As we near the bottom of our real estate market, investors are realizing it’s becoming a great market and it’s time to start buying houses again. Investors who buy now can hold onto the investment for very good cash flow or flip the house for an instant income.
Taking a wholesale property and transforming it into an income producing asset usually requires some “rehab” work. I’ve noticed several recent CRE Online Forum posts where fellow investors are asking questions about: How to Find a Contractor.
That is a great question, and the purpose of this article is to help establish a road map to find a good new contractor.
Once you have found the perfect house you will need to begin planning your construction. Before even starting construction, it’s vital that you choose the best contractor for your investment business.
How to Find a Contractor? Think Long-Term
Remember, real estate is a team sport. You will need strong people helping you in all aspects of your investing and contractors are a critical component of your team. When I am looking for a contractor, I am looking for a long-term team member who can help me fulfill three specific needs:
It is difficult to find a contractor who is fast, does quality work, and has excellent pricing. The good news is that in today’s economy it is possible to find them.
Licensure and insurance are a must. If the contractors are not properly set-up with general liability insurance or do not want to provide information for your W-9 reporting to the IRS, I would recommend you keep looking for another contractor.
Decisions for your investment property improvement projects should be with intention and diligence. Although it can be a bit tempting to hire a company with the lowest bid, it would still be wise to hire someone who does the job right, and save money in the long run.
Where Do I Begin?
Here are easy tips on how you can improve your chances of selecting a credible contractor the first time.
Begin your list with at least three to five general contractors. This list will serve as the starting point. This is where you begin pre-screening them in order to end up with at least two or three good contractors whom you want to bid on your projects.
Referrals from friends, family and relatives can be helpful but you still need to look into what each company has to offer to ensure you get the best deals.
You may want to check ServiceMagic or Angie’s List. With Service Magic the contractors are typically pre-qualified regarding licensure and insurance, and you can find them in a wide variety of categories.
Your 8-Point Hiring Checklist
1. License: Make sure your potential home contractors are licensed and insured. Call your local state business licensing board to verify current licensure and ask about any complaints that have been issued to your potential home contractors. Also be sure to request a copy of both the license and insurance as part of your investigation.
Contractors are licensed as a Class A, Class B, or Class C, and then there are also trade licenses, specifically for HVAC, Electrical, and Plumbing. Here are the classifications:
Class A: Work on a single contract up to $120,000 or multiple contracts up to $75,000
Class B: Work on a single contract up to $7,500 or multiples up to $120,000
Class C: Work on single contact up to $1,000 or multiples up to $7,500
2. References: Talk to some of your contractor’s previous clients and references. There is no better way to evaluate potential contractors than by talking to their previous customers or checking out the finished work itself. If you get the chance to view some of the work that the company has done, don’t miss it. Ask the references specific questions regarding communication, project time-line, surprises, budget, etc.
3. Insurance: An absolute requirement for every contractor is a General Liability and Workers Compensation Insurance. If a certain contractor doesn’t have insurance, you could be the one held liable for any accident that can happen under construction premises while work is going on. Get a copy of the contractor’s insurance certificate from their provider before starting any project. Make sure the information is current.
4. Complaints: Search for contractor reviews and complaints online. Run your own background check on these contractors by searching for reviews and complaints from your potential contractions online. You can check out the Better Business Bureau site or other sites such as ServiceMagic or Angie’s List.
5. Contract: Create and sign a good contract. Sign a good contract that will protect the interests of both parties. Specify the tasks that need to be done, the duration of the project, its cost, and the payment dates. Don’t forget to be specific with the details. This is usually where the conflicts occurs.
The scope of work should include that they are responsible for any issues that may occur during the rehab. Residential rehab bids are often poorly documented with a lot of issues being overlooked, poorly defined, or left out. Include in the agreement the pricing, draws for payments, insurance requirements, and timeline for completion.
6. Permits: You should ask your contractors specifically about how they plan to handle necessary permits for the job. If they absolutely refuse to pull permits, consider this a red flag.
7. Change orders: Watch out for the change orders. Rehab construction has this element of unknown and other pre-existing conditions. These are conditions that may alter the original construction plan and are left inherent during the bid. Make sure the “change of order” process is clearly defined.
8. Deposit: All contractors will want to have some funds up-front. Be sure that the construction draw process is clearly documented in the contract to avoid future misunderstandings. Be careful of contractors who request more than 50% of the work up-front.
9. Schedule: Speed of construction is a major consideration. Be sure to clearly define the start date and expected completion date in the contract. Your holding costs on your investment will skyrocket if the construction takes forever to complete.
It’s Not About the Lowest Bid
No matter how long the search becomes, in the end what’s important is that you get the best deal for your investment. The best contractor value consists of a combination of quality, speed, and price. When searching for a great contractor, you want to find that balance.
Be sure you find a contractor who will be on your team and have your best interest as his primary objective. Keep in mind that you are providing the contractor with a large contract and entrusting him to do a great job and complete it on-time with minimal hassles.
I would love to hear from you. Leave a comment and share your contractor experiences, and we can all continue to learn from one another.