How can real estate investors manage contractors without being ripped off
Deni & Brian chat about how investors can protect themselves when working with contractors.
About screening contractors and then choosing the one who is probably going to do a better job and prevent headaches on the process!
Video Broadcast Version
Audio Podcast Version
Also available on iTunes, Stitcher, and wherever else you listen 🙂
Brian Davis: Hey, guys, Brian Davis and Danny, we hear from Spark Rental.
Deni Supplee: Hi, everyone.
Brian Davis: Happy Tuesday. Always a pleasure to be with you.
Brian Davis: So as you guys join us, let us know where you’re tuning in from. We always love to hear from you and make this more of an interactive experience rather than a pre-recorded podcast, which it’s not. It’s broadcast live every week on Tuesdays. So let us know where you’re tuning in from and don’t hesitate to fire questions at us as we go through here. Again, this is meant to be interactive, not just the two of us talking at you. So on that note, we are going to talk today about eight do’s and don’ts of dealing with contractors. So the eight commandments of managing contractors, if you will.
Brian Davis: Last week we talked about 4 little known but must include lease clauses to protect yourself and your investment property. Today, it’s all about contractors because honestly, contractors are one of the most challenging parts of being a real estate investor. They will drive you crazy, but it’s super important. And it’s something that not many people talk about in the real estate investing education world because it’s not super sexy and there’s no glitz and glamour to it. It’s kind of a down and dirty nuts and bolts of investing in real estate. So that’s why it’s so important. So without further ado, let’s jump in here and talk about the first commandment of measuring or managing contractors.
Deni Supplee: First, I want to say hi, Ronnie Jones, and you’re from Pennsylvania, too. So go, go PA! Well, you definitely want to get referrals. You don’t want to just, you know, grab one.
Deni Supplee: I mean, so many people right now will Google one in the first one that’s at the top they’re going to grab and they’re going to run. And that’s not always the best one. So you definitely want to check these contractors out thoroughly. And that means that check their reviews out because reviews do mean something. And you want to the best way is to get a referral for them. So find somebody that you know, that’s either another real estate investor or a realtor or somebody who deals with them on a regular basis because they’re going to have the ins and outs of who’s good and who’s not. And also check for licenses if you’re state or county or whatever requires licenses, because you a lot of them will also have like an online database if they’ve ever had issues with their licenses or their, you know, they’ve been in court or anything like that. So make sure that you are checking them out, because unfortunately, like almost any business, there are good and bad.
Brian Davis: And you have to screen your contractors carefully just looking to screen your tenants carefully. And one thing to tack on to this point, the one place that you can ask for referrals for local contractors is in our Facebook group. For landlords and real estate investors, there’s 32.000 and some landlords and real estate investors and property managers from across the country and even some international ones on there. So ask for referrals and their chances are you’ll get an answer for your your city if you live in a concise city.
Deni Supplee: Speaking of Facebook, they have local groups all over Facebook. My husband’s a contractor, so I know how that works. And you’ll see a theme like you’ll see somebody on say, you know, I need a plumber. Who who do you use? You’ll see that name. Keep coming up. Keep coming up. And you know that that’s that’s the guy that they’re in that area they’re looking for. So, yeah. Use all of that stuff.
Brian Davis: Absolutely. So rule number one is, do you get referrals for contractors, particularly from people who are in the real estate industry, although homeowners count as well. All right. What’s the second rule?
Deni Supplee: Get more than one estimate. I mean, you’re you don’t want to just say some guy tells you, oh, yeah, this is going to be $250. And you say, OK, and then it be done because like anything else, there are different prices. So the only way to do this is to get a couple, two, three. It would be great and get there. What they’re listing are estimates written down and then compare the prices. Know right now that if you’re especially right now, contractors are super overbooked and busy. And you if you want it done quicker, you may have to offer more money. But, you know, check across the board, get estimates prices. Don’t just accept the first one that you hear.
Brian Davis: Yeah, I get at least 3 quotes, preferably 4 or 5 and don’t. Necessarily go with the lowest one, although that is an option sometimes, but, you know, sometimes these quotes will range like 3 or 4 times, 3 or 4 times the lowest one. I mean, you can see an enormous range in these quotes. So get as many as you can without pulling your hair out. Absolutely not.
