The Original Realty Magazine
50% or more of your success in real estate is going to come down to how you deal with contractors. You can find and negotiate great property deals all day long, have all the capital in the world, and even be great at leasing and resales. However, if you don’t have great contractors and don’t know how to manage them well, it can all come apart.
This is true whether you are just starting out on your first HGTV style project or you are a giant fund buying millions of dollars in property a week. I’ve been doing this for 18 years, and I’ve seen it make or break many investors and institutions.
The Importance of Managing Contractors Well
You can’t get your assets producing income and profits unless the contracting work is done. It doesn’t matter if you acquired that deal for four cents on the dollar if you can’t get it ready for a renter or in good enough shape for another buyer to get a mortgage on. You can’t maintain great tenant relationships and a strong reputation that attracts great tenants and creates the best returns if you aren’t managing contractors well.
However, if you can cultivate a group of great contractors, then you can have a huge edge in the marketplace. You can get in and out of deals faster, turn them into cash faster, earn far higher annual returns; and in turn earn more weight with bigger sellers, buyers, and other vendors.
For the most part, the majority of contractors aren’t very efficient. At least not from an investor, owner or builders’ perspective. To master this, you not only need to be able to find the good ones, but learn how to manage them well.
Systems & Strategies
I started out flipping houses in 2000. It wasn’t so much DIY renovations, but micro-managing contractors to get mostly cosmetic projects done fast.
I quickly learned the need for systems and processes. That was going to be essential for scaling to bigger and more intensive rehab jobs and closing more volume.
Some of the most common issues investors complain about with contractors are that they are always jumping between jobs to get more upfront dollars without finishing jobs, that they co-mingle funds and are always short, and they frequently jump ship entirely when a better project comes up.
So, one of the first things I started doing was to begin negotiating and structuring contracts on performance. If you’ve got a smaller $50k or $30k project, for example, you can break up your scope of work by the week. You give them a set timeframe for these items, and pay them weekly on a percentage of the job done. So in essence, it’s performance and inspection based.
Another strategy for those who are just getting started in house flipping, or when overwhelmed with lots of deals or when exits are taking longer than expected, is to use joint ventures. You can do a JV with a contractor, let them absorb the labor costs, and pay them at closing with a percentage of the profit. They may bring suppliers and material deals too. I don’t often use this structure, but it can work well.
Even without a JV, you can have contractors bring their own materials. This way you aren’t eating the cost of paying for extra materials, have waste, or need to store it or have them take it to another job site.
Rethinking Working with Contractors
One of the biggest sources of friction and frustration with contractors is that investors and contractors often have conflicting interests. They have a history of not getting along smoothly or efficiently, and the way most approach it just fuels more of that.
Investors want to pay as little as possible, as late as possible and yet have their work be top priority, get done instantly, and be perfect. Contractors also work on very short cash cycles, have subcontractors to pay weekly or daily, and need to take on a lot of jobs to maintain income.
So, I probably work with my contractors much differently than most. As a result I have people that I’ve been working with for over 10 years. I keep them fed. I keep them going with consistent work, not just promises of future work. Right now, they are working on 6 rehabs, and there are 3 more deals under contract and waiting to close for them to work on.
Contractors are much more motivated when they know there is future work and they get good pay. I think about them, other team members, attorneys and vendors, and even neighborhoods in all parts of my business like family, and people I want to take care of. I have a lot of people relying on me and who I have the ability to help, by providing good jobs and business too. I’m really passionate about that.
So, make sure you are adding value too. A lot of people complain about contractor prices. I try to think of them being like me. Like me, they want to provide for their family. So I don’t always beat them up on price. I even let them win sometimes. They feel good and put food on the table.
Not every person is going to respond to being treated like this the way you want. They’ve just been burned too many times in life already. Still, it’s worth trying. Treat them like family. Care about them. Just have smart checks and balances in place too, so that you know the important work is going to get done, at a good price, and you are serving your other investors and clients just as well.
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