, you should first look inward to figure out what you are doing wrong.
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.
1. Your expectations are too high.
As investors, we are looking for some unique combinations of qualities. We want our contractors to:
- Be amazingly fast and efficient.
- Always be available when we need them and be able to start projects on short notice.
- Be punctual, reliable, and always stay on schedule.
- Provide great remodeling tips and design ideas to improve projects.
- Have outside-the-box solutions to problems.
- Work with very little oversight.
- Provide professional invoices and quotes, have proper licensing, and provide insurance coverage.
- Give the highest quality work.
- Have rock bottom prices.
Are you starting to see why it’s so hard to find the perfect contractor? Nobody can achieve all of these requirements.
Manage your expectations or be prepared to pay more.
There are a lot of contractors who can cover many of the above qualities, but they will probably have the highest prices. The ones who reach your goal #9 are probably lacking several of the other qualities.
So, which will it be?
Neither option really works for an investor. Too expensive and it will blow out the budget, while the dirt cheap guy will probably lower the after repair value and ruin your timeline.
Instead, you can focus on finding the contractors with the right combination of qualities. Create a list of what is truly important to you, then have only those ones bid on a project.
For example, you may have a project manager working for you, so you don’t need a contractor who works well unsupervised. You may have an awesome interior designer, so you don’t need someone to come up with design ideas.
The point is to take the focus on what you truly need in a contractor and not expect to get everything.
2. You always take the lowest bid.
The conventional wisdom is to get a minimum of three bids, then take the lowest one. It’s so ingrained that even the federal government follows this requirement when putting projects out to bid.
Some people say the more bids the better. I’ve actually read that one person got over 30 quotes just to get the lowest price on a water heater. Who’s got time for that just to save a few bucks?
Many people recognize the flaw in this system, and now it’s common to say “it was built by the lowest bidder” when disparaging things like body armor or other protective equipment.
The problem is people believe contracting is a product and not a service. A product such as a book or an electronic device is standardized — once you figure out which model or item you want, you can simply go find the cheapest price. You get the same thing regardless of what you pay.
Contracting is a service, and you get what you pay for.
Stop taking the lowest bid.
So, let’s just get it out of the way — stop taking the lowest bid. The majority of the time, the cheapest bid will result in the lowest quality work.
Obviously, you don’t want to overpay for the job, so how do we get the lowest price for the service you need?
The key: compare price for service.
Start with the work you did in #1 and rank each contractor in each category. Some contractors may have great qualities above and beyond what’s on your list, but remember, you don’t need those. Focus on what you need to have and just keep those “nice to have” features in the back of your mind for now.
Get rid of any contractor who doesn’t score well in all your “need to have” categories. Then start getting quotes from the rest.
When you get the quotes from the contractors, put them in the same order as the service they are providing to you.
If one price is considerably more or less than the others, immediately discard that. The costs for a job don’t suddenly decrease, so low bids are suspect. Really high bids can be overcharging, paying for better service, or paying for more overhead expenses. Regardless, we don’t need to pay for that either.
Now you have a great list, and it should be pretty easy to choose the best one at the best price.
3. You get itemized quotes or push for “labor-only” quotes even on complex jobs.
I know this one will be controversial, but I need to put it out there. I can speak to this from the perspective of an investor as well as a contractor (I’m licensed as a GC in my state and used to own a remodeling company).
Essentially, the majority of really good contractors will never give itemized quotes and will give labor quotes only if they are getting paid hourly.
People would ask for this, and I’d say no. If they pushed hard on it, I’d refuse to bid the project or walk away.
The reason is simple — the vast majority of people in the United States don’t understand business basics such as overhead expenses. Also, there is a massive falsehood floating out there that a “fair” contractor markup is 15-20%. Let me explain.
This is how contractors usually factor in overhead expenses.
First, contractors have a lot of overhead expenses. Michael Stone runs a great website that helped me tremendously when I was contracting. He explains contractors overhead expenses best:
“Advertising, sales commission, job supervision (which isn’t usually a job cost), office expenses (even if they work out of their home), insurance, accounting and legal fees, licenses, taxes, employee expenses, and their own salary are just a few of their overhead expenses. The typical remodeling contractor will have overhead expenses ranging from 25% to 54% of their revenue — that means every $15,000 job could have overhead expenses of $3,750 to $8,100.” — Markup and Profit
Additionally, every company should be able to charge a fair profit of 5-8%, which is money that can be reinvested for future growth. I can attest to this, as my company had a 25% overhead expense rate and a profit goal of 8%, for a total markup on each job of 33%.
