Has this happened to you?
Lets first talk about working with a contractor.
Investors tell me their contractor is a bum, or that he left the job site without finishing the job, or took all my money. The list goes on and on. Nine times out of ten, the investor who hired the contractor is at fault. I know I’m not popular with that statement, but lets review some of the problems.
Were there written instructions on the scope of work to be completed?
Did you specify an allowance amount for items, such as: lighting, carpet, appliances, etc.
Was there an agreement on price for services before he started, verbal or written?
Was there an agreement on when the contractor would be paid?
A bid contract from a contractor should have a schedule of payments along with his bid price.
Have you asked for an inspection, without paying for his services?
Have you ask for his advice without paying for his services?
I have found that a rehab goes smoother when walking through the house with the contractor and spelling everything out you want, and reviewing the contract bid thoroughly before signing. Expect the fact that you still might have a
change order, although under $500.00 would be reasonable. Sometimes you cannot anticipate what you cannot see behind walls.
You pay your Attorney, Doctor, and Accountant when you ask for advice or services, your contractor should be treated the same way. Assuming Contractors work for free is where the problem starts. Promising the contractor future work, is an old trick that doesn’t work. Once you have used a contractor successfully on a job, it gets easier to ask for a bid or advise, because why wouldn’t you use him again.
The best way to establish a good working relationship with a contractor where both sides win is to have an agreement up front that spells out his prices for services, and allowances. I hope everyone understands, that a good contractor will help you make money.
Initial Inspections
If you are buying properties and making bids and you have a question about the condition of the house, having a contractor you can call on puts you in a better position to buy the house right. I know it’s unheard of, but pay the contractor to inspect the house and use his services when you get the bid. On the first few houses, go with him on the walk through inspection. Let him show you the house and have him point out his concerns and problems with future repairs. It may be that after the first few, you can make your own rough estimates to make offers, and then hire the contractor to do a hard bid during your inspection period.
Think about it . . . If you look at 4 or 5 houses for someone in the hopes of getting the contract to do the rehab. You don’t get paid for any inspections up front and the investor keeps loosing the bid. Then finally, on the 5th house the investor has the highest bid and gets the house. Since the contractor did not get paid for the repair bids and may not get paid for future bids, you may find that his bids on each house get a little bit higher because he adds those “free” bids into his repair costs. So would you not be better off to pay up front for a rehab bid and have it agreed upon before the contractor makes the bid rather than having him pad his actual rehab bid on the job he does get to cover all his time spent on the bids on the houses he did not get.
Don’t always promise future work; pay him today for the work he has performed, and deal with the future when it arrives. Inspecting the house takes time and is work; it has taken him away from what he was doing to look at this house that you may never buy. We know it’s a numbers game when buying properties. You are going to be looking at a lot of houses you don’t ever buy.
Home inspectors charge $300.00 to $500.00 to inspect a house, and if you hire them they expect to be paid. This price is too high if your looking at 2 to 3 houses per week. Keep in mind these prices usually include a full write up and possibly photos, you may find that hiring a contractor who does not have to do all the write up may offer the same service for much less. (Note that many inspectors have a much lower fee if there is not write up and they get paid at the time of inspection)
When you buy the house you have been searching for, if the contractor did the inspection, they are all set to give you a hard repair bid for your rehab or for you to use when you wholesale the property. By agreeing up front what you will pay for a repair bid or inspection, paying at the time of inspection and the contractor not having to hope to get the rehab to get paid, you will have established a decent working relationship with your contractor. You will now have a contractor in place and ready to do your rehab once you close, just be sure to outline the scope of work (what you expect to be done and the quality of materials) and the payment plan in place before the project begins.
Another mistake I have seen new investors make (even the ones on the TV shows) is waiting until the day of closing to start looking for a contractor. This will cost you valuable time and holding costs and could cut into your profits eat all your profits.
Payment Plans
Keep in mind that a contractor is always skeptical when starting a rehab with a new investor. They have the same questions in their mind about you as you do about them. That’s why many will ask for 50% up front when starting the rehab. They want to make sure that they get paid enough to start the job and getting paid 50% up front is not that out of order when starting a rehab as the majority of the money needed in the rehab is spent in the first two weeks of the project: roof, furnace, air, electrical, plumbing, windows, etc are all usually done if the first two weeks and eat up a majority of the cost of the repairs.
Don’t put him on a 30-day payment plan; he won’t be around in 30 days. A good contractor has people working for him that expect to get paid every Friday and the materials that go into your rehab are not free, they need to be paid to cover these items. Expect the contractor to be able to carry a little bit of the costs, but if your contractor can afford to carry all of these costs, he is probably charging you a lot more than the competition.
Working Relationships
After you have a working relationship with a contractor, the bidding process will go smoother knowing your numbers up front before you buy. When he knows he will get paid like you promised, that you will in fact give him work, and you will hold true to your word, the contractor will get to your job faster than other people he works with and may just throw in a free inspection now and then.
Because our contractors and subs know that when they do a job for us that they will get paid in a very timely manner, our jobs may be bid cheaper and be acted upon more quickly than other jobs. When we have a small question of how something should be fixed, they will often stop by and look at it for free and give us advice, they will probably get the repair if it is warranted. And they even bring us deals because they know what we look for in a house and that when we buy it for rehab, that they will get the job.
In conclusion, approach the rehab with the knowledge that the buyer will hire a home inspector, and his job is to dig for any problems. This list that he comes up with can cost hundreds more if you have not inspected your house as thoroughly as a home inspector. If you know something is not right, fix it now before the inspection, while the contractor is set up in the house. These steps alone can save money and stress at the time of the sale of the house.
Try out some of these ideas and let me know how they work for you.
About the author: Donald Tucker has been investing in real estate since 2000 and has been in the construction and building trades working with contractors and sub contractors for the past 30 years. Currently his company Tucker One Properties (www.TuckerOneProperties.com) is wholesaling homes in the Kansas City metro area and his real estate brokerage Realty Resource (www.RealtyResourceKC.com) is helping investor buyers and sellers in the metro.
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