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Being Your Own General Contractor Makes Sense for Rehabs

By Brian Kline | February 5, 2016

If you're in the rehab business, there are many reasons that you should work as your own general contractor. Some investors believe that hiring a general contractor makes more sense because you agree to one project price quote and than let the general contractor oversee the subcontractors. However, until you are highly experienced and are running multiple highly profitable rehabs, this doesn't make sense.

  • Same Oversight: Using a GC requires just as much oversight as managing the subcontractors yourself. You'll find that you still need to ensure the subs are on schedule, issues are being addressed, and workmanship is meeting your standards. No one has as much of a vested interest in your success as you do!
  • Costs are Higher: The GC is marking up the cost of the subs (how he makes money) so the rehab is going to cost more. Instead, build your own team of subcontractors.
  • Payment Problems: A GC receives a draw from you and then pays his subs. It's more difficult to gauge how much to pay a GC relative to work completed then it is paying individual subs directly. Usually, when you hear of an investor who was “screwed” by a contractor, it was a GC and not a sub.
  • You Don’t Learn the Rehab Costs: The real problem with using a GC is that you don’t learn the costs of each aspect of the rehab. The GC is not going to share with you the exact cost breakdown, that’s his value. It's crucial for you to know the cost of each subcontractor not only to ensure you don’t over-pay (or under-pay) for the work but also the better you understand the cost of each aspect of a rehab, the more accurate you will be at estimating the next deal.

Become the GC

For some reason, many investors don’t want to manage contractors. It sounds too much like work and requires good communication and management skills. Many investors can relate... when they first start they use a GC until one day they decide to “man-up” and tackle the task. If you are serious about becoming a successful fix and flip investor, make the investment (in yourself) and become the GC on your own projects.

Hourly Pricing vs. Project Pricing

You should try both methods of paying subcontractors by the hour or by the project to learn the difference. However, you'll quickly become certain that paying by the project is a more of a motivational factor than paying by the hour. Paying hourly requires plenty of oversight on your part to make sure the contractor is hustling to get the job done and is paying attention to quality at the same time.

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 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 will make more money than hourly. For example, one contractor once worked all through the night hanging kitchen cabinets. The following day he was asked why he worked all night. His response was, “I like money more than sleep.” That wouldn’t have happened had he been getting paid hourly.

Selecting Contractors

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, if you receive a quote from a painter that you have never previously used, you'll know that the material should cost approximately $900 and a 2-man crew should be able to complete the job in approximately 30 hours. If each painter earns $20/hr, labor should cost approximately $1,200. Since you've taken the time to learn how much material and labor costs are for painting, you now have a gauge ($2,100) when getting quotes. In this example, the quote from this new contractor is $3,500. After asking him to explain why his price is $3,500 (to make sure you're not missing anything), you determine he is simply priced too high.

Attention to Detail: You want contractors who are really paying attention to detail, really looking at the bigger picture, and going the extra mile. If you have contractors that go the extra mile then they stay on the team. Those that overprice and do shoddy work don't come back.

Proven Track Record: All contractors must first have a proven track record. What does that mean? You don’t want an “on-the-job training” program. As an experienced investor, you don't want to be the guinea pig. For example, you don’t want someone learning how to do ceramic tile on our job. We want an established tile contractor on our job that is experienced and good. For that reason, contractors must be highly referenced. Your contractors need to come highly referred by other respected investors or contractors.

Draw Schedule

Once a contractor is awarded the job, a draw schedule is determined up front. The draw schedule defines which milestones must be completed in order to get a draw. Contractors must understand and agree to the draw schedule during the quoting stage. And then you hold them to it to keep work on schedule.

Please leave a comment if this article was helpful or if you have a question.

PhotoAuthor bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 30 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.

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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