So a job that cost about $5,000 in labor and $4,000 in material would have an additional $3,000 tacked on to cover my overhead expenses and profit.
“Labor-only” quotes kill contractors.
Let’s say a contractor got duped into giving a labor-only quote. The amount they should charge is $8,000 since their overhead expenses don’t change just because you paid for the materials.
Unfortunately, it’s too easy to look at the project length and quickly calculate the contractor’s hourly rate. You would balk at paying a labor rate 60% higher than what a “fair” wage is for a contractor.
So you shop around and find a contractor who isn’t quite as good with the business side of things, and he charges you $5,000. Well, his overhead expenses are still around $3,000, which means he is taking home $2,000.
Let’s say the contractor quoted a rate of $30/hour originally (166 hours at $30 is roughly $5,000). He is taking home roughly $12/hour after you subtract his overhead expenses ($2,000/166 hours).
Do you still wonder why these guys disappear and go out of business?
The exception is really labor intensive jobs with an unknown duration.
Contractors hate itemizing quotes.
It’s actually really simple when you think about it.
Every contractor inevitably underbids one part of a project and overbids on another — there are just too many unknowns and variables to account for when bidding.
Investors love to get itemized lists because they can beat up the contractor on prices. The problem is the contractor will have to lower the prices that are overbid, but he has no way to increase prices that are underbid.
Result: The entire project gets underbid, and the contractor is guaranteed to lose money.
The exception is that a contractor may itemize out a large item. It’s common to offer a price with 2 or 3 scenarios, such as “with and without an addition.”
Good contractors don’t need your business.
The title of this section says it all. Good contractors are really busy and don’t really need your business. If you show any signs of a “nightmare” customer, they will simply walk away from the project.
I had one customer who I knew was going to be a nightmare, so I told them I was going to add a fee to work under their conditions. They accepted, and I added $3,000 to the project cost of nearly $30,000.
I still lost money.
Someone only needs to lose money once or twice before they learn from their mistakes.
That’s why really pushing for these can scare away the best contractors and leave you with a pool of people who will probably go out of business.
4. Your goals don’t align.
Another reason you may have a hard time finding solid contractors is that your interests don’t happen to line up.
Most contractors want to provide good quality work that they can be proud of, along with fair wages to support themselves, their family, and their employees.
Quality and good wages are both subjective, so it’s easy for your interests to not align. There is good quality in $100,000 homes, and there is good quality in $1 million homes. Also, a frugal contractor might think a lower wage is fair, while a contractor with a big family and new truck might think a higher wage is fair.
Many investors simply have different interests or goals than the contractors they are getting quotes from. If you want low-quality work at cheap prices, then you need a very different contractor than one you would hire for mid to high-end homes.
Make sure your interests line up.
Simply interview the contractor and get a good list of past projects. You can see what kind of projects they tend to work on, which categories look best, and what neighborhoods they are working in.
If they primarily do bathrooms and kitchens in high-end neighborhoods and you need a basement finished in a mid-level neighborhood, don’t waste your time or theirs getting a quote.
Also, you need to make sure your needs line up with their business model.
- If you want top notch customer service and follow up, you may want the contracting company that has a back office and a dedicated support person or two.
- You may want to find a company that has salespeople or a design team if you need designs or engineering.
- If you are just a one-person show trying to get a flip done in an average neighborhood, you may just want a small crew with no other support.
Changing Your Focus
It’s important to understand that finding good contractors is not the same as finding cheap contractors. If you are having a hard time finding and retaining good contractors, it is probably because you have the wrong focus.
If you are focused mostly on price, you will always find your way to the low-quality contractors. Instead, you need to focus on the service they provide and then find the fairest priced contractor within that subset.
[Editor’s Note: We are republishing this article to help out our newer readers.]
Is there anything you’d add to this list? If you’re working with a great contractor, how did you find them?
Let me know your thoughts with a comment.