Chris Jameson, Founder and CEO of Freedom Private Money, has been in the real estate investment business for a long time, and learned his way around the entire process. One of the biggest questions he hears from potential investors is how to handle contractors. When it comes to your investment team, your contractors can be a source of insecurity and headaches. In the building trades, turnover of employees is high, and things like weather or even other jobs the contractors have going can stall your progress.
Chris has a few tips for managing and dealing with your contractors that have served him well in his own investment projects. First of course, you will need to decide if you will act as your own contractor and find your own subcontractors, or if you prefer to higher a General Contractor to run the project for you. When it comes to General Contractors, they range from very large and professional outfits to much smaller, which can be just a guy that knows building. A very large General Contractor can be quite pricey, but you are taking a real chance with the small guys as well. And, when it comes to appointing yourself as General Contractor, ask yourself honestly if you are up for the job. Do you know the rules when it comes to pulling permits? Do you have a solid understanding of what needs to be done and the potential costs? Do you have a bank of subcontractors that you can rely on?
Chris feels that one way to come out ahead is to buy the building materials yourself. That isn’t to say you have to literally go to Home Depot and pick out the sheetrock. Get your Contractor to go to buy materials with you, or have him go, but then have Home Depot or Lowes call you to arrange for payment. The reasoning behind this is that then you are only paying labor costs to the contractor. Typically, in this scenario, you can pay labor at the end of each week. This provides incentive for them to keep on task. Asking your contractor to send you photo updates of progress as the week progresses is another good way to keep tabs on the job.
Chris recommends not allowing yourself to get behind. In most cases, there is no reason to pay more than $5000 upfront to get work started, unless major items like HVAC or foundation repair is happening. Typically, your beginning costs are mostly labor costs. If this isn’t the case and your contractor wants $15,000-$20,000 upfront, you may find yourself falling behind in your project, as that weekly pay isn’t as much of a motivator for them with a large, upfront payment.
Speaking of falling behind, it is always wise to have a contract in place with your contractor. Include a payment schedule and a timeline, and include verbiage that there will be a penalty in payment to the contractor if the timeline isn’t met. A strategic way to approach this is discuss the timeline, then automatically build in a 1-2 week buffer, to account for weather or other unavoidable delays. This way, your contractor will feel you are working with them fairly, but they understand they will face monetary consequences if the project falls behind because of their project management.
Practice is the key to becoming comfortable with all of this. With each project, you will build your team of reliable contractors who you can count on, as well as your confidence in dealing with them.