Learning about Contractors - Builders with Real Estate Investing

Learning about Contractors - Builders with Real Estate Investing GOOD LUCK!!! You will need luck with Contractors in the REI Business! Unfortunately, a few contractors have earned a bad reputation for ripping people off. Naturally, not all contractors are dishonest. Once you find contractors with whom you would like to work, be sure to visit their projects (completed and uncompleted) and check to be sure they are licensed and insured. Contractors are licensed individuals able to perform work, whether by their own crew or by subcontractors (including pulling permits), to property owned by others. Contractors generally hire subcontractors to perform the work that they are hired to do. A subcontractor is a contractor licensed in a specified field, such as a plumber, a roofer, an electrician, a carpet layer, a painter, or similar building professional. Contractors are paid by the seller and make their money by charging the seller more than they are paying the subcontractor to perform the work. For example, if you hire a contractor to replace your roof, he/she will call a roofer for an estimate. The roofer may give an estimate of $5,000 to the contractor, and the contractor will give you (his client) an estimate of $7,000 for the same work. Obviously, you will save money by cutting out the middleman. It is a good idea to learn the cost of materials and supplies. You can accomplish this by visiting your local home improvement center. These stores usually offer free classes teaching how to do many repairs. The benefit of learning about cost is that you can figure out how much you are being charged for labor. Remember, all estimates are negotiable. Don’t rule out the local “handyman” if the work you need to complete does not require a permit. In other words, most cosmetic repairs can be done by you or anyone with experience repairing minor problems. Be sure not to pay anyone up-front or in full for incomplete work! Until we develop a great relationship with a contractor, we do not pay anything up-front. Instead, we pay “in draws”. For example, when a job estimate is $4000, regardless of the estimated length of time for completion, we pay the contractor approximately $1,000 upon providing receipts of such an expenditure. In addition, we inspect the property to be sure the receipts cover work to our project. One of the reasons we disburse in this manner is to ensure better workmanship. We find that if we pay workers up-front, their incentive to finish the job in a timely manner and perform a good job is diminished. When the contractor says the job is finished, go through your list before making the final payment. When you inspect the property, you may find a few items you want finished or changed. Reserve the final payment until the list is completed. We find it difficult to get contractors to come back to finish small items once they have been paid. We also want the work completed quickly so that our holding costs are lower. We put a clause in the contractor agreements stating that if they don’t finish by a certain date, we will begin deducting $100 (or any agreed upon figure) per day from our balance until they are completely finished. Likewise, if the job is finished by a certain date, we may offer an incentive. It is possible to “partner up” with a contractor or handyman. For example, offer the contractor a bonus to complete the repairs, including materials, and wait until the property sells and closes before receiving full payment. Or, offer a portion of payment now and the balance, including a bonus, at the closing. It is possible to have the closing agent issue the contractor a check directly from the proceeds of the sale. This might be an incentive for the contractor to finish quickly and perform better work. The purpose of the “partnership” is to save on out-of-pocket expenses now. As you begin buying and selling more than one property at a time, you may want to hire additional contractors. Don’t get exasperated, because like other investors and ourselves, you will go through many contractors!