The following is a post from our series of articles on How to Buy Your First Rental Property. If you would like to see more of these posts or learn about our upcoming video course, then please view our course page.
In today’s real estate tip you will learn:
- How to find a quality contractor
- Understanding the trade offs between quality of workmanship, price of work, and time of completion.
- The importance of using licensed and bonded contractors
- How to set up a proper contract
One issue first time real estate investors struggle with is finding a contractor who is able to help them repair their property. Many first time investors are overwhelmed trying to find the right contractor, who fits their needs. Before we can dive into the tactical aspects of finding the right contractor, we first need to think about the trade-offs between quality of workmanship, cost of work, and how long it takes work to get completed.
Related article: Preparing to Invest in Real Estate
The Iron Triangle Of Contracting
My dad used to say, “quality is long remembered after price is forgotten.” This is especially true when it comes to contracting. Investors have reached out to me in the past with the following request, “Hey Jordan, I’m looking for a high quality contractor that can complete a project quickly and at low price.” Unfortunately this request is unrealistic because a high-quality contractor understands their worth. Why would they want to work extra hard at a low price?
Before you begin with a contractor, you are optimizing for two things from the Iron Triangle Of Contracting.
Quality: The quality of the workmanship will determine if the work done at your house will last 5, 10, 20, or 30 years. I try to avoid skimping on the quality of the work, but I understand that there are capital constrained landlords that may need to make a necessary trade, in order to get work done. The problem is the risk of having to pay for the same work to be done twice. Unfortunately, ff this does happens, it means it would have been cheaper if they didn’t skimp on quality.
Price: This is the price you will pay to get the work done. It’s important to understand that a contractor who charges a high price for work, doesn’t necessarily mean you are receiving a quality job. That’s why when I receive a bid for a job, I seek out two more and check the prices on contracting websites.
Time: How long will it take for a project to be completed? If you need a project completed ASAP, expect to pay a premium price for the work done. If you want a high quality job done at a low price, then expect to a wait long time to find a contractor who is willing to take on this work. If they decide to take on this work, it is likely you will have to wait until they finish other high priority jobs before they complete yours.
Finding the right contractor is the most important decision a real estate investor can make. Selecting a contractor that fits the investor’s specific criteria is well worth the effort.
Before purchasing an investment property, develop a network of contractors because, like it or not, every piece of real estate will require some type of repair work.
How Do I Find a Contractor?
Referrals From Family, Friends, & Neighbors
Did someone you know recently hire a contractor? Is your neighbor having some work done? If so, talk to the person about their experiences with the contractor. Try asking them the following questions:
- Were they satisfied with the contractor’s work?
- How did the contractor handle customer service?
- Did the contractor do what they said they would do?
- Did every part of the work get done?
- After the work was completed, did the contractor clean up the job site?
- Was the project completed within the budget?
- How long did it take the contractor to finish the job?
- How did the contractor handle change requests?
- Would you hire the contractor again?
Word of Mouth Referrals
A good contractor has an extensive network of other reliable contractors specializing in different trades. If you have previously worked with a contractor that did a great job and now you have a project requires work to be completed that’s outside of their expertise, ask the contractor for a referral. Typically, a good contractor will refer their clients to quality craftsmen because the contractor wouldn’t risk hurting their relationship with current clients.
Whenever a contractor completes a project and I am satisfied with their work, I make it a habit to save their information. In the future, if I come across a job that happens to be outside of their scope, I feel comfortable reaching out and asking them for a referral. Usually an “A” level contractors will know other “A” level contractors. Of course I still request multiple bids on the work (assuming the dollar value is above a certain threshold).
If I don’t have leads, I’ll reach out to the area’s realtors & property managers to find out if they know someone. If they provide me with a referral, it is still worth requesting 2-3 other bids. If one of those referrals lands, I make sure to thank the person who connected me to the contractor.
Redbeacon, Homeadvisor, Homewyse, Yelp, and Handy can be used to find contractors. Enter your project details in the websites and they will provide a list of contractors to complete the job. From there, you can reach out to the contractors.
Once you have found referrals, it’s time to interview the contractors.
Should I Use My Property Manager’s Contractor?
Before you make this decision, be sure to keep the following in mind:
- Make sure the property manager doesn’t receive a finder’s fee or commission from the contractor they referred you to.
- If the contractor works for the property manager, the property manager has the incentive to over-bill the project.
- If the property manager finds a contractor, ask for an itemized quote to compare so you can compare bids with other contractors.
Questions to Ask a Contractor
Is the contractor licensed, insured (liability and worker’s comp), and bonded?
- Check the contractor’s license number, insurance policy, and bond. If the contractor isn’t licensed and insured, walk away. If the contractor will be working on a small job, a bond isn’t absolutely necessary. In order to enforce your rights, you must obtain a certificate of insurance in the name of your job for both worker’s comp and liability insurance.
- A California State Contractor’s License requires a minimum proficiency in construction and an understanding of state and local regulations within their speciality. Check the contractor’s license number with the state’s licensing board’s website to see if any complaints have been filed against the contractor.
- A licensed flooring contractor shouldn’t install a 200 amp electrical panel. Confirm under which trade your contractor is licensed.
