Dealing with contractors is one of the hardest parts of investing in real estate.
The ones who actually return your calls promptly, show up on time for work, and complete jobs on-schedule? They charge a pretty penny for that basic level of professionalism.
In fact, according to Remodeling Magazine’s 2019 home renovation report, not a single home renovation had a positive return on investment. All cost more than they added to the home in value.
But real estate investors can’t afford to make repairs and renovations with negative returns. Their very livelihood depends on making home improvements with the highest ROI, and earning a positive return on every property update!
Which means they need to learn how to negotiate with contractors, and how to manage contractors through completion of the project. It’s one of the most important skills real estate investors ever learn.
Here are 12 tips to help you negotiate with contractors more effectively, and get great work for a low price.
1. Start Building Relationships with Contractors Before You Need Them
There’s nothing worse than getting a phone call that a pipe burst and is blasting water all over your property – and not knowing who to call.
You end up frantically dialing whatever plumbers you can find in the Yellow Pages or Google. Never mind if they’re any good, never mind what they charge. And, of course, the contractor can hear your desperation all over your voice.
It’s all a recipe for being charged double.
Instead, start networking with contractors now, before you need them. However you store your contacts, set up a folder for contractors, and sub-folders for specializations like plumbers, electricians, HVAC specialists, roofers, and general handymen.
Because no matter how clear the skies are today, you know it’s going to rain sooner or later. The day will come when you need every single type of contractor under the sun. You prepare financially by budgeting for repairs in your properties’ and personal emergency fund; you also need to prepare by gathering contractors before you need them.
Ask for referrals from friends, family members, neighbors, property managers, other landlords and real estate investors. Search on Angie’s List and Google for the best reviewed contractors in your area. Try them out on small jobs, to see how they do.
The wider your network of contractors, the more choices you’ll have, and the greater your negotiating position.
2. Plan Property Updates in the Slow Season
When do you think you’ll pay less to have your furnace serviced: in January, or in October?
HVAC contractors work around the clock in the sweltering heat of summer and frigid cold of winter, fixing and servicing and replacing furnaces, duct lines, and air conditioning condensers. And then they largely twiddle their thumbs in temperate spring and fall seasons, when no one needs their heat or air conditioning.
“But Brian, sometimes the furnace just breaks down, and needs immediate attention!”
Sure. But it’s a lot less likely to break down in January if you get preventative servicing in October. Like Scar says, “Be Prepared.” (Or is that the Boy Scouts? I can never remember.)
While emergency repairs do occasionally pop up, you can dramatically reduce your maintenance and repair costs by planning preventative maintenance and property upgrades and improvements in advance. Write out a schedule for the next 12 months, for which upgrades you want to conduct at which properties.
Then plan them in the slow season, when contractors are hungry for work rather than swamped. If nothing else, it helps you budget better for them in advance.
3. Never, Ever Look Desperate
If a contractor smells desperation on you, they’ll double their quote. And contractors are great at sniffing out desperation.
So before calling a contractor, give yourself five minutes of meditation or breathing exercises or whatever it takes to calm down if you’re feeling anxious. When you call the contractor, speak slowly and casually. Explain the scope of the work in a precise but relaxed way.
Wrap up by explaining your timeline. Ideally, this shouldn’t be “yesterday.” But if it is a more urgent repair, tell each contractor that you’re collecting four or five quotes, and while you do want to get the repair done as quickly as possible, you don’t want rushed or shoddy work.
Ask for their best price, and their what their timetable looks like.
As you talk to each contractor, ask questions and take notes about the requirements of the job. The better you understand the repairs yourself, the better informed you appear to the next contractor you call.
4. Gather 3-5 Quotes, and Learn As You Go
When you tell contractors that you’re gathering four or five quotes, that shouldn’t be a bluff. You need to actually do it, despite your protestations about how much work it is and how urgent the repairs are.
To begin with, you have better odds of finding the right contractor for the job, if you talk to five contractors instead of two. And with each quote that you collect, you get a better understanding of what “normal” pricing for the job looks like.
But talking to more contractors also helps you know what the hell you’re talking about. When the first contractor comes out, you might only know that the air conditioning isn’t blowing cold air like it should.
They look at your air conditioning condenser, and give you their opinion on the source of the problem. When the second contractor comes out to the property, you can explain not only the symptom of the problem, but the previous contractor’s diagnosis of the cause. This second contractor gives you even more information, which you then bring to the third contractor, and so on.
You gain confidence with each contractor you speak with, and can discuss the problem with fluency and authority. That puts you in a better position to negotiate.
