I am a first time rehabber and am closing on an reo I was able to pick up for 48k in a few weeks. We are taking out a hard money loan for 75k to cover purchase and repair costs. The Arv on the property is around 135k and our house will have more updates and much nicer than the recent comps in this nieghborhood. These home have been selling in about 60days on average.
The question i have is that the hard money lender we are using (and
I assume most are this way)will not cut a check for any rehab funds until the work is complete. I understand why they do this but how are most rehabbers paying their contractors to get started? Will most contractors start the job and wait to be paid if you show them proof of funds. We do have some funds of our own we can dump into it if neccessary but would prefer not to. Any advice would be appreciated.
Do not pay contractors up front for ANY reason. If they cannot afford their own materials or payrole, how do you expect them to complete your job. Now, I will pay contractors on a % completion basis but I make sure I hold back at least 25% of the total cost until the job is DONE, DONE, DONE. I can’t count the number of contractors who wanted me to release the final payment without completing the job. I did it once, and that is why I will never do it again. If you need to front some of your own money on a % complete basis or to buy materials for a big job, so be it. But make sure that the completion percentage is actually complete before cutting a check.
Now, I will pay contractors on a % completion basis but I make sure I hold back at least [b]25% [/b] of the total cost until the job is DONE, DONE, DONE.
we do around 20%, but the rest is pretty much the exact same. We’ve been working with some guys for 10 years and we still never pay them a dime before work is at started. They know it’s nothing personal and they know we have the money. To quote the movie Jerry McGuire, “It’s not showfriends, it’s showbusiness!”
Well, as the owner of a remodeling company, I thought I would add another perspective…
Although I can pay for my own materials/payroll, I am not a bank for my customers, nor am I interested in financing their business for them. tfeager’s original question is exactly one of the reasons why I would not begin a project without earnest money. From what I’ve read thus far, it does not sound like he has the funds to bankroll his own business, why would any contractor bankroll it for him? What if he can’t complete a phase of the project and can’t get the draw check from the HML? Who gets stuck hanging their butt in the wind with the only recourse being a mechanics lien payable sometime down the line, if ever?
I can tell you one quick way to protect yourself, remove a layer of cost (mark-up for materials, delivery, etc.), manage those costs and not become a victim of the “robbing Peter to pay Paul” cycle that so many contractors fall victim to. Purchase and provide your own materials for your projects and only hire out the labor. It lowers your project costs, and negates the main reason most contractors ask for upfront money - materials. Set-up your own trade accounts under your business name to get the same discounts they do. It also gets you more intimately involved with the costs associated with rehabbing and over time (when you’ve developed an accurate costing spreadsheet) allows you to project what deals are actually deals vs. hoping you got it right.
By only contracting the labor portion, you offer to provide weekly or bi-weekly progress payments based upon pre-set production benchmarks. Establish upfront a timeline for the project (i.e. - project days to complete each phase), and at each completion stage, you provide the funds to cover the labor (a percentage of the total labor pre-established). This keeps them focused on your job, as they know they will get paid. I would also provide them with 5% of the total labor upfront. Then let them know that the next check is available when they reach the next agreed-upon stage. If they walk for whatever reason, your only liability is their pay up to that point. Make sure you also provide a clause in your contract that time is of the essence in relation to the project and that work is expected to be completed as outlined in the timeline that was established in a professional manner, and that if work stops or no progress is made for X numbers of days (yes, you need to check up on them) without notification that continued employment/payment is at the sole discrection of XYZ Company (you).
I would approach them by saying that the way you work is to streamline the process to be the most efficient and take delivery schedules, ordering, etc. out of their hair to free up their time so that they can focus on the project and getting paid. Just make sure you don’t drop the ball…
Thankfully I am beyond this stage in my investing career. I have a trusted team of individuals that I can count on. My main contractor, who supervises and works at the work site is awesome. I trust him so much that he holds an authorized credit card for Home Depot and bank issed Visa card that are in my name. After initial walk-through, he goes to the local hardware stores and picks up the materials he needs and then I review the receipts and match them to my on-line bank statements. It works very well. You would be surprised how much time this saves on the project. If he needs it he can go get it. As for the subs, the more you pay upfront, the less likely you are to see them working urgently to complete the job. Progress payments are fine but be actively involved with the rehab. Even with my 50 hour per week work week I am on-site every single day evaluating progress. And lastly(a little tip), After each job, I tell my contractor to go purchase a new tool on my credit card, $300 or less. This motivates him even more and when he puts those tools to work it makes him more efficient on future jobs. Treat your contractors right and they will work very hard for you. However, make it clear who is in charge and who holds the purse strings at all times.
