Today’s REI Classroom Lesson

When working with general contractors, Ron Carlson provides a list on what to look for in their business model, including how many crews they have and their staffing overall. Not only do they need a suitable business model, but it’s good to know more about the general contractor personally so that red flags are known from the beginning.

REI Classroom Summary

While you need to know about how the general contractors are managing the site, you also need to know things like how far away they live from the project and how their communication is.

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, there. My name is Ron Carlson. I’m a general contractor with Renovation Gurus. And today, I’ll be hosting the REI classroom and I want to talk to you today about things to be careful with when you’re hiring a contractor.

Mike: This show was sponsored by passiverental.com.

Ron: Maybe you could say it’s some red flags, as an investor and as a contractor, we come across a lot of people in this industry and there are things that keep coming out that I want to advise you on so if you catch wind of these things, then you can be careful, not necessarily not to hire the contractor, but just know what kind of contractor that you’re hiring.

So the first one is to be careful of contractors who are in more jobs than they can handle. And this one’s tricky because it’s hard to find out if a contractor is in more jobs than they can physically handle. But this is kind of what we’ve done. Most contractors can handle one job per crew. One crew would be two to four people.

So when you’re interviewing your contractor, ask him, “How many crews do you have?” And if they say, “Well, I have one crew,” well, then just follow up, “How many houses are you in?” If you find out they have one crew and they’re in three houses, then that might not be a contractor you want to hire right now or today because they’re going to delay your rehab.

But if they have four crews, and a crew, again, is two to four people, but they’re in four houses, they might be able to take on one additional rehab. One thing you want to do when you’re asking that particular question, “How many are you in right now? How many rehabs are you in right now? But when’s your next one going to be done? Are you going to be done on Friday, or are you going to be done in two weeks from now or a month from now?” Because that will a direct correlation on when they can start your next project.

Be careful of contractors who are short-staffed internally and externally. This kind of goes in the same line with, “Do they have enough crew members to rehab your current job?” You can ask how many crews you have. If they’re short-staffed, you’ll know by, “Oh, I have two-man crews, but I’m in five jobs.” Kind of the same thing, but the internal staff is really what is concerning.

If they don’t have an office admin, if they’re trying to write the bids themselves, work on the project themselves, go to the hardware store, the lumber store all by themselves, then they’re going to be short and you’re going to find out that they don’t have the time to give you the service that you want, as a client. And remember, this is a service industry. So if you’re not getting phone calls back, you’re not getting emails back, or it takes you 10 days to get a contractor’s bid, then they might be short-staffed internally. And you can just screen them and ask them kind of what their process is, what’s their communication, how do they collect payment, that type of thing.

Be careful of general contractors that work on a property at the same time they are managing the property. And what I mean by that is some general contractors, they’re just a mom and pop type business. So they’ll go out and they’ll bid your property and then they personally work on the property. I’m not saying that that’s bad, but it’s really hard for them to be working on your property and managing your property and managing all their crews, and going out and collecting more business.

Typically, what will happen is they’ll start working on your property, noon will come around, a prior client of theirs or a future client of theirs will call them and say, “Hey, I have a property. You need to walk through me. I’m going to close on this in two weeks.” So they stop working on your property and they go right to bid for future business and then your rehab will be delayed inevitably because they’re trying to get more business while they’re working on your job.

There’s a rhyme and a reason to the contractors that are successful, but I’ve actually broken it up to someone’s going to go write the business and go and write the bids, and someone else is going to actually manage the property. If the same person is writing the bid and managing the work on the property, inevitably, you’re going to have problems. The only exception would be if it was a guy that only did one property at a time, but that’s never going to be the case because they’re always looking for future business.

And if they don’ have future business coming in, they actually kind of be a red flag as well because why won’t they have a future business coming in? Because they’re not a good contractor. Good contractors will always have referrals.

Be careful of contractors who are clueless of where the property is financially. What I mean by that is you’re into the rehab, you’ve already done, say, a first draw, and you go to your contractor and you say, “Hey, when’s the next draw due?” or, “how much is the next draw? How much are we into this property for? When are we going to be done?” If they don’t know . . . now it’s okay for them to say, “Okay. Let me check on that and let me get back to you.” But if they don’t actually know if they’re like, “Well, blah, blah, blah, blah. You know, I think that’s about $3,000,” but you think it’s really $6,000, well, that’s probably a sure sign that they’re taking your money and using it at someone else’s rehab.

That’s where it gets really tricky and hard to track a rehab is when they’re taking money from one rehab and doing, say, buying labor and material on another rehab. So if they don’t know, you need to know, first of all, where you’re at, but they need to know it, too. And if they don’t know, then you might want to start paying them less or paying them less aggressively so they don’t accidentally really run out of money in your particular property.

Be careful of contractors who can’t give you references. And when they do give you references, don’t let them give you references from mom and dad, don’t let them give you references for grandma or their neighbor or their best friend. That’s not the references you want. You want references of people that have done a rehab with them in the last two months. If not currently doing a rehab with them, that’s a repeat client that’s permanently doing a rehab with them. Sometimes, we get references from anybody, contractors in particular that are, “Hey, this is my mom and this is my grandma.” Well, mom and grandma are always going to say good things about the contractor.

Be careful that the references that you get, that you actually call them because it’s one to get the reference, but if you don’t actually call them, then you just set yourself up for failure in the future. And make sure, like I said, that reference is currently working with them and has done a good job. And if at all possible, go lay eyes on a property that they’re currently working on because you’ll get a good feel and a good number of where they’re at and how they run their business.

Be careful of contractors who live more than an hour away from the project. It just takes so much time just to get to the project if they’re more than an hour away. If they went and checked on your project and then they came back, they are looking at two hours just to find out where your project is every single day. It could be good for an hour, anything more than that, it’s just a lot of wasted time and you’re eventually going to feel that in the long run because they’re not going to be able to manage and work on your job the way that you want to, as a client.

Again, this is Ron Carlson. I’m with Renovation Gurus. This is part one of part two. Part two will be available to you at a later time. Be looking out for that. And if you need to contact me for any reason, you can contact me on my cellphone, 817-566-4346. You can call me or text me or you can find us at renovationgurus.com. And thanks for joining us today. Mike: passiverental.com is your source for turnkey done-for-you rental properties. If you’d like to be an investor and not a landlord, please visit passiverental.com to learn how to purchase cash flowing, professionally managed rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting passiverental.com. 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