This is a continuation from a previous article written about Fast Rehabbing.
Hiring a general contractor to rehab your property is the lazy way out that will cost you money in the end. If you are serious about becoming a successful fix and flip investor, make the time investment in yourself to learn how to be the general contractor on your own projects. For various reasons, many investors don’t want to manage contractors. It sounds too much like work and requires good communication and management skills. However, these are the exact skills a professional rehabber needs.
Hourly Pricing vs. Project Pricing
Where to start is by considering both methods of paying contractors; hourly or by the project. You’ll soon learn there are significant differences.
Paying Hourly: When you pay a contractor hourly, 100% of the responsibility to save money is on you, the investor. If the contractor hustles, you’re going to save money, and that’s what is enticing. Paying hourly requires heavy oversight to make sure the contractor hustles. But, if the contractor doesn’t hustle then you lose money. From experience, you’ll find that an hourly contractor will hustle on the first one or two jobs but the tendency over time is to slow down for job security.
Depending on your state laws, you also run the risk of having the contractor classified as an employee instead or as an independent contractor. Only hire independent contrators. That way you don’t have to be their accountant and responsible for for their taxes, insurance, and other costs and responsibilities that come with having employees.
Paying by the Project: Paying a contractor a set price for a specific scope of work puts the responsibility to make money on the contractor because if he hustles, he makes more money, if he doesn’t hustle, he loses money. For this reason, project pricing is better than hourly pricing. A good gauge of a good contractor is that he prefers being paid based on the project because he knows he’ll make more money then hourly. For example, a contractor once worked all through the night hanging kitchen cabinets on a project (a neighbor called complaining about the noise). The following day he was asked why he worked all night. His response was, “I like money more than sleep.” You can be guaranteed that wouldn’t have happened had he been getting paid hourly. Paying by the project is also a good tool for staying on schedule.
Selecting the right contractors is critical to completing the rehab on schedule with quality craftsmanship at the right price.
Understand Labor and Material: The better you understand the “going rates” for each subcontractor, the better you will be at selecting the right contractors. For example, a recent quote from a painter came in unexpectedly high. You should know that the material should cost approximately $900 and a 2-man crew should be able to complete the job in approximately 30 hours for each painter. If each painter earns $20/hr, labor should cost approximately $1,200. When you take the time to learn how much material and labor costs are for painting, you will have a gauge ($2,100) when reviewing quotes. In this example, the quote from this new contractor was $3,800. After asking him to explain why his price was $3,800 (to make sure your not missing anything), you can determined that you aren’t missing anything and his price quote is simply too high. Find a different paint contractor.
Attention to Detail: You want contractors who are really paying attention to detail, really looking at the big picture, going the extra mile. If you have contractors that go the extra mile then they will stay on your team. If they aren’t a team player and don’t pay attention to detail, you can easily replace them. It’s a competitive market and you should use that to your advantage as the boss.
Proven Track Record: All contractors must first have a proven track record. What does that mean? You don’t want to be the “on-the-job training” program. For example, you don’t want someone learning how to do ceramic tile on our job. You want an established tile contractor on your job that is experienced and good. For that reason, contractors must be highly referenced. Your best contractors should come highly referred to by another respected investor or contractor. And you should offer your own references to others for highly skilled contractors that pay attention to detail.
Being totally involved in your rehab projects will make you a lot more money than hiring a general contractor.
Please leave a comment if this article was helpful or if you have a question.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.