Today’s REI Classroom Lesson

Today, Ron Carlson goes over what you need to think about before you hire a contractor.

REI Classroom Summary

It’s important to consider what is expected before the job begins, when payments are due, what happens if something goes wrong, just to name a few.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

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.

Ron: Hey, my name is Ron Carlson. I’m with Renovation Gurus. Today, I will be the host of the REI Classroom. I’m going to talk to you about 12 things that you want to consider when you hire a contractor.

Mike: This show was sponsored by passiverental.com.

Ron: Simple things, things that you should think about, but in the moment you sign the contract you might not think about. The first thing is how much money is due up front? Most contractors are gong to require some sort of down payment, some sort of up-charge. They need to pay for their labor and their materials so you want to know how much money is upfront. And talk about that before you sign any paperwork, before you make a final commitment because if you don’t, the number you thought that you were going to pay may change in the middle of your rehab or in the beginning. Let’s say that the contractor wants $10,000 upfront and you only want to pay $2,500 upfront. You’re going to want to hash that out right in the beginning.

How much money is due upon completion? As somebody who is hiring a contractor, you should never, ever, ever pay 100% of the job completion until it’s 100% completed and you’re satisfied. S know how much you’re going to pay upfront, how much it’s going to take to complete the job and then you’re probably going to have the draw some process in the middle, maybe one or two or three payments in the middle of that. Just know how much you’re paying. Get it all in writing, all on paper so there’s no discrepancy at the end.

What happens if the contractor does not start the job or doesn’t complete the job? You should know that and have a discussion or have that in writing with your contractor. Look at your bid and see if the material is included in the bid. There are a couple different ways to write bids. Some contractors say labor only, some do material only, some combine labor and material. I’ve seen a lot of contracts. As a contractor, I see a lot of contracts from other contractors and they’re very vague.

You want to know what you’re getting and how much you’re paying for it. If it says, “Toilets, $50,” does that include the cost of the toilet or is that labor only or is that the cost of labor and the cost of the toilet? A lot of times, it’s just having a conversation, what does this really include, but make sure that the contract and the bid are both very, very clear or you’re going to have problems with your contractor later.

Is labor included in the bid? We just talked about that, same concept. Just make sure you got labor and material included and you’re not going to get blindsided with additional expenses later.

Do you have an accurate bid at all? If so, how do you know so? What I recommend is you go through the property before the contractor gets there. You write down everything you want, everything you see, everything you need, and then when you go through with the contractor, you go back through your notes and make sure that you have everything that you discussed with the contractor and all your additional notes together and compare them. If you’re missing something, make sure it is addressed before you go in your rehab or you can get hit with a change order.

What happens if materials or tools get stolen? I’ve done a lot of rehabs. We do several a month. Sometimes 20 or 30 a month. It’s important to know what is going to happen if the materials get stolen. Typically, as a contractor, I’m going to pay for the material out of the funds that my client gave me, but if I have, say, $5,000 or $7,000 or $10,000 worth of material and it disappears one night, am I responsible as the contractor to go pay for that or is the homeowner responsible to pay for that? Hash it out in the beginning or you’re going to have problems when it does happen. It typically should not happen, but things happen and you just want to be safe when you’re going into a contract.

Who’s liable for doing the work wrong? Are you liable for doing the work wrong as a client or your contractor? If you’re hiring a handyman or a day laborer, are they responsible for the work you’re doing wrong or are you going to pay them extra to do it right? Just some tips to clarify that you should some conversations you just have with your contractor, and I say this because I see it all the time and a lot of people with good will, trying to do good things, working together, it doesn’t always work out because they just didn’t have simple conversations.

What is the start date? “When can you start? Mister or Mrs. contractor, when can you start and when are you going to be done?” I want to know and I want in writing so we can hold each other accountable. Now, if you have circumstances, weather, material problems, you can’t get material in time, change orders, well, then you have to be flexible. But in the initial beginning, you want to know what’s the start date and what’s the end date.

And then what’s going to happen if the job is not completed on time? If you are six or eight weeks over time, are you going to compensate me? Or is the contractor going to compensate you? Is there going to be a penalty? Is there a fee? Are you just going to be okay with it because it takes a little longer? Talk to your contractor to find out what that is that they’re going to do in the case that they are running a little bit late.

What kind of payment does a contractor take? A lot of people don’t think about this before they get into a rehab. For a long time, we didn’t accept credit cards and our clients would come to us and want to pay their first draw, $5,000 or whatever it is, in a credit card payment. We didn’t take credit cards. Well, now they didn’t have any money for the rehab because they were going to fund the whole thing on credit cards. Know if they take a check, know if they take a cashier’s check, figure out how they get paid and then make sure you always get a receipt when you pay them so they don’t walk away with your money.

Now, what kind of insurance do they have? Most contractors should have a minimum of $1 million dollars liability, depending upon their field. We carry $2 million because we want to be highly protected. And then, does their insurance cover the material that’s in the house, workman’s comp, that type of thing. That’s what you’re looking for. If they don’t have insurance, you’re going to be responsible for it as a client.

So my name is Ron Carlson. I’m with Renovation Gurus. You can reach me at renovationgurus.com. You can call me on my cellphone at 817-566-4346 or you could email admin@renovationgurus.com. Y’all have a blessed day.

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Please note, the views and the opinions expressed by the individuals in this program do not necessarily reflect those of flipnerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.

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Ron Carlson
Wholesaling house after house gave enough capital to start flipping houses. For a short time he worked alongside a few hedge fund companies. Started a real estate brokerage firm, started a construction company, started owner financing houses. He spends a lot of his time speaking at local REI groups, and time leading his team of acquisition agents