Deni Supplee: Rule number three, don’t negotiate, negotiate, negotiate. You know, nothing is final. If somebody tells you this price, that doesn’t mean you want to pay that much. ”How about this” or ”I got some quotes that were this much, you know, would you go to this or meet me in the middle of something?” Never take an estimate as final word, because that’s just the the way the business really.
Brian Davis: Everything in life is negotiable.
Deni Supplee: Yeah, seriously.
Brian Davis: And especially contracts and repairs. So.
Deni Supplee: Just like your real estate’s negotiable, so. Yeah, I’m putting a link here for an article on how to negotiate with contractors, so we even teach you how to do that.
Brian Davis: Yeah, not everyone feels super comfortable negotiating. So if you are new to negotiating, check out some of those tips for negotiating specifically with contractors as a real estate investor.
Deni Supplee: Absolutely. And it may be maybe like I tend to be a little bit better than my husband. My comes to that. So I usually handle that. So if your partner or your business partner, whoever is better negotiator, get them in their.
Brian Davis: Absolutely. All right, rule number 4.
Deni Supplee: I have heard such nightmares about this do not give full payment. I first of all, if a contractor asks for full payment up front, there’s a problem right there. And that even if they’re referred, nobody. Yeah, it is. So, yeah, that’s just pretty cut and dried. Don’t do it. You can give them 10%. Some of them will ask for half but never give a full payment. There’s usually a payment schedule. This is how much you get in the beginning. This is how much you get in the middle of the job and the end of the job. And then before you even get payments for each of the jobs, make sure that you’re looking at them and what is done. And that is acceptable.
Brian Davis: Yeah, this is a super important point because contractors are always going to try to get ahead of you on payment, they want as much payment upfront as they can get and then they want as much payment as you go through the job as they can get. And they’re going to try to negotiate as little payment at the end of the job as possible. And you want to be coming at this from the opposite extreme. You want to give them almost nothing upfront and as little as you possibly can throughout the job with as much payment as you can after the job is complete. So this this ties back in with rule number three of always negotiate. You have to negotiate this very carefully. Do not let contractors get ahead of you because they’re going to try to do that. And that is a recipe for them walking off the job if you pay them too much money, too early in the process.
Deni Supplee: Yes. And I’m telling you, I have heard story after story and I just look at like, you know, recently somebody I know said that thousands they gave and and now the guy’s gone. And I’m like, well, you can’t pay up front like that. You just don’t do it. You just don’t do it. And Ronnie says that negotiating is a good one, but it is harder when they are booked. And you’re right. You’re right. And I, I get my husband’s a contractor and I see he works with a lot of other contractors and what he does and they are booked solid right now. So negotiating may take a back seat if you need something done in an emergency for, you know, as an emergency or maybe wait if it is an emergency, if it is not an emergency.
Brian Davis: All right. Rule number 5,
Deni Supplee: Permits get all permits. Don’t Assume you don’t need a permit because so you’re usually wrong, puts townships like you to have permits or localities. Yeah, and you don’t want your contractors, they’re not responsible. So if they tell you, oh, you don’t need a contract for this, don’t take their word for it. Permit. I’m sorry. Because if there’s hefty fines, if your township zoning officer comes walking on your property and sees all the stuff being done and asks, where’s the permit? Not only that, not only will you get fines, but you could end up having to scrap what you’re doing, which is another cost. So check your township to see if you need a permit. Don’t take their word for it. More often than not, a permit is needed.
Brian Davis: You go do your own homework when it comes to parents.
Deni Supplee: All right, rule number 6, make sure you read your contracts and the fine print. So many people don’t do this. I mean, I am somebody who does. I read through contracts so often you hear the old oh, that’s just the small print. It’s in all of them. Don’t worry about it. But that’s not the case. You should really be reading your contracts with contractors. Contracts say that ten times. There are usually buildings in there, a lot of things up due to unforeseen circumstances. A big one I see, especially again in my my husband’s business is rock. You know, they hit he’s a he’s an excavator and they hit rock. And it’s hard to tell if there is rock there. But you want to know, like, what does this mean? Is it going to cost you more or so ask questions, read your contracts, know what happens if they don’t make it on time? But what happens if a part’s not available the whole nine yards? So make sure you’re reading the contracts and ask questions.
Brian Davis: Absolutely.