If you’re in the process of overseeing your first property renovation you’re in for a real treat as you get a crash course in working with contractors. While most are professionals who are dedicated to doing the best possible job for you, there are some prima donnas out there waiting to take advantage of your naiveté. Here are some steps you can take before you hire a contractor to ensure that your first contractor experience is a positive one.
Have prospective contractors fill out an application – It may seem silly, but by having a prospective contractor take the extra step of getting an application and filling it out, you can assess how serious that contractor is in working for you. If they won’t take the time to fill out an application in order to win a bid, what makes you think they’ll take the time to follow up with more important details – like showing up at the worksite?
Get references and check them – Your contractor will probably offer to provide you with references when they bid on your rehab project. Most will have good references, but you need to know as much as possible about a contractor’s work ethic before you sign on the dotted line and commit to spending several thousand dollars on a project. When you call their references ask specific, pointed questions about the quality of their work. If they have a tendency to not show up for work, or worse – disappear in the afternoon, it can significantly impact the profitability of your project.
Get all bids in writing – I know you’d like to be able to do business with someone based on a handshake and a smile, but the reality is that memories fade and a good faith agreement can be misinterpreted by you or the contractor. A contractor is only human, and by taking the time to get all agreements in writing, you’ll have clarity in the event that a disagreement crops up later.
Work with licensed and insured contractors – Licenses and insurance are common business expenses, but too many contractors are running around without the necessary licenses and insurance. You may be provided with license numbers and promises that they have insurance, but I highly recommend that you take what you’re told with a grain of salt. As the owner of a property, you are ultimately responsible in the event that there is an accident or a fire. Make sure that their insurance information is accurate – and that their coverage is in force before letting them begin a job.
Visit one of their worksites – Wouldn’t it be nice if you could somehow magically know ahead of time what the quality of your contractor’s work will be? Fortunately, by visiting one of their worksites you can gauge the quality of their work and see how vigilant they are about keeping work areas clean. Before visiting one of their worksites, make sure you have permission to go. Find out if they’re the general contractor on the job or just a sub-contractor.
Don’t pay them until the job is done – One of the biggest perils you can face as a new real estate investor is that your contractor doesn’t cause dramatic delays by failing to show up for work when they say they will. Perhaps as problematic is the contractor that will prematurely suck the funds out of a project and then not want to complete the work. There’s really only one way to prevent this from happening. Don’t release payment until the job is done. You may be hit by pleas to release payment early, but if you do there’s a strong likelihood that your contractor won’t show up to finish your project. Imagine that your contractor has already been paid for finishing your job. Then after giving you a hard-luck story, you can’t depend upon him to return to finish your job. This could put you in the position of having to pay twice for the same job or having to postpone the process of renting the property. Obviously, you’ll need to release some money for materials or your project probably won’t get started. Just be careful that you control the purse strings carefully.
I don’t want to give you the impression that most contractors are lazy or unwilling to live up to their agreements, because that’s simply not true. The vast majority of contractors are as honest as the day is long, but by clearly defining expectations you can stop problems before they come up. By doing this, you can ensure that your interactions with your contractor is a positive one, and that you’re just as happy when you part ways as you were when he first waltzed into your life.
I am also a contractor an do mostlt rehabs. I will never in any case invest my own money to buy someone elses materials except when a job is only a day or two, floors, paint, small stuff then it is payment in full upon completion.
When working on a rehab I require materials in stages it is easier to just have them delivered for the majority of these stages. Roofing, drywall, etc. Smaller loads I will pick up as needed. I bid the job in complete and break it down into stages, here is whar has worked.
- Electrical, Plumbing=Progress Payment
- Drywall Hung, Finished, Painted, =Progress Payment
- Kitchen and Bath = Progress Payment
- Final Payment Upon Completion
Do not let your contractor jump all over the place hoping everything will come together magically at the end it will not. Start a project take it to completion and inspect it move to the next. Anyone who does this is a rookie and dangerous. AND to reiterate be on site daily it will keep your contractor moving and eliminate confusion, questions will come up be there to answer them.
