One of the hardest aspects of the fix and flip business is working with contractors. You have probably heard, experienced, or know someone that has been ripped off by a contractor.
Happens far too often!
At LVN Real Estate, we have bought and flipped hundreds of houses and still to this day, it happens to us more than I’d like to admit. Shoddy work, not finishing, not doing what was agreed to, late on timelines, etc. It all costs us money and we try to do everything we can to avoid these issues. It happens to the best of us though!
Here are five common practices we use to try to ensure these things don’t happen and we can get to the finish line as smoothly as possible.
1. Vet the Contractor
Where you find the contractor is important.
Is it some guy from a random Craigslist ad or is it a referral from a fix and flip buddy, family member, etc? You want to hear good recommendations from trusted people you know. This is the first step in the right direction. The second step is vetting their work. Go to some of their job sites, talk to the people they are currently doing work for or past clients. Next, look them up online. Do they have any negative reviews or were reported to scam sites? Do your research before giving them money!
Once you have found the guy you want to work with and worked out pricing for the job, the next step is to put it in writing. A handshake simply won’t do in today’s world. That signed paper with terms and expectations spelled out covers you in case of a dispute. You can always refer back to this when they bring up extra items or things they “forgot about ”.
Keep ’em honest and put down as much detail as possible in your contacts. Getting an attorney to review or draft it up is a good idea and well worth the money. This document will serve you for a long time and can be reused with new contractors.
3. Timelines / Payment Schedule
In your contract, you should have clear timelines and payment schedules. Avoid giving large chunks of cash up front. Been there, done that! You pay them and all the sudden their phone isn’t working and there’s a million and one excuses.
If they need money for material, buy the material. Maybe a small down payment if you feel really trusting and good about them.
Giving large chunks upfront is a bad idea and doesn’t put you in the driver’s seat.
In your contract, you should spell out expectations of what work will be done by what date.
We typically look to release 3 – 4 payments throughout a job if we are working with a GC. This is called your draw schedule. After they complete the items in the first draw and you have inspected the work, you then release the money. Before you release the money, you will get a partial lien waiver from the contractor though. This says that you have paid them up to X date for X work. This also helps cover you if they claim you owe them more for work that wasn’t done in case of a dispute down the road.
4. Weekly Check Ins
Working with contractors can be like herding cats… seriously! You show up at the job site and no one’s there because they got some other higher paying job and are doing that before your project. There’s a million excuses where they are at and why they couldn’t work. Usually it’s around some sort of blame on you that you don’t have the proper material there or something along those lines.
Communication is everything to getting your project on time and on budget. Call them and check in regularly. Go to the job site and check on their work. Tell them you’ll be there Friday to make sure it’s on track so you can release payment.
You must make sure they can feel your urgency and expectations for this job to get done like you agreed to in the contact. If you get busy and forget about the job for a month, you’ll likely have issues or lack of progress. Over communicate and check your projects for best results. If things aren’t getting done like agreed to, don’t be afraid to cut them loose.
We’ve spent far too much time holding onto a contractor’s word and letting them drag us along just to cut them loose a few months down the line. They get a few warnings and if things don’t change, they’re gone and we are onto the next. Time is money, people!
5. Hold Backs / Finals
When it comes to money, the goal is to always be ahead of the contractor. When I say be ahead of them, this means they have done more work for you than you’ve paid them for. This will give you the upper hand in negotiations and put you in a good position if you need to cut them loose. When the job is nearing the end, you will want to make sure you finalize the property before paying them. On a regular basis, we have contractors tell us they’re “done” only to show up and the toilet isn’t installed and a mirage of other things aren’t completed. Their idea of “done” is usually different from our idea of “done”. Then there’s all the little nickel and dime items you’ll find. Scratched paint, didn’t install vent cover, no light bulbs, etc. Go through the house thoroughly and check everything. You could even hire an inspector to come through before they put the house on the market in order to catch all the little things you can’t see with plumbing and electrical items. This is cheaper than the contractor being gone and paid and then having to bring in another one to fix a bunch of their work because they won’t honor their work.
There’s no “if’s”, “and’s”, or “but’s” about it. If you fix and flip houses, you are going to run into contractor issues. It’s the name of the game. At LVN Real Estate, we still have these issues I referred to above, but we mitigate a lot of them through these 5 steps. Good luck out there and stay safe!