Hiring the RIGHT contractors is a critical part of the house flipping business. The following tips are based on what we have learned from our flips and dealing with dozens of contractors.
When explaining how to flip houses one of the best tips I can give you is to try and consolidate as much work as you can under the least number of contractors. For this project it meant hiring a general contractor (GC) to do most of the work.
However, regardless of how many people you end up hiring you should use the same basic hiring process.
House Flipping Tips #1: Consider a General Contractor if the Project Calls for It
When I did my first rehab I hired separate contractors for the different aspects of the project. I hired the painters, the garage door guy, the drywall guy, pressure washing guy and so on. But that was basically because it was a “small” project. It was a total of $10,000 in repair work and took less than two weeks to do.
In this case since I was still learning how to flip houses I knew I was facing twice the amount of work and cost plus the fact that it was more complicated work. Considering that I would have had to deal with 10+ different contractors over a 2 month period and the fact that I have a day-job it just was not realistic to hire and manage all the workers myself.
One of the best tips I ever got was to hire a general contractor.
When trying to decide if you should hire a general contractor (GC) consider the following:
Cost and Scope of Project - There probably is no set cost and/or number of repairs at which you would be better off getting a GC. Because I have experienced the difference between a $10,00 rehab and a $30,000 rehab I now know where to set that line. But consider that if the project will involve several trades and more complex repairs then consider a GC.
Your Experience- Are you good at managing people? Can you set detailed expectations and hold people accountable for them? Will you fire a contractor if they are not performing to expectations?
Your Time and Availability - By far the number one advantage for me of using a GC was the time it saved me. It was great getting a phone call or email every other day to update me of what was going on, what colors I wanted for the kitchen, how things were progressing. I didn’t have to keep going to Home Depot to get this and that, open up the house, make sure I was there to explain what needed to be done to each new trade, etc. This is the reason why real estate investing can be done as a side business - if you can’t be there then hire somebody who can.
Profit Margin - Let me be clear, using a GC will be more expensive, period. So I made sure that based on my initial profit calculations and then my repair calculations I could pay a GC for the work and still meet my profit goals. I could have saved a couple of thousand by not using a GC but it would have taken me at least another month to complete the work plus 10-20 weekly hours of my own work. How much is that worth?...
House Flipping Tips #2: Ask the Right Questions
You need to screen every contractor in some way, shape or form. From the guy that is cutting the grass to the electrician that is re-wiring the house. You do this to protect yourself because the wrong contractor can wreck havoc on your project. Although you will screen a GC harder than you will the lawn guy, consider the following questions as applicable:
1. Are you bonded, licensed and insured? Workman’s comp insurance (if he has employees)? – Ask to see the license and for insurance company information that you will verify on your own.
2. How long have you been doing this, how many similar rehabs have you done, have you worked with investors before (does he understand how to flip houses and my needs)?
3. How much of a detailed breakdown will you provide in your bid? Will you create a scope of work?
4. How do you break out your payments? – I suggest you negotiate the smallest amount possible up front, then a 25-30% payment when 50% of the work has been done and then the final payment after the final walk through.
5. Will you be using your own employees or sub contractors and how will you pay them? Who will you be using for what? – If he uses sub-contractors they can put a lien on your house if he does not pay them.
6.Ask for three references with phone numbers (that you will call).
7.Will you be getting the permits if they are required?
8.When will you start, when do you expect to be done and when is the absolute final date you will be done? – This is crucial if you don’t want your project to drag on forever. Ensure these dates make it on your signed final contract.
House Flipping Tips #3: Compare Bids Carefully
You should get at least three bids for any work you are hiring. The same goes for the bid for your GC. However make sure that you are comparing “apples to apples”. This is another reason why your scope of work document is important.
When comparing your bids the cheapest bid is not always the best. It can be if you figure out why it is cheaper than the other ones and it is a justifiable reason.
For example, I had three bids for doing some waterproofing work in the basement. One bid was low, one was high and one was astronomical. But the reason for the astronomical quote was for the overhead – the marketing, the glossy brochures, the company trucks, office employees – a more scaled down operation was able to do the same work for significantly less with the same warranty.
When comparing the different GC bids I had two that were very close and one a bit higher. They all came with good recommendations and I had seen their work in previous projects.
However one of them gave me a very detailed breakdown of the work to be done. For me that was somebody that thought like me and I liked this approach.
I went into further negotiations with this GC and ended up awarding the job to him.
House Flipping Tips #4: Protect Yourself
You do this in two ways: insurance and contracts.
Insurance - insurance means both yours and theirs. They have to have to be licensed if the state requires it and they have to have general liability insurance (I suggest at least one million) that you will independently verify with their insurance company. You also have to have your own insurance on the property plus I suggest you also have an umbrella policy as added protection.
Contracts - Everything that was agreed on, discussed and promised has to make its way to a piece of paper which you will both sign. Make sure the contract includes start and end dates, scope of work, payment schedule, final payment after a final walk-through, lien release or lien waiver, and a method of settling disputes (usually arbitration).
Hiring and managing contractors is one the many real estate investing basics you will have to deal with when flipping houses. At the very least you can use these house flipping tips for your real estate investing training and at best they can set-up the success of your house flipping project.
Up next, I will give more house flipping tips for dealing with problems and staying within budget and schedule…
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