How to Work with Contractors

Mike: This is the flipnerd.com Expert Real Estate Investing Show, the show for real estate investors, whether you’re a veteran or brand new. I’m your host, Mike Hambright and each week I bring you a new expert guest that will share their knowledge and lessons with you. If you’re excited about real estate investing, believe in personal responsibility, and taking control of your life and financial destiny, you’re in the right place.

This is episode number 313 and my guest today is Ron Carlson, the founder of Renovation Gurus. Ron started a general contracting business after struggling as an investor to find good, reliable contractors, a problem that a lot of real estate investors have. So today on the show, we get into a lot of important details that we haven’t talked about really all that much on the show before after 300-plus episodes here, including how to find contractors, different types and levels of contractors, and how to avoid a lot of common mistakes with hiring and paying contractors.

He goes into what to look for in terms of whether things are potentially going to go south, when you start having problems, when to interject and the right questions to ask, a lot of common mistakes that people make. So if you rehab houses or maintain rental properties or do make readies, anything like that, you’re going to learn a lot in this episode. So don’t miss it.

Please help me welcome to the show, Ron Carlson. Ron, welcome to the show.

Ron: Hey, man. How are you doing?

Mike: Good. This is a topic near and dear to my heart because a lot of folks know I’ve primarily been a rehabber. I’ve rehabbed hundreds of houses over the past several years. Sometimes people ask me questions like, “How do you find contractors?” and stuff like that. I struggle with it a little bit because I have been very fortunate to have found a really good contractor that like I said, is in many ways kind of like a brother to me now.

I trust this guy implicitly. We’ve been together for a long time. There are none of the traditional issues that a lot of people have about contractors about trust, reliability and stuff like that. We have that relationship. I feel blessed in that regard. But I know a lot of people struggle with finding good contractors and I have too, certainly with different subs or specialists and stuff like that. We still have problems.

I’m excited to talk about finding contractors and kind of what questions to ask and making sure that you find the right people to help you get your job done efficiently. So welcome to the show. Sorry, I was long-winded.

Ron: Thanks, man. No. I think I can help answer a lot of your questions because we’re in the trenches all the time in this particular field.

Mike: Yeah. Well, tell us your story a little bit about how you got into being a contractor. We’re going to talk ultimately a little bit about the difference between a contractor that works with investors versus kind of a retail-type contractor, kind of the differences there.

Ron: Sure. So a long time ago, I really started reading books on real estate. I decided I wanted to try this out. I started wholesaling, took some classes on wholesaling. I realized I was giving away a lot of my equity. It’s a great exit strategy most of the time, but sometimes you’re giving away a large percentage. That’s why it’s called wholesale.

We started flipping houses, doing pretty good. Our contractor was actually working with the home investor guy and the home investor guy was increasing the volume. We were increasing the volume. And the contractor just broke. He couldn’t run 20 houses at the time. He was only about 4 crews or a 16-man team.

And it worked out really good, but we were like, “We’ll just hire more contractors.” We didn’t know what we were doing on contractors because overall he treated us really well. This contractor we were working with is kind of like your friend. Maybe he is your friend. I don’t even know. But he just wasn’t big enough. So “We’ll just go hire a couple more, a couple more.”

We started hiring other contractors. We found out okay, they weren’t showing up on time. They weren’t doing quality jobs. They weren’t bidding the jobs properly, something like that. One guy in particular, his name was Roger. Don’t hire a contractor named Roger. Just joking.

I didn’t realize how he stole it and I didn’t know that he actually stole it from me, but he took about $21,000 on one house and $24,000 on another house. What I mean by that is once I fired him, that’s how much money it took me, more than what he bid me, to get it all back together. There was material lists and bad quality, that kind of thing.

Hired another guy. He hit me for a 30% change order at the end. When you’re doing a high interest loan or a hard money loan, 30% is a lot of money. You’re like, “Oh man, [inaudible 00:04:35] didn’t give that to me,” so you’ve got to come up with that.

Ultimately I had about five houses going that were my own personal houses. I fired everybody, had a couple vacant houses. I sat down with my business partner and said, “We’re a construction company and we’re going to figure this thing out on our own.” We started to rehab our own houses.

We started to build processes and systems. As the client, what do I want from my contractor? As the contractor, what should I be giving my client as far as emails, estimates, accurate estimates, estimated timeframes? What are we going to do when something bad happens? It’s rehabbing houses. Something bad happens on every house right?

Mike: Right.

Ron: There’s always evil there that you didn’t know was there, especially when you have hoarder houses or floods or burnouts or something like that, conversions. So we just started rehabbing our own houses. We didn’t have tools. We didn’t have any crews. We hired a whole lot of people.

