How to Manage Contractors When Investing in Real Estate
Who doesn’t have a horror story about dealing with contractors?
Getting gouged by greedy and incompetent construction men is almost a right of passage for investors.
The Mason From Hell
My top debacle happened shortly after I closed on my third property. It was early in my Real Estate career and cash was tight. The building inspection report had mentioned an issue with the brick facade. I didn’t really understand the problem, but—I was sure of one thing—I didn’t have enough money to pay for expensive repairs. After getting three bids panic was setting in. Two quotes were for over ten thousand dollars! It was money I didn’t have.
The expensive firms gave me written estimates with technical drawings. They explained that to do the job properly, they had to dismantle the wall, install new anchors, and then rebuild the wall straight. “You can’t repoint brick that’s sagging,” they told me.
The third guy gave me a verbal estimate that was a fraction of the cost of the other two.
Which guy do you think I picked?
We shook hands. I handed over my deposit and the cheap guy went to work.
He showed up on a Saturday with two guys in the dirty pickup. It struck me as strange that they were working on the weekend. Later I realized they did this to avoid city inspectors, who patrol job sites on weekdays. Of course, the “contractor” had neither a construction license nor a permit to carry out the work.
Three hours after he’d started the job, the guy called me. “Re-pointing won’t solve your problem,” he said. “Brick is separating from the house. We need to take down the wall and rebuild it.”
He now wanted triple the price: the exact figure the other two contractors had quoted me! This guy had chucked in a low bid, knowing full well he wasn’t quoting the real price. With half my money in his pocket, the crooked mason was suckering me for more cash to do the job right. With no written contract, I couldn’t even argue about what was involved.
“Get lost,” I told him. “I’ll get someone else to finish the job.”
“I’m not leaving without the rest of my money,” he said.
I drove off in a huff. A few hours later, I found the mason and his two buddies parked in front of my house. As I tried to get in, they blocked my path. It was a bad situation.
In the end, after a shouting match in the street, I paid them for three-quarters of the job even though their work was useless. After calling back one of the more reputable guys, I paid for the job twice. The expense went on my line of credit, and it took me a year to pay it off.
Do It Right The First Time
Dealing with contractors can be a major challenge. Maintaining and repairing properties is expensive, and therefore anxiety-inducing. Construction attracts all sorts: from the expensive and highly competent to the fly-by-night and dishonest. Add this to the fact that at least initially—we, the investors—don’t fully understand the work we’re subcontracting out.
Who fully grasps plumbing, electricity, masonry, roofing, drainage, and HVAC the day they close on their first property?!
For me, the main issue when dealing with repairs has been the learning curve of knowing whether the intervention proposed is the right one. Often, different contractors propose slightly different solutions. If we don’t know fully grasp the principles at work in maintaining something, it’s hard to know which intervention is the right one.
Don’t despair! There are things you can do to minimize the headache and uncertainty and to educate yourself before you award expensive contracts.
How Not to Get Hood-Winked
Here is a list of do’s and don’ts that will save you from the mistakes I made early in my career.
- Always get more than one quote. Make sure the estimates are detailed and that each line item is properly explained. You’ll want to compare pricing, but you also want to understand the solution being quoted.
- Consult Uncle Google. If you want to know the state-of-the-art way to repair something, do a little research. Many construction firms post blog articles that explain the proper way to repair and maintain building systems. Do your homework before awarding a big contract!
- If you don’t completely understand the construction principles behind the work being done, make the contractor explain them. Get technical drawings. Make each contractor walk you through the proposed solution. Asking questions also serve to gauge overall competence and willingness to take time with you, as well as the quality of the proposed solutions.
- Compare the quotes. What are the differences? Are all the contractors quoting the same solution? Are you comparing apples to apples or apples to oranges? Be aware that the cheapest price might not address the whole problem.
- Make sure the contractor is licensed. (The license number should appear on the quote.)
- If there are any changes along the way, make sure the contractor amends the original quote in writing. You always need to have up-to-date documentation reflecting what’s been done. This will serve not only to guarantee the work but also to protect you if anything goes wrong.
- Define your payment terms. This is a big one! Insist that an amount be paid on completion (ideally as large an amount as possible). This ensures the contractor doesn’t get fully paid until everything is done to your liking and all the debris is taken away.
- Get referrals when you can. Consult other landlords in the neighbourhood or fellow investors before you ask Yelp or Facebook. What specialized firms have your investor colleagues used? How was their experience? Networking is a great way to find honest, reliable contractors.
Take Your Time
Whatever you do, don’t rush the process of awarding big construction projects.
- Focus on getting it right, not just getting the best price.
- Take the time to understand what’s getting repaired and how.
- If you’re ignorant of the construction principles involved, learn about what you’re paying for.
- Get a feel for how contractors respond to you. Do they take the time to explain things properly? Return your phone calls? Show up when they’re supposed to? Is their paperwork in order?
Construction jobs can be unpredictable. You might know where certain repairs start but not where they end. Make sure the person handling the project is honest, polite, responsible, and easy to deal with. Treat the quotation process like a job interview: let each contractor show you who he or she is.
And, a final word of advice, always gets everything in writing!
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