- A liability policy ensures if any damage is done to the property by the contractor, the customer can file a claim against the contractor’s insurance for damages.
- Workmen’s Compensation insurance pays any claims related to injuries related to the job. If the contractor is injured during the project and doesn’t have worker’s comp insurance, the customer will be liable for the medical bills.
- A bond provides the investor with insurance in case the contractor is unable to complete the project due to insufficient funds or other issues. If that happens, the bond company is liable to pay for the work. Example: You hire a contractor to complete a $500k job. The contractor runs out of funds to complete the work. You sue the bond company to fulfill the contract.
Who will be completing this job?
You might speak to one person to negotiate the terms of the work, but then another contractor could be completing the work. If the contractor is hiring subcontractors, ask for their names and confirm they are licensed and insured. If the general contractor (person in charge of the project) doesn’t pay the subcontractors, you could be liable to pay them. You should require the general contractor to provide you with proof of payment to the subcontractors before the final payment is given to the general contractor.
How can the contractor be contacted?
Does the contractor prefer phone calls over email? Or does the contractor like to be texted? When are the best times to contact him? Will the call be returned within 24 hours? These are all great questions to confirm with your contractor before signing any contract.
Does the contractor guarantee or provide warranties for his work?
The contractor should give you a guarantee or warrant on his work. It’s up to the investor to determine if this is a legitimate guarantee or warranty. The State of California requires warranties for certain types of work, but it’s your responsibility to conduct the due diligence.
Also, some warranties claim the work is guaranteed for a certain time period; however, the warranty might only cover the cost of materials, but not the cost of labor involved to repair the work.
Related article: Rental Property Tip #2: Nesters, Investors, and Metrics
When to Bid Work, When Hourly is Enough
When the expected cost is low, or when the extent of the work is unknown, paying by the hour might be better. You can eliminate the overhead of a full estimate or work with the contractor as much, or as long, as necessary.
A simple project with no (or low) risk is a safer bet for hourly contracting. A project where the full extent of the work necessary cannot be known in advance is much more dangerous. In this case, you want to prioritize working with someone you know and trust on something open-ended. If you don’t already have that established relationship with a contractor you might want to do a trial project first.
Consider a Trial Run
If you have a smaller project in mind, you can treat it as a trial run for something bigger. Go through the same steps as you would for the larger project, but focus as much on the interaction you have with the contractor as you do on the smaller (trial) project itself. Do you enjoy working with this contractor? Are they flexible, trying to work with you to solve problems? Or are they sticklers for the details of the agreement? You want someone who’s style matches yours; someone you will be comfortable working with when the stakes are higher.
How to Bid the Work
Once you have created a short list of potential contractors, it’s time to ask for quotes.
- Make sure the quotes are itemized by labor, materials, and other fees related to the job so you can compare the bid to other bids.
- The quote should have a final price. An agreed-upon price will pressure the contractor to finish the job on time and within budget.
- Confirm the bid is the final price. If it’s an estimate, the price will most likely increase.
- What about small jobs or handyman work? I still would ask for a quote or a ballpark figure not to exceed a certain amount.
Now That I Have the Bids, Who Do I Choose?
Review the bids to see which types of materials they are using, how they are billing potential labor costs, etc. If you see a deviance from other quotes, ask the contractor why. If their rationale isn’t substantiated, odds are, they are padding their numbers.
Redbeacon and Homeadvisor provide users with calculators to determine how much a project should cost. This can be used as a guide, but shouldn’t be the sole reason for choosing a contractor. If you go back to an experienced contractor and tell him to lower his price, this can be seen as an insult, and the contractor could decline the job. Remember, quality is remembered long after the price is forgotten.
Related article: SVIC’s Guide to Getting Started in Real Estate Investing
You Must Have a Written Contract
Confirm all of the discussed details of the project are included in the final contract. If the contractor verbally added sweeteners to the deal, ask him to add that to the contract. If he won’t, I wouldn’t sign the contract.
The final contract should include at the minimum:
- When the job will start
- When the job will be completed
- Materials that will be used
- Cost of the job
- Payment criteria
Creating a Work Log
Once the work begins, you should create a written log of all communications between you and the contractor. For each entry in the log, include the date, time, person you spoke to, and the details of the conversation. This log can be used as a journal to protect you from any misunderstandings.
- Do not pay the contractor until the work is completed. (See above.)
- Conduct a final walkthrough once the work has been completed. Meet with the contractor for a final walkthrough. The walkthrough should be used to inspect the project and discuss any changes or improvements that might have been missed or need to be done.
- Pay the contractor and refer her. Once the work has been completed and meets the terms of the contract, make the final payment for the contract. If you were happy with the work, spread the word. The more work this contractor has, the more likelihood he or she will prosper. They will be able to stay in the business longer and will never forget your help.
Life (and Contract Work) is a Repeat Game
The way you and the contract work together and how interesting or profitable the work is for the contractor can determine whether or not you work with the contractor again on additional projects in the future. It is also important to assess how available and affordable the contractor was during the project. The odds are good that you will have more projects to do, later on. If you develop good working relationship and receive consistently positive results, working with the same contractor again will be much easier than finding a new contractor from scratch.
How do you go about finding your contractors?
Let me know with a comment!