A good contractor will do quality work and complete a job according to schedule at a reasonable price. They will show up on time and finish the job rather than leaving it ninety percent done. Keep in mind, however, that just because a contractor is good at one thing doesn't mean he is good at all things. In fact, be wary of those contractors who say they can “do it all.” Some can, but many cannot. Some contractors prefer to do just one thing since that is what they do best. In any case, I highly recommend that you check referrals of contractors. You'll likely be sorry if you don't.
Building a list of reliable contractors is essential. In addition to performing work for you, they can help you determine your repair costs, and you can refer them to other investors. The more you can help other investors, the more likely they are to help you. For instance, if you find someone who is installing carpet and padding for $8 per yard, you had better get their name and pass it along to all of your investor friends. They will save a few hundred dollars on every investment property and thank you for it. Or say that you sell a home that needs a furnace to someone and they don't know who to call. You are doing them a favor by providing them with the name of a good heating contractor. Always be on the look out for quality, professional contractors. Chances are high that someone you know will be able to use them.
Your Contractor — Your New Best Friend
My contractor is my best friend…literally. This is a good thing since I am having him handle all of my rehabs. He knows the way I like my homes to be renovated right down to the color of carpeting, the types of kitchen cabinets, etc., so I don't have to get involved with making any decisions involving quality or color of materials used. Once we decide how to tackle the layout of a particular property, he hires all the subcontractors, negotiates the best deals for me, and frees me to do what I do best – find cheap homes in good neighborhoods. Our relationship works very well. I can't do his job and he can't do mine, but together we make beautiful homes.
Upon entering the business of rehabbing, you can choose to work with a general contractor, as I have, or you can be the general contractor yourself. Acting as the general contractor yourself can save you money since you won't be paying someone else to manage the project, but it can also cost you money if you make mistakes due to your inexperience. For example, if you close in a wall before having the plumbing fixed, then you will waste money tearing it back down to fix the plumbing and rebuilding the wall a second time.
This may seem like common sense, but it is only one of a hundred different things to consider when redoing a home. Contractors who have been through the process before don't typically make these kinds of mistakes. They are good at what they do and think ahead, fixing or building things when it is most cost efficient. Now this is not to say that it is impossible to be your own general contractor. Just be prepared to take some lumps as you learn.
Your Contractor — Mr. V.I.P.
Though I don't want to lessen the importance of any of your other team members, a good contractor is probably your most important team member. As a rehabber you have nothing until your homes are completed and completed properly. Many contractors can get 95% of a job done, but the last 5%, the little things that make the biggest difference, seem to be impossible for them to complete. As investors, we tend to hang on to these guys. Once they start a job, it is often easier to let them finish, even though it takes months for them to complete the last 5%. This delay can cost you much of your profit, so I highly recommend that you spend some time locating a good contractor and holding onto them once you do.
Finding and Qualifying a Good Contractor
Contractors can be found in many different ways. You can open up the yellow pages, check classified ads, look for business cards at building supply stores, ask for referrals, stop by other jobs, take phone numbers off of trucks, etc. No one method of finding contractors is better or worse than another. However, I would recommend staying away from the BIG ads in the yellow pages. These contractors typically charge the most. Not that price should be your number one criteria for qualifying contractors. Oftentimes, it pays to spend a little more (within reason). In fact, though I try to get the best deal, I tend to stay away from the lowest quotes that I receive.
My reasoning is that these quotes are usually much lower than everyone else, and I don't feel that the job can be done effectively for the price I was quoted. In most cases, by not taking the lowest quote I am saving myself and the contractor some heartache. If I awarded the contractor the job, he wouldn't make any money, and chances are that I would have to spend more money paying someone else to finish their work. Any of you who have ever had to pay someone else to finish another person's work can attest that the overall job winds up costing a lot more than if you had just dealt with even the most expensive person from the start.
