After the purchase, the most important factor in your fix and flip project will be the performance of your contractors. Managing your expenses and making sure you are on budget can mean the different between profit and potential disaster. Proper contractor management not only ensures you are under budget but also on schedule to finish on time. Even a two month delay could spell trouble for a flipper – this means two months of interest payments, two months of missed rent, two month delay in selling the property and moving on to the next project.
In fix and flip projects time really does equal money.
Problems with your contractor can send your project into a tailspin – contractors have no issues walking away from a job, and other contractors will be hesitant to pick up where the previous one left. Add potential liability issues, cost overrun, and change orders – and you can see how a bad situation can turn worse.
We complied 9 helpful tips to make sure your contractors perform properly, and make sure your fix and flip project is a success.
1. Hire locally and ask for references
References are the best way to find good contractors – ask your friends, family, and business associates if they know anyone who can perform the job. Ask them about potential issues and about the quality of the work performed. Hiring local contractors is not just convenient, it removes travel time and helps a lot when pulling permits – as most local cities require separate registrations for an approved contractor.
2. Look up the contractors online
- Every contractor has to be licensed by the state board. Here is an example of the California board for contractors, where every professional is named and numbered. Hiring a licensed contractor is the only way to go – it ensures quality off the bat, all licensed contractors must adhere to minimum standards. Most importantly – many state contractor boards must post a performance bond, so you are protected against damages as a result of the work.
- A word on workers compensation – injuries on the job happen all the time, and a lawsuit against you could devastate your project. A licensed contractor should always have worker compensation insurance for his/her employees. It will protect you first, and it is worth paying more for contractor with workers’ compensation.
- Check out if the contractor has any reviews – you can look up at Google Business, Yelp, or any other reputable site for reviews. We don’t think every review is gospel, but if a contractor has 20 good reviews is better than 20 negative ones.
3. Get multiple bids
Gather at least 3 bids before you make a decision so if this is your first time, you aren’t getting ripped off. It’s not bad idea to mention to potential bidders that you are looking around, so they are encouraged to submit the best price. Always get bids in writing.
Don’t choose the cheapest bid right away. This may seem counterintuitive, but it may save you headache in the future. A lot of contractors and subs will bid low just to secure the job, and later send you charge orders and extra fees and you’ll end up paying more.
4. Never pay upfront
- Never pay for a job upfront – contractors always want some or all the payment upfront – which eliminates risk for the contractor and exposes you to liability (and runaway contractors). Don’t be fooled or pressured when a professional asks you for cash so they can buy ‘materials’ – it’s one of the oldest tricks in the books.
- Buy materials yourself – never hand cash to a contractor before the work is completed. If the contractor tells you the price is from a ‘special supplier’ or a ‘wholesale price’ – simply suggest to go to the supplier with the contractor and pay yourself. Paying after the job is completed makes sure the contractor is invested in the project and completes it fully.
5. Always sign a contract
A good contract in writing will protect you from pitfalls during the job – a good agreement can specify in detail what the contractor needs to do and when they get paid. An agreement should include the scope of work, responsibility of the contractor, what constitutes a finished job, and payment terms. It’s tempting sometimes to work on a handshake – its fast and easy and you get to start the rehab right away. Don’t fall for it, a good contract is like insurance if anything goes wrong.- Get a local attorney to draft a template contract you can use for all your subs – insist to use your form so you can control whats in it and how it will play out during the course of the construction.
- Everything is negotiable – even if the contractor insists on using their own contract form – remember you can make changes to it, on everything. So if you read it and don’t like something, make changes and submit it back to a signature.
A good contract in writing will protect you from pitfalls during the job – a good agreement can specify in detail what the contractor needs to do and when they get paid. An agreement should include the scope of work, responsibility of the contractor, what constitutes a finished job, and payment terms. It’s tempting sometimes to work on a handshake – its fast and easy and you get to start the rehab right away. Don’t fall for it, a good contract is like insurance if anything goes wrong.6. Details of work are important
Here are just a few things to think about when considering the details and scope of the work:
- Who buys and pays for the materials? Is the amount you agreed to includes labor and costs?
- How detailed is the scope of the work section?
- Does the contract specify when the work is completed?
- Change orders – when can the contractor ask for them and how much will they cost you?
- Who is responsible to pull permits? Who pays for permit fees?
7. Do a property walkthrough before payment
- Create a checklist before the work starts and make sure everything is checked off before letting the contractor go.
- Ideally one of the checks should be a final inspection by the city (if needed) – many times the contractor will finish the job, only to find out the city inspector found problems with the work.
- This is a quality control measure to show the contractor his work will be inspected to ensure it is done right
8. Lien Waivers and W-9s
Lien waivers and W-9 forms are very important to complete before letting the contractor go – and can save you a ton of headache in the long run.
- Lien waivers – contractor liens are incredibly powerful if successfully placed on your property. It can cloud your title and grow over time. With a lien waiver – you ensure in writing the work is complete and the contractor was paid in full.
- W-9s – all vendors performing work for you above $500 should fill and complete a W-9 to comply with the IRS. It ensures that you can expense the work and show it was a legitimate business if you are ever audited. Getting audited a year after the project is done and then running after contractors to fill out a retroactive W-9 will be as easy as finding D.B. Cooper.
9. Lawsuits and disputes - what to do when things go wrong
Contractor disputes happen all the time – they walk away from the job, want more money because they estimated the budget wrong, or any other reason agreements go south. If you end up in a dispute and can’t resolve it amicably, here are a few ideas:
- Write a demand letter to the contractor and ask for the money back. It creates a starting point for the negotiation and it solve the problem if the contractor decides to complete the work to avoid a dispute. In some states, it is required to at least attempt to settle before filing a small claim complaint.
- Write a negative review – reviews can make or break a business, and leaving a factual review of the contractor at the appropriate can be a strong bargaining chip if things go south.
- Surety Bond – licensed contractors in most states have to post a performance bond by law. If the contractor did not perform or caused you damages – you can file a claim with the bond company (called a surety) and collect the amount of the bond.
- Insurance – licensed contractors always have insurance – you can file a claim against the insurance for damages. You can do it yourself, use an attorney, or with a claims adjuster.
- File a small claims lawsuit – small claims is fast, efficient, and parties can’t use lawyers. If you are sued, you have to show up, in person. Most states have an easy process to file, and cost is usually minimal.
- Consult a lawyer to see if you can collect in civil court – obviously a lawsuit is expensive business, and few attorneys will be willing to work on contingency for a contractor case (not to mention the amounts are usually low). But in cases with over $10,000 – it may be worth your while to litigate.
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