We fired a whole lot of people. We started to see patterns. We started to see this particular type of contractor, when this happens to him, he shuts down or, “They have to get paid by this or they’re not going to work right because they need money for the crews.” So we started to be a little bit more fair with them, I guess, instead of so stringent, we took a lot of hits, learned the construction world, but ultimately we built a construction company.

We’re doing about 30 rehabs a month, something like that where we’re working with hedge fund companies, property managers, a lot of flippers, some landlords. We typically don’t do your mom and pa restorations. When Grandma calls me for a bathroom, we don’t do it. When Aunt Susie wants a kitchen, that’s not what we do. We like them vacant. We like them dirty and we like to just go to town on them. I don’t want to go fix a leaky faucet, if that makes sense.

Mike: Right. Talk a little bit about the difference. I know all contractors aren’t the same. Over the years I’ve tried different things. I’ve talked to different people. You’ve got the person that is coming around in the wrapped vehicle that you can tell has a lot of overhead. You’re like, “That guy is not going to be cheap.” You’ve got the guy who calls on the way there because he doesn’t have gas money to get there and everywhere in between.

And then of course you get the retail people too that I would have maybe work on my own personal house because I want some things that are not as important to me on an entry level kind of rental property. But talk about all the different flavors, if you will, of contractors.

Ron: There are really two breakdowns of what you’re talking about, the retail, it’s just a beast on its own and I’ll touch on that first. From the other question you’re addressing, it’s really type of management, it’s how much you personally want to be involved. If I can put them in classes, the lower the class of the contractor, the more you need to be involved morally.

Let’s talk about the retail client first. They’re just a different animal. They’re not investors. They don’t think like investors. They want different walls painted different colors. They want different textures. Typically specifically when you’re rehabbing a property that they’re living in, now you’re moving all their stuff so you can repaint, you can retexture. You’re tarping. You’re throwing plastic. Inevitably you’re going to break something. You accidentally bump their hutch or their heirloom their grandmother gave them.

You’re getting dust everywhere. They’re trying to sleep in the closet and you’re trying to rehab the living room. It’s just a different animal by the nature of that because they’re a little bit more time consuming and a little bit more tedious. They are very picky on everything, quality, on price. You’re going to charge them a little bit more because the truth is, there’s probably twice as much work going back and forth choosing colors and that stuff than an investor.

Most investors that we work with, they give us some free rein. Some of them want to be involved, some don’t. The best ones for us are, “Hey, look. Here’s my budget. I don’t really care what you do with it, just do it nice.” We like those because they’re vacant. I typically do one color on all the walls. It’s typically one color pattern.

Let’s say I have an investor I’m doing a lot of houses with. I know it’s the exact same vinyl plank, the exact same laminates, exact same carpets, exact same exterior color. That cookie cutter is really good. There are some flaws in it. With the investors, they’re typically like, “Hey, look, just put a nice tile in there. I don’t need a $5 or $10 tile. The $1.99 or the 59 cent stuff will work as well.

Mike: Sure.

Ron: Part of that is the ARV of the property. The higher ARV, you’re going to use better quality products. But there’s a way to use low quality products and make it look high end as well.

Mike: Yeah. We were the same for my business. We’ve rehabbed hundreds of houses. I think in every situation but a couple we used the same paint color for everything. The couple times we didn’t, they were like higher end houses that we tried to get creative and make the bathrooms a different color. We ended up regretting that because then you’ve got to go back and do touch ups later and stuff doesn’t match. It was a lot of issues.

So kind of streamlining that, we use the same carpet and the same tile until they’re out of it, then there’s usually some replacement that’s pretty similar and keep it pretty similar over and over again.

Ron: Yeah. One thing when you’re building that cookie cutter program if you’re an investor doing four houses a year or something like that is actually re-getting the material. There are some scratch and dent places or some outlet stores that you can go in and buy leftover tile. That’s awesome. You might have a good deal, but if you’re 10 square feet short, you can’t get anymore. Now what do you do?

So when you’re building that cookie cutter program, you want to make sure that you can get that same material over and over and over again.

Mike: Yeah. Let’s talk a little bit about how you . . . folks that are listening to the show right now, I think one of the benefits of doing volume is that . . . we can talk about contractors, like working with clients that you work with kind of an ongoing basis. It never stops. You’re doing a house or five houses a month for that person.

Then the investor that might be listening now who does two or three houses a year, not necessarily with your company, but with other contractors, what I found was on the contracting side, let’s start there, if I’m important to somebody as a customer, I’m their primary source of income, they’re reliable to me because I’m going to give them the next job and the next job. Where I know that folks that do a house and don’t do anything for two or three months and do another house and they call that person, that person is on to the next thing. So it’s hard to expect a contractor to be as reliable.

