Decipher the Construction Code

Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Joe: We’re in the REI Classroom. FlipNerd is in the house. This is Joe Calloway at RE360 and RE Investor Professor. And today, I want to talk about one of the most important aspects of doing flips, rentals, or just investing in real estate in general: construction. No one likes to talk about the nitty gritty. I want to decipher the construction code and break down two important factors of making sure your flips go right.

Mike: This REI Classroom real estate lesson is sponsored by UglyOpportunities.com.

Joe: The two factors I want to talk to you about are subcontractors versus in-house employees. When people start out, oftentimes, they always say to me, “Joe, should I have my own employees or run my own construction crew? Or should I sub things out?” And I say, “Potentially both.” And the first thing people need to ask is, what are your capabilities? If you are a construction expert or you’re good at construction, good at management . . . You might have run a small construction company or a large construction company in the past, then that’s when it might make sense to run your own crews and handle your own employees.

Now, when you’re handling employees, it can be very tricky as well. There are good sides and bad sides to both. When you’re hiring people in-house to work on your construction crew, one of the hardest things to do is find good people. I think that’s in any business. Construction is extremely tricky because everyone says they’re a construction expert and then you realize, they start hanging your drywall or wiring your house and they have no clue about what they’re doing. So it’s hard to find good help.

The other thing is hourly employees, they’re paid hourly, they sometimes don’t care about shirking or taking their time. So then you have to manage that. So managing people is very, very hard within itself, let alone trying to manage your flip on top of managing all these people.

So it’s not as easy as you think to just have these hourly employees that you’re paying a good wage, but not as much as your subcontractor. And you’re going to cut all those costs because your subcontractor is working hard to get the done so that he gets a paycheck. Whereas your guys, who you’re paying hourly, are working per hour, and they’re going to make $10, $12, $15, $20 an hour no matter what they do, even if they’re asleep under your desk.

The other thing with employees, it’s a timely responsibility on the administrative side, on the insurance side, and you have to keep up. You have a ton of different laws and codes, you have to make sure people get paid and get paid properly, and you’re walking with the Department of Labor, which can be extremely tricky to deal with. So be careful when you’re hiring employees that you’re treating them fairly, you’re doing everything by the law. Because the Department of Labor can not only come and find you but they can also have you press criminal charges. So that can be very, very scary. So if you’re not set up to handle employees, just don’t it.

And that’s when I turn subbing it out. A lot of guys say, “I always sub everything out because it’s much easier.” And I would say that is correct if you get the right subs. Myself, we sub a lot of stuff out, but we also have an in-house crew and about 15 payroll employees who do a lot of our jobs. And the reason we use both is, our employees, we can manage it because I like to get out there and grind with the boys and manage the construction site. But also, I like to have the flexibility because on flips, when you’re doing order houses, renovations, bad things happen. And when you move and shake, it’s much easier to move and shake with your own team than manage a bunch of change orders with subs.

Now, subs, the best part about that is, for the most part, if you find a good one, there are a lot of bad ones out there too, they are in it to win it. That’s their business, it’s their lives. They want to perform and get the job done as fast as possible because you’re not paying them hourly. You’re paying them by the job. So you’re in line with that, assuming they know what they’re doing.

But that brings me up to the second point, not all subs are created equal. Just because they have a fancy ad, and a nice truck and they talk the game, they may have no idea what they’re doing, and you can get stuck with a lot of poor-quality work.

So if you’re managing subs, don’t forget the managing part. You have to manage them. Be on site. Watch what they’re doing, especially their first few jobs. Once you realize they know what they’re doing, they’re honest, trustworthy, good people, then you can slack off a little bit. But you’ve always got to keep an eye on them, especially in the beginning.

Liability for the sub or the payroll employee, you have liability if these people get hurt. So you’ve got to make sure you’re managing them in accordance with various different codes. Your employees have to have worker’s comp. Your employees have to have the proper insurances. Your employees have to be paid in accordance with the law. You have to follow safety guidelines. You have to make sure to provide them with the right safety equipment.

The subcontractor is responsible for a lot of that, but you still have to verify that they have the right insurances and that they are working in accordance with the Department of Labor’s guidelines on who is a subcontractor versus who is an employee.

So I’m not going to go into that because I won’t go into the Department of Labor inspection. It was eye-opening and, actually, it was a positive experience because we realized we were doing mostly everything correct. And it worked that well, and the person educated us a lot on the difference between the subcontractor and [inaudible 00:05:46] employee, a few things we have to watch out for the liabilities.

However, you need to make sure you’re educated on running a company, running employees. Just because you’re flipping houses doesn’t mean you are flipping houses and the construction company is an afterthought. You have to run it within the law and run a tight ship, watching people, watching your admin, watching your numbers, watching your payroll.

And if you’re doing subcontractors, that’s awesome too, but you still have to watch them. Just because you gave them a check and that you think they run a business, they might be just trying to make a check off you. So you have to manage that tight as well. Thank you and we’ll see you next time.

Mike: HomeVestors, the “We Buy Ugly House” folks, is a franchised system of hundreds of real estate investors that have purchased over 65,000 houses. If you’d like to learn more about the most powerful real estate investing system in existence, whether you’re a pro or looking to take your business to the next level or whether you have no experience at all, but a burning passion to be successful in real estate investing, please visit FlipNerd.com/ugly to learn more.

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