Other factors to consider when qualifying a contractor include the following: How long have they been in business? The more experience, the better. Do they have their own truck and their own tools? Do they have their own lines of credit or working capital to buy materials? If not, you'll find yourself running back and forth to Lowe's or Home Depot just to pay for materials. How well do you communicate with them? Find someone who sees eye to eye with you and understands what you are trying to accomplish. Do they want a long-term relationship? Some contractors are just “working for the weekend.” How are their current jobs coming along? Visit the job sites and talk to the owners. And finally, do they have any references? Check out the names that they give you, bearing in mind that they should be investors who have had some experience in dealing with contractors and thereby formed a basis for comparison. Find out if these former clients were satisfied with the quality of the work as well as the time it took to complete the job. Ask if they would use them again.
Is There Such a Thing as a “Good” Contractor?
Yes, despite what you may have heard, just like there are good realtors and bad realtors or good investors and bad investors, there are good contractors and bad contractors. However, most everyone is good for something and someone. Part of your job as an investor is to coordinate the efforts of your team members, find their strong points and their weak points, and determine who is good for what. If you identify a weak spot in one of your team members, it is your responsibility to teach them how to do it, if possible, or find someone else to do that job. A lazy investor should get along well with a lazy contractor, someone who hates their job but tolerates it since it pays the bills and may decide to take a week or so off if they make really good money for a few days. In contrast, a hardworking investor will never get along well with a lazy contractor. They will never see eye to eye and would rather deal with a contractor who treats what they do as a business and carries themselves more professionally.
Payment Schedule – In Advance or In Arrears?
This is a touchy area. I never like paying contractors anything up front simply because I have been burned EVERY time a contractor has owed me because I was ahead. I've done it three times and I have been burned three times. As a result, my policy is to pay after the work is completed. I may pay in draws as certain things are finished, but I don't pay in advance under any circumstances. As long as I owe a contractor money, I'm sure they are going to be around. As soon as they owe me money, they usually end up working for someone else who owes them. Though you won't usually have this problem with big companies, they also charge a lot more to cover their overhead, more than I'm normally willing to pay.
I recommend that you put your agreements with a contractor into contract form. I didn't do this when I first started, and when a home was near completion the contractors would say things like the light fixtures were not in their quote. My response would be, “Yes, they were. We were standing right here when we talked about it. Don't you remember I told you that I wanted this type of light here and that type there?!” The contractor always came back with, “I don't remember,” or “We never discussed that.” Then I would have to work something out with them to get my light fixtures installed. So, my advice to you is…GET IT IN WRITING and save yourself some heartache, even after you've established a relationship with someone.
I would make sure that whatever contractors you hire are insured for liability and workmen's compensation. The work that they do is dangerous and the possibility of someone getting injured while working on one of your homes always exists. If a contractor or one of his workers hurts themselves and they do not have insurance, the person they are going to sue will be you. Even if it's a frivolous lawsuit, the expense may put you and your family in the poor house. So obtain a copy of the contractor's insurance certificate. Though anyone can sue you for anything, with this in hand, you will be in much better shape.
Release of Liens
For those of you who don't know, a Release of Liens is essentially an agreement signed by a contractor and given to a property owner at the completion of a job. Basically, it states that the contractor has been paid in full for the work done and relinquishes their right to place a mechanic's lien on the property. The release of liens serves as protection for the property owner from an unscrupulous contractor who, though paid in full, might try to claim that they are still owed some money and place a lien on the property for any amounts which they claim are due but not paid.
Personally, I have never had one of my contractors sign a release of liens. After talking with most contractors that I have used, I have discovered that most wouldn't even know how to put a lien on your property. The one time I did have to threaten a contractor with a lawsuit via a letter from my attorney, I never heard from him again. Therefore, I have never considered obtaining a Release of Liens from any of my contractors. I am not going to advise against having your contractors sign a Release of Liens upon receiving final payment. Personally, I don't do it, but I'm not aware of the laws in other states. You should look into this where you live because I know that some people strongly advocate it.