As value-add real estate investors, we are looking for deals that need to be improved to increase the property’s value. I’d say one of the most difficult things to do is finding solid contractors that you can rely on to show up on time and do quality work, and won’t rip you off.
With more than 15 years of experience in real estate, I have run large commercial projects while working with other companies and have had to bring people on for our deals today. I’ve had to bring on general and sub-contractors to work on all sorts of deals.
Here are 3 considerations on how to best deal with contractors and reduce headaches and issues that may come up.
1) Don’t Hire the Cheapest Contractor
When you get multiple bids on a job, it may be tempting to go with the lowest offer. Often, the lowest contractor either left something out of his proposal and they will change-order the entire time they are on the job. If they don’t do that, they will realize partway through the job that they underbid and just up and quit on you. Worse than either these two things are that they will just order additional materials only to end up missing.
Instead, hire a contractor that is the right for the job. If they are a specialist at painting, don’t expect them to do an excellent job laying down marble tile. Ask for pictures of work they have done before. Ask for referrals. Don’t hire a single-story contractor to do major work on your three-story multifamily property. Get referrals and make sure to call them. Aside from phone calls, you can also check their ratings on websites you trust. and look at their Facebook page to see what others have said about them.
2) Look at Their Financials
Once you narrow down your list of contractors that are a good fit for the job, you will want to ask them if you can get a look at their balance sheet. You are looking for how they make their money, and do they have the cash to pay their employees and other overhead. If that contractor only has $15,000 in the bank, they are obviously not financially healthy. They won’t be able to hire enough people to keep the job on track. It also tells you that they do not have a pipeline of customers that want to use their services.
Getting your hands on their financials is even more important if you are doing a large-scale rehab or new development. The largest chunk of the project will be spent with this contractor – more than permitting and other costs. If you don’t get this info, you risk not only a delayed project but also legal issues and loss of rental income.
3) Check the Contractor’s History
All contractors must be licensed in the state they are working. As part of your due diligence, you need to make sure they are licensed by looking at their registration with the state. For many states’ websites, you can see the contractor’s history and background a well as problems and complaints. You can see if their license is up to date or if it’s lapsed or suspended. You can use those same resources to find any down payment limits as they vary from state to state.
As far as other considerations make sure they have General Liability, Worker’s Comp and property damage insurance before they step foot on your property. Also, always get a written contract that lays out how and when payments will be disbursed. (I would talk to your attorney for that document.) For larger projects, you can use a checklist that lines up to the contract which will help keep expectations for both you and the contractor. Speaking of payments, never pay cash. Use a check or credit card for small jobs and arrange financing for larger projects.
If you are looking to hire a handyman for several properties, ask them to do a small job to see how they perform. Do they show up on time? Did they perform the work as promised? Were they conscientious about the property and the neighbors? A test job is a quick way to find out.
Anyway, do you have any tips on hiring contractors? Let me know in the comments.
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