By: Stephen Cook
Time and time again, it’s been said that the most challenging
element for an investor in rehabbing a property or flipping
real estate is working with contractors to ensure that
the project is completed within the planned timeframe
and budget. While there are numerous reasons for a project
to run over time or over budget, the two main culprits
are 1) lack of communication between investor and contractor
regarding quality of materials or workmanship and 2)
mishandling of repair monies by investor or contractor.
Beginning with the issue of communication (or lack
thereof), we as investors usually ask for one thing
while the contractor hears something totally different.
While the reason for this might be that the contractors
just aren’t listening to us, this isn’t necessarily
the case. Many times, we don’t specify exactly what
work we want to have completed. Be it newer investors
unfamiliar with available materials and contractor lingo
or experienced real estate investors facing time pressures
or unfamiliar repair problems, both groups fail to convey
their desires in sufficient detail. Rather, they speak
a language unfamiliar to the average contractor and
then become disappointed when the scope and quality
of work aren’t what they expected.
More often than not, we investors in flipping real
estate convey that the work should be done as cheaply
as possible; however, we fail to communicate what we
really want? “quality” work and materials for the cheapest
price. Let me explain.
Quality of Materials
For example, we tell a contractor to put in a new tub
surround. They hear us loud and clear. Subsequently,
they make a trip to Home Depot and buy the $29 tub surround,
install it and (rightly so according to our instruction)
think they just did a great job for us. We then receive
a call from the contractor saying that the work is finished
and drive to the property excited that our project is
moving along well. But alas, total disappointment awaits
us when we arrive and discover the appearance of the
tub surround. The walls of the surround are wavy, and
the edges are rough and unfinished.
In our mind’s eye, we had envisioned a much more appealing
tub surround. However, since we didn’t communicate to
the contractor that we wanted a quality surround that
would have cost $129, we received a cheap one that was
purchased for $29. So quality of materials is one area
Quality of Workmanship
But materials are only half of the equation when it
comes to a quality finished product. The other half
For instance, we may ask a contractor to paint the
interior of a house. From us, the contractor hears “paint”
and “get it done cheap.” “OK,” they say and off they
go, agreeing to do it without charging much money. We
leave thinking, “This one’s in the bag,” and begin to
mentally spend our profits from the resale of the house
as we drive home.
Meanwhile, the contractor does a little figuring. In
order to complete the job for the price quoted, they
can only afford to contribute a few days’ labor to the
painting as opposed to a week. Therefore, they have
to buy the paint and get started right away without
When the job is done, we receive a call and happily
drive over to inspect the work. Once again, though,
we are disappointed, this time due to shoddy workmanship.
Everything is not caulked properly, patches covering
prior holes are not smooth, and the trim is not “cut
in” like we wanted.
In short, we received a cheap paint job, which is what
the contractor heard us request. However, we had really
hoped for something much better. In this case, quality
of workmanship rather than quality of materials was
the area of miscommunication.
Solutions to Quality Problems
In most cases, the investor doesn’t even know what
they want. They don’t know the varying levels of quality
for materials available for a particular job, and they
assume they will receive high quality workmanship regardless
of the price quoted by the contractor. The idea that
someone might adjust the quality of their work downward
to meet a budget never crosses their mind.
For these reasons, investors have tremendous difficulty
conveying to a contractor their idea of a quality finished
product. AMaterials List (quality of materials) and
Scope of Work (quality of workmanship) are essential
in helping investors clarify their thinking and conveying
their desires to a contractor effectively.
As a part of the Scope of Work, I have assembled a
“Materials List.” This has several advantages.
First, it eliminates any confusion between myself and
my contractor on the quality of materials I want them
to use. Second, using the same materials on all of my
jobs produces the same finished product every time rather
than dissimilar results with which I may or may not
be satisfied. Third, I’ve documented what I like and
I don’t need to spend time deciding which materials
to use for each new job. Fourth, it allows my contractors
to call in their orders to Home Depot and have the store
workers pull everything for them in advance. This saves
them a lot of time as one trip to Home Depot for materials
usually consumes 2-4 hours, precious time that could
otherwise have been spent working on my project.
While it will take you some time to craft YOUR materials
list based on your own preferences, once you finish
it, it’s done. It was fairly easy for me as I already
knew the materials I use. I just needed to spend about
2 hours one day in Home Depot getting all the relevant
SKU numbers and prices.
Scope of Work
In my Scope of Work, I address many of my own concerns
regarding the quality of work to be done. While I don’t
believe it necessary to meet each contractor bidding
on the job at the site, I do firmly believe that you
must make each contractor understand what you want in
a finished product. Do this by using a Scope of Work
and being specific when explaining your vision for the
completed rehab project.