The same thing happens with materials. It’s hard to get efficient because two or three months later, the materials have changed. Some of them have, at least, or the reps that you used to talk to have changed jobs. Maybe talk about the difference between doing small volume versus larger volume as an investor.

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Maybe talk about the difference between doing small volume versus larger volume as an investor.

Ron: As an investor in smaller volume, it all depends on experience too. You can do 4 houses a year and you’ve done 100 houses, that’s a different client than if you just started and this is your very first house.

Mike: Right.

Ron: Typically if it would be your first house, you’re going to make some mistakes. You’re going to try to get more involved than you might need to, but you’re trying to get involved because you don’t know the contracting world. There’s a rhyme and a reason for us as contractors to work with the smaller guy, if they’re doing like four houses. Same on the bigger guy. On the smaller guy, you just have to be more cautious.

I was thinking about this last night. When you’re hiring your contractor, a lot of people aren’t going to like that I say this, don’t hire your friend and don’t hire your brother, your sister or relative because typically you need to be able to hire somebody that you can fire. Without experience, you don’t know how to indicate whether you need to fire them or not.

Mike: Right.

Ron: First getting started, do your due diligence first. Do your due diligence one, on the contractor and try to get at least a material list. For example, if you went to Home Depot or an outlet store or something like that and say, “This is the laminate I want, this is the color paint I want.” If you do that prior, then it’s easier for the contractor to bid you out properly.

When you’re the big guy and you’re doing 20 to 30 houses a year or whatever that number is, anything probably more than five houses a year, well then you and your contractor probably already have a relationship. He’s already bid you out on I know what kind of flooring, I know what kind of backsplash. But the little guy has to be a little bit more ahead of the game because if they’re not, they’re going to get a bid and then they’re going to come back and be like, “I really wanted hardwood floors, not engineered hardwood floors or something along those.

If you have your materials set aside in the beginning, you’re going to get a more accurate bid and then I always probably use three contractors that can show you their work, not just say that they’re contractors.

Mike: Yeah. Any other kind of tips you have on how to . . . I think it’s a natural problem to be an investor and kind of know in your mind what you want done, but it’s hard to communicate that sometimes or you may think you communicated it but they didn’t read it that way, so they come back later and say, “I didn’t include that in my bid,” for example.

So one way I’ve kind of found . . . I’d like to hear your tips on this. I’ve had a little bit of a different situation because I’ve had one person that’s not done every house I’ve done, but kind of been fortunate there. But is to basically say high-level stuff that I want for the whole house. I want switches and outlets changed in the entire house and then kind of get in the specifics of the rooms.

The bedrooms, I want new baseboards, new doors and new ceiling fans or whatever it might be. But sometimes we think, “Well, of course I wanted all that,” but we didn’t communicate it and the contractor wants to get the job, so they bid it on the low side. Then you come back later and say, “No, I wanted this,” and they’re like, “I didn’t include that.” That creates all this friction, right?

Ron: Sure. So I have perfect examples of this. My best solution to your answer is get as much of it as you can in your original contract and in writing. What you said or what you say when you’re on the job, everyone is going to forget it. Everyone can have their own side of the story. I said this. You said this. It’s a he said-she said war.

But when it’s in writing, this is one thing that we learned when we first started doing the remodeling. For example, contractors that we used to use, they would do something like kitchen, $5,000. Literally the first contractor I was telling you about that was working with this other home investor guy.

I’ll give you a perfect example. He told me the kitchen would be a certain lumped price. I show up and I was like, “Hey, man, where are you going to install the granite?” He’s like, “Oh, the granite wasn’t a kitchen product. You’ve got to call the granite guy.” I was like, “Well, that was $1,200.”

Mike: Right.

Ron: Then we saw the granite and I was like, “Where’s the backsplash?” He goes, “Oh, that wasn’t in the kitchen price.” And then my kitchen price was this and this.

Mike: Exactly.

Ron: Same with hardware. He didn’t have hardware on there. So it was $400 for the backsplash, $1,200 for granite. Some people don’t realize they go hand in hand. When you’re doing granite, you’re typically doing new sinks, new faucets. He was going to use my old faucet on my new granite. Well, I don’t really want you to use my old faucet. I want a new faucet. That thing looks dingy.

So getting it in writing is huge. So what we did in return, when we first started, we started with clients and we had the same problem. “You told me this but I thought that texture and all the tape and bed was included in your paint price.” “Well, no, paint, bed, texture and paint, they’re all separate costs. It costs us as a contractor a little bit labor and material for both of those.”