Be sure to call up the first contractor or two after speaking with the others, so you can share what you’ve learned, and give them a chance to update their quote.
When the time comes to choose an option, you’ll be well informed and feel confident in your choice of contractors.
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5. Collect Credentials & Documentation Before Signing a Contract
Before you sign on the dotted line, you’re in a position of power, and contractors want to win your business. To make the sale, they’ll offer up their credentials and documentation, such as copies of their contractor’s license, insurance bond, and customer references.
Afterward, there’s no reason for contractors to give you any of that. They’ll stonewall you, because there’s no upside for them in giving you that kind of leverage over them.
As you collect quotes, ask for copies of their license, insurance bond, and references. Spend ten minutes making phone calls to verify the license and insurance are valid, and the references’ feedback about the contractor. Ask penetrating questions about what they liked and didn’t like about the contractor, the quality of their work, whether they stayed on-schedule and in-budget.
Keep in mind that your municipality might require the use of licensed contractors for specific types of jobs. If you need to pull a permit, you need a licensed contractor.
In the event of a dispute, you can file complaints or claims with the state licensing agency and bond insurance company. The license and bonds help protect you, the customer, so get them while you can.
6. Check with Other Clients, Too
Contractors cherry pick their references, just like every company does. They want to highlight their most satisfied clients.
But you should also get a sense for how their average client feels about their work, not just their happiest clients. Ask contractors what jobs they’re working on currently, and ask for the client’s name and phone number. Call them up and get their feedback.
Also take advantage of online review platforms like Yelp, Home Advisor, and Angie’s List to read real customers’ reviews and experiences. Every business has the occasional negative review, so don’t discount a contractor over one client’s ragefest.
If half the reviews are negative, that’s a different story entirely.
7. Don’t Share Your Budget
Contractors want to feel you out before providing a quote. One way they do this is by asking for your budget; if the standard price for a given job is $2,000, and you answer that your budget is $4,000, what do you think the contractor is going to quote you?
Instead, you want to force the contractor to come up with the numbers. Ask them probing questions like how much they charge by the hour for labor, and for a quote broken down by labor and materials (more on materials shortly).
If the contractor gets insistent about your budget, tell them your budget is $0, but since that’s not realistic, you need their best price because you’re collecting multiple quotes. Put the onus for coming up with the quote on them.
8. Get Aggressive About Structuring Draws
If you’re financing renovations, or doing a large-scale renovation project costing thousands of dollars, the payment is going to be released over several draws. After each set of work is done, you release money for that draw.
The problem is that contractors want to structure the draws so that as much money gets released to them as early as possible. They want to get paid before doing the work, if possible. And you want the exact opposite: you want to pay them only after the work is completed to your satisfaction.
Unfortunately, they know their costs and trade far better than you do. So you get extremely aggressive about pushing money to the back end of the draw schedule.
Release as little money as possible in the first few draws, for the maximum possible work. Hold as much money as you possibly can for the last draw, to be released after the project is completely finished.
Because if the contractor gets ahead of you on money, there’s no reason for them to finish the job. They can simply walk away and leave you hanging with a half-finished job and more than half of your money.
9. Buy Materials Yourself
Far too many contractors charge a premium for materials, and earn a margin on them. They quote you material costs at $2,000, even though they’ll actually cost $1,400.
Don’t play that game. Before negotiating with contractors, ask for the initial lump sum quote, then ask them to break it down by labor and materials. Then tell them you’ll buy the materials yourself, and simply pay them for labor. Watch their reaction carefully – if they hesitate and try to argue, you know they inflated their materials quote.
It also removes their argument for an up-front “materials” deposit. It helps you prevent them from getting ahead of you on the draw schedule.
After hiring a contractor, go with them to the supplier and buy the materials yourself. Watch what they buy carefully, and question any materials you don’t understand, or that look out of place for the job.
As an extra perk, you can charge the cost of materials directly to your credit card, helping you partially finance the renovation costs. Depending on the size of the project, you may be looking at a lot of reward points!
And if you’ve taken out an investment property loan to finance the renovations, it gives you more flexibility to buy the materials on your own, with your credit card, and decide yourself when you want to reimburse yourself for it.
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10. Demand a Discount for Sign Marketing
Contractors want to use your property for free advertising. They want to put their enormous, tacky yard sign up saying “Another great job done by XYZ Contractors!” or some other such nonsense.
As you negotiate with contractors over price, ask if they want to market their business with a sign on your property. If they say yes, tell them that using your real estate for marketing isn’t free, and tell them they can either compensate you for it through a discount on the quote, or they can leave their huge sign in the truck.
