Good contractors are what take a property from unlivable to ready to sell, and you will come to rely on them a great deal while flipping houses. If you talk to a few people who have been flipping for a few years, you'll no doubt hear plenty of horror stories about investors who used the wrong contractor -- or even got burned by a scam artist.
How to Hire Contractors and Subs
General Contractor or Sub-Contractors?
There are two basic types of contractors who may deal with: General Contractors (GCs) and sub-contractors. Most flippers choose to hire a General Contractor, who then brings his own sub-contractors, overseeing their work and adding 30% to the price. If you have very little construction knowledge or don't want to spend time checking in deliveries, ordering materials and overseeing work, this option may work. Still, most investors end up acting as their own GC, so there's not necessarily a point in paying for one.
There are different schools of thought on this issue. Some investors see no value in saving a bit of money to take on the responsibility of handling all of the sub-contractors on their own. Keep in mind that a good General Contractor can be an invaluable asset. If you find someone you can work well with and trust to manage everything, you will only have to work with, talk to and pay a single person. They can also take on several projects at once, potentially saving you a ton of time.
Types of Contractors
While these are the two main types of contractors, this can be broken down further into general contractors, turn-key or specialty contractors and freelance workers. A general contractor (note the lack of capitalization here) has the ability to handle many aspects of the rehab work. Most excel at carpentry, basic electrical, sheet-rock, basic plumbing, basic HVAC and other general areas.
Specialty contractors are the most reliable option if you choose to act as your own GC and hire sub-contractors. Most specialty contractors are listed in the Yellow Pages, such as companies like Roto Rooter for plumbing, but you can probably find hundreds of reliable companies you've never heard of. Just be sure to check for the necessary credentials, such as a license and insurance.
Finally, freelance workers are those who have some experience but not enough expertise and experience to be trusted with the project without management. Freelance workers tend to get stuck with tough problems, and it'll be up to you to find the solution. As an example, a freelance worker may be more than willing to install carpet, but may not know how. In this case, you would need to demonstrate the proper technique, make sure the worker follows directions and gets the job done. Freelancers are the cheapest labor for the rehab, but also require the most time and effort from you.
Referrals are Important!
How do you know the contractor you hire will show up on time, do the work and not cause problems? This is why it's important to use referrals from other investors to keep your project on track and on budget. One option is visiting your local Real Estate Investment Club, as the investors who attend meetings will probably have referrals you can use. Since they've used these contractors before, you know they have a proven track record. Finding reliable contractors solves one of the biggest challenges of flipping properties.
Get Three Bids on Everything
When you're just starting out with contractors, it's important to have three different contractors make a bid. After you get perspectives and prices from each, you'll have learned a great deal about the cost to fix up a home. You'll also quickly be able to tell who is overcharging or who isn't qualified for the job.
After you become familiar with pricing, you'll learn how to ask the right questions of potential contractors. For example, you may ask a contractor how much they would charge to paint the interior of a 1,500 square foot home in 2-tone paint, including ceilings. With experience, you will know a good price is $1 per square foot. If they quote you $3,000, or $2/square foot, they probably aren't a good match.
Tips for Successful Negotiating
When you discuss a project with a contractor, the ultimate goal is a win-win scenario. You need to buy property at a discount, perform the rehab in the most cost-effective way and sell for a profit. Meanwhile, the contractor probably spends a great deal of his time on marketing, finding jobs, bidding and not getting a lot for this effort.
Your goal should be helping them understand you're not just a retail client, but instead want a contractor you can move with from project to project. This means they won't have to spend a lot of time looking for jobs, and you're offering peace of mind. This can usually earn you a good discount on labor.