Once we started breaking it down by line item, now when we write a kitchen bid, it will be something like this, “Upper cabinets, lower cabinet, this amount of square footage for granite, this amount of square footage of backsplash.” We’ll sometimes even put in there that the backsplash is tiled, can’t exceed $1 or something along those lines, an underground sink, a P-trap, a garbage disposal, electric plugin to the garbage disposal. You can install a garbage disposal, but if there’s no power going there, now there’s a little bit of an extra cost involved.

Mike: Right.

Ron: Hardware, hinges, resurfacing, GSEIs, the actual faucet itself, the cutoff valves below. We’ll itemize each one of those and we’ll put $10 on each one or whatever that price is. Then when there’s a discrepancy, we’ll say, “Hey, you weren’t bid on this,” or, “You were bid on this. This is what was included.”

So getting this specific, and it can actually be, I don’t know the right word I’m looking for, but very tedious. I want everything written out. Ceiling fans, am I going to put a white flush ceiling fan in there, one of these $30 ones, or I’m going to put a $200 ceiling fan in there that has motion sensors and a switch, a little remote I can change it on.

Mike: Right.

Ron: Be specific on that type of stuff.

Mike: Yeah.

Ron: Typically when we’re working with investors, I’m like, “We have a $5 budget for this, price per square foot,” and then I’ll come to them and say, “What color do you want? Here’s what you can do.” Sometimes they’re like . . . here’s a perfect example. You’ve got to know how your contractor is bidding it as well. Is your labor, material and your tax and install in their markup all included in there or is it not?

We did a house for a homeowner just recently. We try not to do that but we did one in Plano. We had on the granite, a certain price for the granite. That included our mark up, the install, all that. He went to the granite store and he found one that matched our price, but that did not include install. It was higher level granite.

He said, “You bid me out at $37. This one is $36. You can install this.” I’m like, “The price of the granite is $36, but what about the labor? What about the cutouts? What about the install? What about the polish? If I had all that, I still have to install it. I guess we can just throw a slab in your kitchen.”

There sometimes is a discrepancy on that that you want to be specific on and what does the bid actually include. There are really about four things. You have labor and material, tax and mark up. Who’s paying for that? Is the contractor paying that or are you paying that, or is one paying a portion of that? If you break that down in the beginning and it’s really detailed, you’re not going to have as many problems.

Mike: Who breaks that down? So you’ve learned the hard way, right? This is kind of how you got to where you are, but a lot of investors, they don’t necessarily know. They’ve never installed a P-trap, they’ve never run electrical to anything. I’m in that group. And I’ve done so many houses that I know a lot of that stuff. I know what has to happen. I don’t know how to do it, for example.

Who’s actually preparing those detailed bids? Is it the investor saying, “These are all the things that I want?” or are you saying that you should only work with a contractor that bids jobs at that much detail?

Ron: The truth is if you’re rehabbing houses, you need to get some education on the construction or you’re going to get taken advantage of. One good thing that I always encourage people, especially when they’re new . . . when they’re seasoned like yourself and they have a contractor, you guys are speaking the same language, having lunch together, every once in a while, he’s probably come to your Christmas party or whatever. That’s different.

But in the beginning stages, you’re building that relationship and the contractor doesn’t trust you and you don’t trust the contractor, right? You’re both trying to be as safe as possible. When you’re new, you don’t speak contractor. You don’t know what a P-trap is. You know there’s plumbing under the sink. But plumbing under the sink, there’s an air gap valve, there’s a bunch of different plumbing. There’s not like one piece that goes under the sink.

Comparing bids, if you get two or three bids, which by the way are really hard to compare contractor to contractor, but if you get a couple different bids, then when this contractor bid me on this on the kitchen, this contractor bid me on this, you can kind of look through each other’s bids. And then question the other contractor, “Well, does yours include a garbage disposal? This contractor is going to put in a garbage disposal. Is that a level two granite or level three granite?” There’s a price difference between the two.

“Is it a tile backsplash or no backsplash at all? Are you driving electrical or are you not?” If you get three bids, one contractor will get most of it and the other two will get the stuff that the other contractor missed.

Mike: Yeah.

Ron: Otherwise you’re going to get hit with a change order probably. If they’ve missed something you’re probably going to be hit with a change order or you’re going to have some friction between you and the contractor as far as, “You said this but it was another thing.” In my opinion, that’s why most contractors get fired, “You said you can do the kitchen for $5,000. I thought that included appliances.” “It doesn’t include appliances.” “Well, you’re a joke. Beat it, nerd.”