Deni Supplee: And our next one is about don’t just assume that this work comes with a warranty or a guarantee. It’s not like buying a washer. Usually a good contractor. If they if you notice something is wrong and you let them know, they’ll do their best to try to correct it. However, they’re not all like that. And you could hear excuses such as ”well, that was there and I did my best. That was the best I could do with what I had” or whatever. So don’t assume that you have this in place, which is one of the reasons why you want to make sure you hire a good, knowledgeable, reputable contractor because they’re going to do good work and then you’re not going to have to worry about this as much. So definitely. And the other thing is keep track of all the communications with your contractors, so if there is something that isn’t done properly, do you have that as a frame of reference for anything later?
Brian Davis: You absolutely do not assume that there is a warrant in place. Ask always ask about it. And what happens if the work that they do falls apart? If they yeah. I mean, whatever the work is, make sure that you ask what kind of warranty is in place.
Deni Supplee: Absolutely.
Brian Davis: All right, Deni, the final rule for managing contractors
Deni Supplee: Know some of the stuff yourself know we teach property management for those who are getting investors are going to be investing in real estate. And the same goes with learning some common repairs. And that doesn’t mean getting in there like I can’t fix a toilet, but I do do some of the common terminology I can and not so much anymore. But I use my memory’s not that great. But when I when I was managing large apartment complexes, I got to hear so many of the repetitive repairs. And eventually I would be able to know, is that this or maybe that’s because this is happening or did you put this down the toilet that you are supposed to? And so the more you know, the the better off you are able not only to deal with contractors, but realize what kind of contractor you might need and maybe not need one at all.
Deni Supplee: So, you know, especially things like toilet stuff and things like that, you want to try to get to know as much as you can and also going to throw a link in for some of the common landlord repairs so you can get used to seeing what those are.
Brian Davis: And the more knowledgeable you are about property repairs, the better job you’ll do in screening contractors, in collecting quotes, in knowing what are reasonable costs for common repairs, you will just be in such a better position to manage contractors. If you are knowledgeable about these repairs yourself and you know some of these, maybe you can knock them out yourself. You know, maybe it’s something that would take you a half hour to fix and you can save yourself $500 on bringing in the contractor so it doesn’t hurt to be handy when it comes to your own properties.
Brian Davis:I say that as the least handy man alive, but more knowledgeable you are, the easier time you’ll have with all of this. So as a quick recap of the eight do’s and don’ts for managing contractors, number one, get referrals from people you know and trusts, particularly people in the real estate industry. Number two, get several estimates and compare them, get at least three estimates when you’re collecting quotes. Number three, do negotiate, negotiate every time with contractors because they are going to try to charge you as much as they think they can get away with. Number four, do not give full payment until the project is completed. And you have verified that with your own two eyes. Do not let contractors get ahead of you. Number five, do not assume that you don’t need a permit because you might need a permit even if the contractor tells you don’t. You were the one who is ultimately on the line for the fees and penalties for permits if you don’t get one and you should not the contractor.
Brian Davis: So number six, do read your contracts and proposals thoroughly. Read all the fine print. It’s not fun. It’s hard in your eyes. It’s boring as hell. But you could do it if you’re going to not get caught in a technicality and lose a bunch of money. Number seven, do not assume that there is a guarantee or a warranty in place. There may not be. You have to ask the contractors in plain English what exactly they’re guaranteeing and for how long and what they will do to rectify any problems that they cause in the property. And finally, number eight, learn how to make some of these common repairs yourself more knowledgeable. You are the better position you’ll be in to collect quotes and manage your contractors. All right. Any any final thoughts on this before we call this episode complete?
Deni Supplee: Just that. I just want to throw in there that if you’re working on property that you just got and you have, you know, a lot of costs involved, you can always roll them into the mortgage in some cases. So.
Brian Davis: That also, you know, one other thought just to add in here, so next week we are going to be hosting a webinar free webinar with funding grow. And what they do is they help real estate investors open up a series of unsecured business credit cards, usually between fifty thousand dollars and two hundred and fifty thousand dollars in total credit lines. Those can be a great way to pay for renovations and property updates. So we will send you out in to our mailing lists and in our Facebook groups. We will send you a link to where you can sign up for that free webinar to learn how to open up all these unsecured business credit lines to pay for a lot of these repairs. We do have a couple of questions here before we wrap things up. So Rania’s do you still offer personalized plans and advice? So we do. We have a course that we sell called Fire from Real Estate Fire being an acronym for financial independence, retiring early. So with rental properties. So that course is available. It does come with a free half hour strategy session with both Denny and myself. And you do get ongoing support with that course as well. And beyond that, we also offer a free course that you can take its eight videos and they’re all super quick. They’re like 10 minutes apiece, but they’re packed with information.
