Dealing with Contractors

Rehabbing, Fix and Flip, Rental Properties
1

I have a question for the seasoned investors out there that have dealt with general contractors. I have used contractors on 5 of my flips so far, and only 1 of those 5 I have been happy with. I have dealt with a crew quiting mid project, them getting behind, and the one I am using now promises me the world and then does not deliver. I use contracts and draws and have everything in writing and have not lost any money in these dealings, I have just been unhappy.

The way I have it set up with the current contractor is that I gave him 1/3 up front, then gave him 1/3 halfway with the remaining balance to be paid when he is finished. Right after I gave him the second 1/3 he immediately missed the next day and also missed one a few days after that. I have an idea about how I want the next one set up. 1/4 down, 1/4 halfway through, and then 1/2 when finished. The money owed is for labor only by the way.

I would love to hear how some of the seasoned investors have succesfully dealt with contractors and draws. I’m just looking for some clarity in the matter to see if this is a problem everywhere for investors or if I need to adjust my expectations. Thanks :beer

2

I ran a home remodeling company in Virginia full time for a year when I quit corporate, and now just do it part time since I’m full time into real estate (i.e., I still get the calls, pass them off to my employees and they handle everything rather than me doing all the running around, etc.)…

It’s tough to make a standard criteria of 1/4 down, 1/3 down, etc. because every job has different ratios of material costs…Contractors normally need all the materials covered at the beginning (those without Home Depot or other credit cards to cover purchases need the materials paid before the materials show up at your house), and if the job is fairly short (1 week or less) you shouldn’t have to pay them for labor until it’s done…

For larger jobs (2 weeks or longer), figure on paying them every week so they can cover their weekly payroll for what’s been done…

The best way to handle the situation is to pay for materials yourself and have them delivered…This ensures that there’s no mechanic’s liens to be placed on them later and that the contractor won’t be running away with your materials money, as well as making sure that you only pay the regular price for materials rather than the contractor’s markup price…

Then make a schedule for the project showing individual jobs that should be completed each week (demo, drywall, plumbing, paint, flooring, etc.)…Figure yourself what percent each week will be of the complete project, then pay a smaller percentage of this to the contractor…In other words, for the labor portion, if 30% of the work will be done at the end of week 1, pay him 20% (or less) of the total labor cost…If 50% will be done at the end of week 1, pay him 40% or less…The reason for the lower pay percentage is in case they go off the job and don’t come back, you’ll usually end up paying a little more than the original amount remaining to have somebody else come in and finish up the job…

Have this schedule completely understood by both of you and stick to it, and you shouldn’t have any problems…If the contractor needs 50% of the total labor cost when the job is 50% complete, you could come out a loser if he leaves the job…All contractors understand this…

There’s no reason to give him 1/3 up front because it just leaves the door wide open to losing that money…

3

is there an easy way to find out if there are mechanic leins on your property? or are you notified immediately if one has been placed?

4

The easiest way I’ve found to deal with this problem is to simply purchase all materials myself. Find yourself a really good lumberyard that caters to contractors. These places have salesmen on the road daily. Have the yard send one to your project RIGHT NOW. This does 2 things. First it shows the saleman that you purchased materials from his competition. Second, it shows him your for real. He can set up an account for you within days. Now you’ve turned the tables on your GC’s because if they don’t show with out calling… THEY’RE FIRED.

I NEVER pay any upfront money. It’s like giving these guy’s a wedding ring. YOU OWN THEM. Break the job up into smaller pieces and pay by the piece. They get hurt, drunk, go on a 3 day coke bing. BYE ,BYE, and you can move on.

Find good subs and pay them quickly. If these guy’s see you sending them regular work and you pay fast they’ll be there, believe me.
We’re always going to have problems with contractors, that’s part of this business, the idea is NEVER let them hold you hostage. Once you do find good guy’s KEEP THEM HAPPY, be ready when you say you will, buy the coffee everyday (sounds stupid, but man it really let’s them know you appreciate their work) Listen to their advice. And I ALWAYS pay bonuses. Yep you read that right. They finish 3 days ahead they get a bonus. Never tell them this, just do it. It’s the best money you’ll ever spend. I pay mine right to the workers. Then slip the boss his later. Works like a magic wand!

5

A mechanic’s lien involves a court case judgement first, although it doesn’t have to involve the homeowner…I had to file 3 in the past…I sued the GC’s who hired my company out (3 contractors who went out of business before I got paid), got the judgements, then filed the paperwork with the city hall for the actual lien…The homeowner doesn’t necessarily have any knowledge of this being done unless they do some title work themselves to check out any liens on their property…This is one danger with a GC hiring out other subs…If the subs don’t get paid, the homeowner could get burned and not know it until their property gets sold…

That’s one reason you need to keep track of all subs doing work on your house…Call them and verify that they’ve been paid to put yourself at ease, but checking with your local city hall is the only absolute way to verify that there’s no mechanic’s liens against your property…

6

before contractors get their final draw(the largest part) they
should sign a mechanics lein release & all inspections (elec,plumbing
,etc.) should be signed. paying a bonus is great , but you can put in your contract that work is to be completed by X date or the GC
pays X per day it’s late.
harriet(fl)