Mike: Yeah. Let’s jump into the taking action segment in just a second. I know I want to tell everybody that’s not going to see this part, I want you to jump over and see it. We’re going to talk about how to find contractors, what questions to ask. I want to talk about how to pay contractors the right way to minimize your risk and all those things. Let’s go ahead and jump into that. Let’s talk about first what do you think are the best ways to find a contractor?

Ron: I find that a lot of hard money companies know a good contractor.

Mike: Yeah.

Ron: Word of mouth referral is good. There are some things like, this is just my opinion, Craigslist, Angie’s List, things like that you just want to be real skeptical on. It’s just mass marketing at that point. There’s no actual referral. Actually, a referral is 100% the best.

If you know somebody who had a good experience or when you’re trying to hire a contractor, don’t talk to somebody . . . talk to somebody that they’ve done work with and that they’re currently working with. A lot of contractors won’t let you know who they’re currently working with because they’re doing that person wrong somehow. But if you can talk to the owner of a property they’re currently working on, that will keep you safe of anything.

Hard money lenders are a good resource. Sometimes you can go to the local REIAs. I’m not going to lie, sometimes we grab people off the street. But we know how to talk to those people to see if they’re qualified. Our network is big enough right now, typically I’ll say, “I’m looking for another framer. I’m looking for another AC guy,” and I start asking contractors I’m currently working with and they’ll give me good referrals.

The truth is I still, even on a referral basis, I still . . . not all of them are good. You take a risk with them every time you use them the first time and you’re going to be a little more strict with them and they’re going to be more strict with me.

For example, I have a guy I just hired. We haven’t worked with him before. He wants me to put 50% up front. I’m real hesitant on doing that because I don’t really know him, versus a guy that I’ve worked with a long time, they won’t even require anything because they know I’m going to pay them at the end.

So the best way to find them, referrals if you can. Hard money companies is the second. Networking is the third. Other than that it’s trial and error and you just have to learn how to safeguard yourself to not be in the situation I got in.

Mike: Yeah. I agree. I’ve always said that word of mouth from other people that have used them . . . you start to get to people that have some concern about protecting their good image, right? So if you’re referred from somebody or a hard money lender or somebody that’s at a REIA club, if they screw you, then it’s going to hurt them because you’re going to go back and tell whoever told you and that stuff is kind of viral, like, “Don’t ever use this guy.” We all have that blacklist.

Ron: The people at the REIA clubs tend to be a really good asset, but be careful with those people because they may refer somebody who sponsors a group, but they don’t use that person themselves. So make sure you ask who should I use, then they refer a sponsor. Well, do you use them yourself? If so, why or why not? There may be a good or a bad reason why they don’t use them. But the people . . . I think there are like 45 REIAs just in our area. You can find that specific person. Most of the time they’re pretty open to talking with you.

Mike: Right. What are some of the questions that you ask contractors? Sometimes you’re trying to see how they react to me asking something. What are some good questions that you can ask contractors to feel out whether they’re the right fit or not?

Ron: It depends on the type of contractors. I kind of have three categories of contractors that I personally have classified. I have a handyman and the day laborer. They’re kind of one guy to me. I have the chuck in a truck and then I have the general contractor. So I’m going to ask each one different ones. Specifically when we’re trying to pre-screen people, we’re asking them what they do and how they do it. The more rehabs you do, the more you’re going to know what to ask.

But for example, paint. If I’m asking a guy, “I want you to paint this house. How are you going to do it?” I’ll be very vague knowing that I’m looking for certain things. For example, if he’s spraying, I’ll ask him, “What kind of tip are you going to use?” He should be using a 315 or a 415 or a 310 or some type of tip. If he doesn’t know the type of tip, that would tell me that he doesn’t know how to spray a house.

Mike: Right.

Ron: Or like in an apartment situation, this doesn’t make sense unless you’re a painter, but people have oils and grease in their hair and they’re rubbing it all over the walls and you can’t see it as a person but you know it’s there. When you paint it and you paint it with a normal paint, then it’s going to peel in those particular areas where they’ve been touching their head on and stuff like that.

If you’re a good painter, you’re going to know how to prep it and clean it and I’m going to ask them things like that. For example, on exterior, I’m going to ask them, “Where’s the drainage going to go on the down spot for the gutters?” If they don’t know how to figure that out, I’ll know that they’re not a good gutter guy. You have questions on the bathroom, the kitchen. Those are the ones that people get in trouble the most.

Flooring would be the next one. Travertine, for example, it costs more to install. It actually takes a special saw to install it. I’ll ask a guy, “How are you going to install the Travertine?” And if they tell me they’re going to use a normal wet saw of they’re going to cut it by hand, I know they’re not going to give me the quality I want, plus they’re going to waste a lot more material that’s going to cost me more money than if I hired somebody who knew how to do it in the first place.