As far as the money is concerned I like to get something in advance a token, this allows me to buy small things that come up unexpectantly and provide reciepts for the exspense. For example you do not want to lose the better part of a day over a few plumbing parts. Remember your contarctor will be spending money every day his own and it can get expsensive for us. I easily spend a couple hundred on gas and misc. per week.
Your conractor should be able to sustain through at least the first week and if not I would avoid them like a plague because that is what they will be.
If you have some of your own funds to invest I would contact the hard money lender and arrange to have funds released in stages. The way I outlined it above in easy to manange chunks should keep things simple for you, the contractor, and the lender. As well as keep everybody informed of their responsibility. You outlay the cash you have and the lender releases funds to cover what you have invested in order to move on.
If you cannot arrange it this way you may go to rehab hell and never get the project done. Your only other recouse may be to partner with the contarctor to do the flip, him supply labor you supply materials. Both get paid at the close.
My take as a Project Manger for Investors w/ Rental properties.
I oversee for the owners the entire project and do price comparisons on supplies, I bring in specific contractors for specific jobs and manage their work and payments for the owners. As a Project Manager, I require upfront funds for supplies and a partial upfront for labor with the rest released in stages. If there is any trouble with the work I manage that aspect also but I do not have to go to the extreme’s as I am on sight and my husband and I do alot of the work ourselves.
We oragnize all receipts and check them against projected costs so that our owners are advised immediately if there is a deviation and supply them with enough information and recommendations of work. By providing these services I relieve our owners of a lot of stress and action is taken immediately to correct and resolve any contractor situation.
We are in communication with our owners daily if need be for progress reports and handle all payoffs for contractors once their work is completed to our satisfaction.
This proves to be a very valuable concept for our property owners, investors and anyone new to purchasing investment propperties that may have repair needs. We then provide the Property Management Services to our owners. So managing their projects is like handling our own and we committ with the same deication after all in the end it is me that will be receiving the phone calls from the renter and managing their repairs. Protecting my owner’s assetts is the most important part of our working relationship. Cathy at DCB Services, llc dba Xtreme Clean
i agree. try not to pay anything up front. when work is paid on the percentage complete method… contractors seem to STAY motivated. also you need to think about protecting yourself. my first project we paid 7k upfront for some foundation work… the contractor bailed out and did not complete the work… I was out 7k…
I’ve been on both sides of this coin. Several have mentioned the best way to do this…pay for the materials yourself and pay for labor only. I would NOT pay one dime for labor until work is started and pay it in stages. Once work is started, some token funds for the small things is a good idea unless you plan on being onsite to be the errand boy for those things.
Well, we were trying to get a seawall and the total job is around $20,000. We were referred to this contractor by someone who works for the company that furnishes the product to make the seawall. We met with the contractor, agreed on a price and needed permit applications filled out and sent to Dept of Envt. Management and Army Corps of Engineers. This process takes about 2 - 3 months. During our first meeting and follow up calls the contractor first told us he wants 1/3 down before he even starts the job. We told him we could give him the 1/3 as soon as machinery is on job site as well as supplies (we thought that was fair). He agreed and told us that he would send the documents to the above mentioned authorities. It has been three months and he doesn’t return calls. His ‘wife’ and ‘friend’ have answered our calls on his cell and say he will call back. We contacted the authorities and they say they have no record of permit applications even though he claimed to have applied…
His 'wife' and 'friend' have answered our calls on his cell and say he will call back. We contacted the authorities and they say they have no record of permit applications even though he claimed to have applied..........
I think it is time to find someone else. :rolleyes
I just had a contract fall through bc i wouldn’t pay the contractor 1/3 at contract signing (4-5 days before work was to start). I agreed to pay 1000, (1/3 would be 2200) and they didn’t agree.
I was amazed.
They were a contractor referred by a local REI board, but I just don’t feel comfortable paying someone ive never done business with.
I aboslutely agree, NEVER NEVER EVER pay anything upfront. I always buy all the big ticket materials and have them delivered and give the contractor a $200 Home depot gift card, so I dont have to run for everyday small items, and get the reciepts from them as they spend and refill if necessary.
Just remember with the gift card, that the purpose of the card is defined in the work agreement and that advanced notice prior to purchase being made, along with receipt provided is required…
You wouldn’t want to become someone"s “Peter” in someone’s “robbing peter to pay paul” scenario…
Then again, using a gift card does limit your liability…