7

I forgot to mention about inspections…Good point…Having them sign a mechanic lien release probably won’t do anything really because they could always sign this no matter what (if they’re ripoff artists, they’ll sign it just to get paid)…

Call your inspection dept. prior to doing any work to find out what requires a permit, and GET ALL PERMITS REQUIRED…This protects you, the homeowner, to make sure the work was done right…Some cities require permits for things like drywall installation, windows, doors, etc…This is just a way for them to make extra money, but for serious work like roofing, plumbing, electrical, HVAC and foundation work always get a permit and have it inspected before the GC gets paid…

8

Just a quick note:

Have your Contractors pull the permits themselves instead of you. This way they are held to performing the work as per code. If you pull the permits yourself and the Contractor doesn’t do the work per code, it’s no-skin-off-his-nose - he’ll just try to charge you more to come back and fix it correctly. If they’re made to pull their own permits and don’t conduct repairs within code standards, they can lose their Contractor’s License (make the City/County work for you).

9

There’s 2 schools of thought to this…If the homeowner pulls it, it should be cheaper since you’re not paying the contractor to spend his time to get the permits, and you can also ensure that the correct permit was pulled…If the contractor pulls it, it’s one way to verify that he’s licensed to do the work…You’d be amazed at how many contractors try to pass themselves off for work they are not legally licensed to do…

No matter who pulls the permit, have it inspected before paying the contractor…I don’t see any way for the contractor to charge more if it doesn’t pass, no matter who pulls the permit…If it doesn’t pass, the contractor doesn’t get paid…So it IS skin off his nose…

They normally won’t lose their license unless they perform work that wasn’t permitted…And even then, the first time and maybe first few times is only a fine…It really takes a lot to yank a license, though this may vary in different parts of the country…

10

buffinvestor,

You make some excellent points but I differ a bit when comes to:

  1. The cost of the permits being pulled by the Contractor verses what it will cost to bring things up to code if he screws it up and has no legal requirement to meet Code (have him include the permit cost in his bid or estimate),

  2. The Contractor should ALWAYS produce the proper Permits PRIOR to starting work and must post/display them on-site according to the City’s instructions. This eliminates any issue with the Contractor not getting permits or getting the wrong ones. I also require the Contractor to submit a copy of all permit applications if he says he can’t start the job because of permit delays (I write this into the Contract so he knows ahead of time that I check on it if it becomes an issue).

  3. Many Contractors work on a “time and materials” basis “as per contract specifications” - if they’re not required to pull the permits, they don’t care if it meets code or not unless you specify in the Contract that the described work to be performed must meet Code (you better make sure too that your Contract Specifications & any Drawings don’t conflict with any existing Code or the Contractor will blame the defects on you and your poorly written Contract). Of course a job requiring a specially licensed contractor (like a plumber) does, indeed, give you some options if he doesn’t do the job right (and you haven’t inadvertantly told him to do it the wrong way).

  4. If you haven’t specified that all work to be performed must meet Code (and YOU pull the permits), the Contractor would be within his rights to sue you for non-payment regardless of the outcome of any final or Code inspection (all he has to do is what you specified in the Contract and to do it in a “professional workmanship like manner”). If you tell him to build a 6’ x 12’ third story balcony, you can’t deny him payment for his work if he makes the handrailings 12" tall. As dumb as it sounds, you can’t assume he automatically knows you wanted him to make the handrailings 36" or 42" tall or not at all.

11

Thanks for all the input.

12

hey buff,
i disagree . if the mechanic lein release is signed IT IS A BIG DEAL.
if the GC is an a$$hole & puts a mechanics lein on the property , it would be a lot easier to win the case in court & clear your title.
remember this can be filed against your property & you will never know it until you are ready to sell & it shows up on title search :shocked. :flush . always better safe than sorry !!!
harriet(fl)

13

MY ANSWER: The GC may sign off, but what if he doesn’t pay the sub-contractors and THEY file a mechanic’s lien?..You’re screwed…I agree that having the paperwork from the GC is a partial victory, but the door’s still open to having a lien on your property…And as long as you have the invoice and cancelled check for the payment to the GC, he has no grounds for a judgement against you…

14

buff,

I’ve had the pleasure and displeasure of being on both sides of this fence (a remodeling and building Contractor for many years, then a Civil Engineer/Contractor, and now a Home Flipper) and have found that Judges are typically only concerned about the Contract Specifications as they are written (if it doesn’t say or imply that you have to meet a certain code from another entity, he generally won’t even try to enforce it).

I think the moral of the story (and what we DO agree on) is to make sure you insert a clause binding the Contractor to perform all the specified work within City Code. In addition, prior to start, have him produce his list of subcontrators that will be used so the Lien Waviers he signs later have more meaning and definition as it pertains to who he is obligated to pay off (any subcontractor who is not on the LIST, or under a separate contract, is not allowed on the job site, has no agreement for services, and therefore is not, technically, given lien rights).

It’s been a real pleasure and I think we’ve brought up some good subject matter for people to think about. Unfortunately we’re going to have to part company not fully agreeing with each other but certainly with all respect.

Have a great one!