Mike: Yeah. I think one problem I see a lot of investors make, I think, is they try to . . . the end goal they want is they kind of want the general contractor approach of like, “I have a touchpoint with one guy and he’s going to figure it all out for me,” but they try to turn people into something they’re not. So for example, a day laborer type person, “Hey, I have a hoarder house. I need a group of guys to take it out and put it in a dumpster.”

Ron: Perfect for day laborers.

Mike: Anybody could do that. But then it’s like, “That guy seems pretty good. I wonder if they can paint.” Then you try to turn people into something they’re not. It’s like, “I want to give them a chance.” What you’re really trying to do is simplify your own life. That stuff probably comes back around, right?

Ron: I have a really perfect example of this particular situation. When I first got started, I had a good relationship with my foundation guy who had done a lot of foundations for me. He said, “I’m Mr. Fixit. I can fix anything.” I put him in about two houses. They went okay. He didn’t really know what he was doing but he figured it out.

Then I put him on a little bit bigger job, a job he wasn’t qualified for, and on the last couple houses, he was buying cans to spray texture. You can actually buy like a foam can. It just looks like a big thing of mush when it comes out. He’s like, “I textured the ceiling for you.” I’m like, “That’s not really texture.”

So when I put him on this big project, there were a bunch of racks all over it and everything. He decided, “I’m not that good at texturing. So I’m going to rip off all the sheetrock. It’s easier for me to replace all the sheetrock.” Right about the time he did that, the city came in. Since we took out the sheetrock, we had to bring the whole house up to code. So now we had to rewire. We had to reinsulate.

But he was Mr. Fixit and I had faith that he would fix it right. There were a lot of things. A tile, for example. There’s a special tile that goes on the bottom of a bathroom shower and is made to bend like this because there’s a curve at the bottom of the shower.

Mike: Sure.

Ron: Well, if you put normal four-inch flat square tiles there, you’re drain will leak eventually. It may not leak today but it will eventually leak because you can’t go down a slope with a flat edged tile. There were things like that that handy man we’ve hired have done or rewiring plugins backward and you then you have dead switches and stuff like that.

So hiring somebody who . . . paying somebody a little bit more who knows that particular industry like a framer, for example, don’t just a pay a handyman to be a framer. There’s [inaudible 00:30:51] to framing. They may frame out one wall in two days where a framer can frame a whole house in a week

So definitely I’m a big, big fan of paying people for their specialty and not trying to get by with getting a handyman who I’m trying to make into a painter or texturer. There’s a time and a place to do that. But you need to be a big player. You need five or six, seven houses a month to train that guy how to do it right. But if it’s just, “Hey, I’m going hire a handyman for today,” chances are you’re going to have a lot of problems.

Plus you have a warranty issue. If you hire a handyman or a day laborer and they do it wrong, you’re going to end up paying somebody to do it right, do the demo and repay for materials. It’s way more expensive if they do it wrong.

Mike: I think that’s one thing a lot of investors don’t look at is the cost of having to redo it or the cost of your extra time into it or whatever those things are. I’ve kind of always been . . . as investors, we’re all frugal, right? We want everything done as cheap as possible. But there is a balance. I know that like with my contractor, truthfully he may disagree. He probably thinks I’m always trying to cheap out on him.

I think I pay him more than I would the average person, but I know it’s going to get done. I know there’s going to be no drama or there’s not going to be any drama that bubbles up to me. There will be some drama and he’ll take care of it and that will be that. That’s worth something to me. So I think there definitely were times early on where I did things that had to be redone or whatever. That all costs you time and money and that’s one thing you’ve got to consider in this business. It’s a real expense. Your time is worth something.

Ron: Sure. You also have opportunity costs in there as well. A lot of people try to hire handymen or day laborers and they want to GC it themselves. They come in, “Hey, I want you to do this, this and this.” Well, then they’re managing their own job and they’re not only looking at other houses. You might pay a couple thousand dollars to have it GC’d, but you’re going to make a lot more if you just go buy another house and make $30,000 on it.

Mike: Absolutely. Yeah. Let’s talk a little bit about paying contractors. I know that’s always an interesting subject. Obviously contractors, they like to be paid in full. The investor doesn’t want to pay anything until their done. There’s going to be a balance there. Talk about some red flags if you hear contractors say things and then maybe your thoughts on what is probably the right mix.

Ron: Yeah. At some point, you’re going to have to trust your contractor and someone’s either going to have to do work for free or get paid. I like to pay contractors as little as possible until further notice. I don’t like to pay anybody until the job is complete.