Brian Davis: So check out our blog page on our website to sign up for the free course. If you’re interested, at the end of that, you’ll have an option if you want to proceed onto the full fire from real estate course. There’s a question here from Sharon Holt. She says, Any tips on partnering with a contractor? She says, for example, I get the bank loan, bring cash and you get the bank cash and the contractor does the flip and then the exit strategies when I would want to keep it as a rental. So a couple of questions in there. So, yeah, the part I’ve seen that work out for people, you have to be really careful who you partner with, which is it’s really true in any business, not just the real estate business, you really have to trust your partner. And so if you don’t have someone specifically in mind already, someone that you know and trusts based on years of experience with them doesn’t mean you can’t do it. It just means you have to be really careful about screening that partner.
Deni Supplee: And if you do that A get a contract in writing and make sure that you’re way protected in that contract.
Brian Davis: Yeah, yeah, absolutely. And B, I would start with a really small project to begin with and then work your way up as you build trust because you’re talking about hundreds of thousands of dollars here in total assets. So you really got to be careful to to go slow with with partnerships like that. And then as far as exit strategies, that’s something you’d have to negotiate with your partner. You know what? That’s and that’s really something you should negotiate before you buy any given property. If you think you’re going to want to keep that property as a rental, then negotiate a price with the contractor beforehand and negotiate that exit strategy rather than trying to do that on the fly after you’ve renovated the property. So then what are your thoughts on that? Anything you want to add?
Deni Supplee: I definitely think that it’s a very unsteady partnership. If you are just meeting up with somebody and he’s a part, you know, he’s a contractor and you’re going to buy the property and and whatnot. But if it’s somebody that, like Brian said that, you know, I’ve seen that work and in different percentages, however you work it out. But just finding a contractor and saying, hey, you know, this needs this, this and this, you know, why don’t we partner up? You have 20%. I’ll take whatever. And then that’s that’s kind of tough to do. And I personally haven’t heard any situations like that where work actually has worked out, because remember, we’re dealing with what we’re talking about now, which is how to deal with contractors. And unfortunately, there’s a lot of. You know, unscrupulous contractors out there, so to speak. And I’m saying this, that, again, my husband is one. So he’s he’s an honest broker, but one must be careful.
Brian Davis: Yeah. So, Sharon, one one way that people get tripped up in that situation to particularly watch out for is the contractor goes in. They don’t have any skin in the game. They get behind the walls and they find that it’s going to be more work or more materials or more whatever then they were planning on. And they just shrug their shoulders and walk away because it’s no skin off their back. Right. So, you know, you have to really be careful about that. So I would personally make sure that they have some money in the deal as well, that it’s not just you with money in the deal so that they have something to lose. If you get in there into the property and discover that there actually is more work needed than everyone was expecting, you need to be able to count on your partner to knock that out. And you also have to make sure that there’s some kind of timeline in place that and some accountability for the partner. If they don’t get the project finished within on time, then they start losing ownership percentage or something like that. There needs to be accountability built in so that the contractor doesn’t just drag this out indefinitely because they don’t feel like doing it or they have higher paying projects that they’re working on or whatever.
Deni Supplee: And then the time is money and all that. So, yeah. And you want to definitely make sure.
Brian Davis: Yeah. So just a couple of things that I’ve seen happen in the past were that Ronnie also says talking about funding growth, that they are awesome. And yes, they are, they’re a great company to work with and they can definitely have you get some good credit lines lined up that are unsecured to property. You don’t need property for these credit lines and credit cards.
Deni Supplee: It’s an amazing concept, really.
Brian Davis: Yeah, it’s awesome. So we’ll have a free webinar for you next week on that. More details to come. And on that note, we will see you next Tuesday at 2:00 o’clock Eastern, 7:00 Pacific. Have a great week. Let us know what you want to hear about next week.
Deni Supplee: Absolutely. Have a great day.
Brian Davis: All right, guys. See you later.