They’ll object and moan and complain that it’s “standard industry practice.” Stand your ground, and respond: “It’s my property, and using it for your marketing campaign isn’t free. If you want to advertise on my property, it’s going to cost $___ discounted off my quote.”
Your goal isn’t to be their best friend or easiest customer. Your goal is to negotiate the best possible price on your repairs and renovations. That means being confrontational and holding firm, even if it’s not in your nature.
11. Pick Over Every Single Word of the Contract
Is it boring? Yes. Is it dense legalese? Certainly.
Do you need to read it extremely carefully? Absolutely.
First, make sure the contract lists the contractor’s license number and insurance bond information, so there’s no ambiguity later on. Their license and bond policy are on the line, and they need to know it before they start work on your property.
While every word of the contract is important, pay special attention to the list of materials used, the warranty on the work, the draw schedule, and the scheduled timetable. These better be outlined in clear, black and white language. No legalese, no confusing prose. Just the cold, hard facts.
And don’t be afraid to get creative with the terms. Consider offering a bonus for completing the work early, by a specific date, and including a penalty for failing to complete the work by the listed deadline date. It might read something like “Owner agrees to pay a $500 early completion bonus if the work is satisfactorily completed by ______. Contractor agrees to provide a $500 late completion discount if the work is not completed by ______.”
Structure the deal however you like, to feel confident that the work will be completed in-budget and on-time. But do it before signing, while you still have the power to negotiate with the contractor.
12. Carefully Manage Contractors Until the Project Is Complete
Make no mistake: hiring a contractor isn’t a passive activity. Screening, hiring, and negotiating with contractors all takes a lot of work.
And it doesn’t stop when you sign with a contractor. You need to stay on top of them every single day until the work is finished to your satisfaction. That means visiting the property to check on the work every day.
While there, ask the contractor how the project is going. Leave it open ended at first, then ask specifically about whether they’re on schedule. If they hesitate at all, pounce on them immediately.
“It sounds like you’re not 100% confident that you’ll finish this job on time. Keeping this project on schedule is extremely important to me, so let me ask again: What do you need to do to make sure this project finishes on schedule?”
My experience with contractors is that, left to their own devices, they’ll wander off-schedule and over-budget. It’s your job to make sure that doesn’t happen, and it requires diligent, attentive management on your part.
Because ultimately, just because you’ve finished negotiating with the contractor and signed a contract doesn’t mean you have what you want. What you’re paying for is the end result, the finished work at a high level of quality. And until you get what you’re paying for, you need to stay on top of the contractor to make sure it happens.
It’s not fun. It’s not easy. If you wanted easy, you should have found another profession.
Final Thoughts
Real estate investors and even homeowners sometimes need to work with contractors. It’s a reality of investing in and owning a physical asset rather than a paper asset.
You need to budget for repairs and maintenance when you forecast a property’s cash flow with a rental income calculator. When you decide you want to build real estate equity faster, one of the primary ways to do so is by improving the property to raise its value.
If you want to find good deals on investment properties, that usually involves buying fixer-uppers that need work.
All of which requires you to learn how to negotiate with contractors. How to hire them, screen them, manage them effectively. And that in turns means holding them accountable and being more confrontational and firmer than you’re used to being with the maid or nanny or other people you hire.
Welcome to being a real estate investor!♦
What have your experiences been with negotiating with contractors? What’s your favorite tip for how to negotiate with contractors? Share your thoughts below!
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About the Author
G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.
Great article. You are very correct about structuring draws. My in-laws gave the pay out to the contractors up front, per the contractors request. Halfway through the work the contractor was MIA and the work was unfinished. Apparently he was an alcoholic and had a mental breakdown, leaving their’s, and many other houses unfinished. They lost all their money and are now going through a court case with this guy. No fun!!
I’m so sorry to hear that Kirsten! Unfortunately that happens more often than new investors think. So important to screen contractors carefully, and to be strict with releasing funds. Very sad that happened to your in-laws, but it’s definitely not a mistake they’ll make again, nor one you’ll make.
For me, “offering a bonus to complete the work early by a specific date and also including a penalty for not completing the work within the deadline date” as a very good idea. This will make the contractor more serious about the work. Any thoughts?
I agree Shafiq! Always good to incentivize workers thoughtfully.
Great article!
Thanks Sheena!
Negotiation has always been a challenge for me. It feels like I’m always being taken advantage when dealing with contractors.
I hear you Brenda. Hope the negotiation tips above help moving forward!
Your guidance on negotiating with contractors has been a game-changer for me. Thanks a ton for sharing such valuable tips on negotiating with contractors.