Sometimes we hire crews for our house and they’re outside of our company crews and we’ll just break it down, “I’m paying you this for this, this for this. Once this is done, then I’m going to pay you.” In those situations, I actually like to pay for the material and then they do their labor. Once their labor is done, then they’ll get paid their labor. But I don’t like to give them the material money, give them the labor money to start and then they don’t do it.

Now, like I said earlier, the more you work with a contractor, the easier it’s going to be. So pay them as little as possible, but what is fair you have to decide. It depends on the size of the project. For us in house, anything under $2,500, we require $2,500 in full, mainly because I can do $1,000 for $2,000 a day in work. So I just don’t have time. It’s such a small job with such a small profit margin on it, I don’t have time to call you for a week to see if [inaudible 00:34:32].

If it’s something like a $40,000 job, we might break it up into four 25% payments. From a contractor standpoint, I don’t actually make any money unless I’m stealing it from you. There are those guys out there that do that until the very end of the project. From a contractor, you take the money, you need money to pay the labor and pay the material to start the job to get to the next portion, but there’s a way, if you itemize the bid, if you have a bid that’s itemized from a client, just with caution, give money upfront is what I’m saying.

How you would screen that is call references. Make sure the references aren’t family member or prior employers or friends. Somebody that actually has done the work, “Hey, did you complete the job? How much did you pay him upfront?” If you ask that type of stuff and get it out of the way, then if you ever feel like the work isn’t getting done and you should not pay them, don’t.

You’re going to come into . . . there are some other things that are going to procure from that, but if you don’t feel like the quality is good, then don’t pay them for the quality. If they installed their floors and they’re all warped, if they have drip marks on the paint, “Well, I painted the house.” “Yeah, but it looks like a three-year old painted it,” then don’t pay them for the paint because you’re going to need that money to do something else.

It’s really that first draw payment that you want to pay them as little as possible on and be as frugal as you can. You have to have faith at some point they’re going to do you right. Most require something upfront.

Mike: For sure. How about right at the end? We talked a little bit about this before we started the show today. Inevitably what happens is they’re going to think they’re done, but you walk in and you’re like, “We’re missing a light cover over there and this light’s not working and that fan doesn’t have bulbs in it.” There’s always that stuff.

But then there’s the stuff when you go to sell the house that an inspector will catch, stuff that should have been done right the first time and wasn’t. There might be some stuff in there that was out of scope for the rehab you did and you still agreed to do it. You of course need to pay someone to do that. How do you prevent being left high and dry from a contractor that you’ve effectively paid in full or close to it and they’ve moved on to the next thing but there’s some work that needs to be done.

Ron: Yeah. So there’s a couple things there. One, if you’re paying that handyman and that day laborer, you’re probably not going to get a warranty and that guy is probably never coming back. It’s just true. Chuck in a truck, the guy who specializes in one field, he’s probably going to come back. If you installed an AC and for some reason the condenser is not working. He’s probably come back and help you out. Most general contractors, they should help you out as well.

However, I recommend before you’re done with a project, you go to your local store, you get that painter’s tape. There’s blue painter’s tape and green painter’s tape. Before you cut a final check or final payment, you should go and tag everything. If there’s a crack in a light switch or if a light switch it not working. Blue tape it or green tape it all over the place and you tell your contractor, “I’m not paying you until all this stuff is done.”

Also a second opinion, bring somebody that has not seen the house yet. That’s really, really good. As the owner of the property, you see progress. Since the demo is now painted, you think, “This is really coming along,” and you get lost inside the house. But if you bring your mom or your sister or something like that who’s never seen the house and you tell them, “I want you to look for flaws.” Oh boy, they are going to look for flaws.

Mike: Right.

Ron: Another thing is, we like blue tape two different times. Blue tape it before we clean it and blue tape it after we clean it because you’re going to see a lot of stuff that you blue tape. Then when your contractor says, “Hey, I fixed all your blue tape. Give me my check.” Go back to the house, blue tape it again. If it’s not perfect, don’t give them a check. Say, “This isn’t done. This isn’t done.”

The truth is, once they get their check, they’re going to move on to the next job with the next client. They’re going to move on to that next person. They’re not going to answer your phone calls, not going to answer your emails and you’re going to have to take that money that you did not pay them and pay somebody else to do it right. By the way, when you do that, it’s always going to be more expensive to pay somebody else to redo somebody else’s work.

Mike: Oh for sure. Yeah. They’re going to find more things too, “This should have been done differently.”

Ron: There’s another thing too. When you combine contractors, which I always frowned against, you don’t want two separate painters painting the same house because one painter is going to be like, “That painter is horrible. Did you see how he painted this here?” They think they’re perfectionists, so they’re always going to bash each other’s work. It doesn’t matter what two contractors will get in there. The other contractor did it wrong all the time. I see that [inaudible 00:39:25] someone else’s work.

Mike: Right. What are some signs to look for when you have a contractor and things are going to go bad? Are there signs like . . . there are some obvious ones. Let me tell you, I’ve shown up before to a house and the door is open, the key is in the lockbox and they didn’t lock it. There’s nobody there and there was supposed to be a crew of guys. That’s a bad sign. What are some less obvious ones of things that you see that could tell you, “Uh-oh, this is a symptom of a bigger problem,” maybe?

Ron: We typically give people grades on the first or second day they’re supposed to show up. I understand that it gets a little crazy. They said they’re going to show up, maybe you give them a little grace there. You’re really talking about middle of the project.

Mike: Yeah.

Ron: The biggest indicator is time. When you did your original negotiation, how much time is this going to take? There are a couple of different things. They could have nobody there or one or two people there, so it looks like there’s a lot of stuff there, but those two people are just sweeping the floor.

I think you need to actually back up a step and talk to the person in charge, talk to the contractor and say, “By this date, what will be done?” And we’ve seen this with contractors we inevitably have fired where, “The plumbing is going to be in on Friday.” “Okay, Friday.” But when next Friday comes around and the flooring is not in, I’m going to start getting some red flags. We also use a rule of thumb.

So for us anyways, it’s typically 50% labor, 50% material. That’s a typical job. So if you’re paying for labor or you know what they paid for labor roughly and that starts to roll where you’re at in the job, for example, here at the 25% mark, but you paid 80% in material or 80% in labor, then you’re going to start backtracking a little bit.

Again, if you itemize it and you only pay them when they’re done with itemized stuff, it’s going to be a lot easier. Some people don’t realize that when you paint a house it looks like you’re 90% done. The truth is you’re 10% done and you have all the little stuff to do. It’s easier for a contractor to say, look how much work we’ve done. We’re 90% done and they’re 10% done because there’s a bunch of little stuff that takes 15, 20 and 30 minutes a piece.

Just having that timeline and that expectation of what should be done, when and then monitoring how much they’re paying in labor and material. If you know where it should be, then it’s easy to backtrack and say, “You told me this,” or, “Why did I pay you for two weeks when you’ve had two guys sweeping the floor. I’m not paying you to sweep the floor.”

Mike: Awesome. That’s great stuff. Go ahead.

Ron: I was going to say in my opinion that’s why it’s dangerous to pay a contractor on a weekly basis because you can pay him and pay him and pay him, next thing you know all your labor money is gone and then they’re not answering their phone.

Mike: Right. Yeah. Well, Ron, I appreciate all your information today. What have we missed?

Ron: The only thing that I can think of that we talked about prior is the installation of flooring. We went over that briefly, but when I’m asking people, “How are you going to install the floor,” there’s actually rhyme and reason.

One thing that’s huge to know is most floors need to be acclimated, which means you actually need to place the floor in the housing for like three or four days so it adjusts to temperature, adjusts to the pressure, adjusts to the moisture. Otherwise, when they install it, it will adjust and then it will crack and buckle and that stuff, specifically hardwood floors and laminate floors.

And the installation process of like a laminate floor is . . . a lot of people will bang with 2×4 or bang it with a mallet when they’re snapping the [inaudible 00:43:16] together. You’re supposed to use another piece of laminate to tap that in. If you know how it’s supposed to be installed, or generally how it’s supposed to be installed, you keep yourself safe by asking the right questions to people as far as “How are you going to install it?” And then know if they’re going to be the right contractor.

Mike: Yeah. That’s great stuff. Ron, if folks want to learn more, you operate in the Dallas-Fort Worth area and you got a lot of good information. I know you have some rehab training that’s coming out too, but if folks want to learn more about you or your company, where should they go?

Ron: Renovationgurus.com with an S is the best place. They can always call me directly at 817-566-4346. I’m generally just open to answering and helping people out. I want to actually keep you safe. You have thought lessons in life. I have a lot of thought lessons, specifically in the construction industry. I’d rather teach you what I’ve done wrong or what I’ve paid to learn to do wrong then for you to go, “Real estate is not for me because my contactor . . .” which is probably your biggest component besides buying it right.

Mike: Yeah. Awesome. Well, we’ll add a link for renovationgurus.com. I’ll add your phone number as well. Thanks for spending some time with us, my friend. I appreciate you sharing all that knowledge.

Ron: Mike, you need a [inaudible 00:44:41] let me know, man.

Mike: All right. Have a great day. For those of you that are listening, thanks for joining us and we’ll see you on the next episode.

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