Quality is subjective. So don’t assume that you and
potential contractors are always on the same page. If
you want the walls to be smooth, say so. If you want
the ceiling smooth instead of textured, say so. The
more detailed you are in your Scope of Work, the better
contractors will understand your needs and the happier
you will be with the finished product.
A Scope of Work that specifically outlines the quality
of materials and workmanship expected also results in
a set of bids that will be easy to compare. Since each
contractor is instructed to use the same materials (e.g.,
same brand of furnace, same type of paint, etc.) and
provide the same level of workmanship, the only difference
between their bids should be the pricing.
Money Problems The second and more important of the
factors contributing to contractor problems is money.
Mismanagement of funds will throw a project into trouble
faster than anything else, particularly for those investors
with limited resources. Let’s examine several issues
surrounding the money aspect of rehabbing.
The opportunity to make some money is what brings the
rehabber and contractor together from the start. The
rehabber gets involved in a deal in order to renovate
a home and make a profit. The contractor does work in
order to earn money and make a living. However, their
approaches to the project are exactly opposite. The
rehabber wants to receive as much work as possible for
as little money as possible, while the contractor wants
to receive as much as money as possible for as little
work as possible. When all is said and done, a happy
medium needs to be found.
Low Estimates by the Rehabber
Sometimes a rehabber’s eagerness gets the best of them,
and they overoptimistically estimate too little money
for a rehab (remember, as much work as possible for
as little money as possible?). Occasionally, this low
estimate will result in them paying too much to acquire
a project resulting in even more pressure to complete
the rehab within their low budget. In any case, with
their low estimate in hand, they search high and low
for a contractor who will agree to do the job within
their limited budget.
Most contractors, even ones they have used in the past,
say they can’t do the job for what has been budgeted.
(Note: This should be a red flag, particularly when
contractors that have done well for you in the past
decline to take a job due to your low budget). So the
rehabber is left in a bad position. They weren’t prepared
to spend more, yet have no one willing to do the project
for the funds they have available. This is when communication
really begins to break down.
Ultimately, the desperate rehabber finds and begins
to negotiate with a contractor, stating they can spend
$XX,XXX. The contractor counters by stating what they
can complete for $YY,YYY, which is usually more than
the rehabber anticipated. Then the rehabber pleads their
case, asking the contractor to do more for less. The
contractor hears them out, and they agree on a price.
However, one BIG problem usually remains. The rehabber
typically doesn’t plead their whole case, and so the
contractor usually doesn’t hear everything. What results
is a shaky relationship between rehabber and contractor
where the rehabber unjustly expects more than they will
receive and, since the rehabber never told them the
full story, the contractor expects to deliver less than
what is really necessary.
Solution to Low Estimates
In order to avoid underestimating a job, you as an
investor must educate yourself on the prices in your
area. Speak with lots of local contractors and investors.
Take a few to lunch. Walk through other jobs that investors
or contractors are estimating. Spend an afternoon in
Home Depot pricing out materials for a rehab. Ask lots
of questions. A few lunches and a few walk-throughs
and you’ll start to realize that you’re hearing the
same repairs and numbers over and over again. Then you’re
ready to construct your own estimates. If you’re still
unsure, have a contractor or an investor double-check
your numbers. And don’t worry about being exact. No
one ever is. Include a “fudge factor” of about 10-20%
of your total. And finally, realize that you will never
know everything and that you will occasionally encounter
a repair which you don’t know how to estimate. In those
cases, just find someone who does.
Throughout the process of estimating, remember that
your goal is to make an educated guess, arriving at
a number that is as close as possible to the final number
given the facts at hand. If there are a lot of unknowns,
your educated guess will be less accurate. Therefore,
you should include a higher number for contingency,
or “fudge factor.”
Also remember when estimating that your primary concerns
are the big ticket items? roofs, kitchens, heating systems,
etc. Little things such as paint, carpet, new light
fixtures, and new switch plates are always going to
be renovated, so assume that you will always do these
things and spend your time estimating the condition
and cost of repairing the big ticket items.
Unrealistically Low Quotes by a Contractor
Low quotes can be good, but not if they’re too low.
Often a contractor will price a job out. Then the rehabber
will ask the contractor to do the work for less. Occasionally,
the contractor pads the price. Often, however, there
isn’t much room to maneuver, especially they have been
asked to work cheaply. Even so, the contractor wants
the work so they lower their already low quote and agree
to do it for the price you’re willing to pay. Part of
the way through the job, they realize their quote was
too low for them to make any money on the job. So they
attempt to turn the job into something profitable by
beginning to cut corners. They use cheaper materials,
don’t do everything as promised, or simply walk off
the job, leaving it incomplete (especially if they’ve
already been paid for the work that has been performed).
Solution to Unrealistically Low Contractor Quotes
The solution to this money problem is to beware of
the lowball quotes and use common sense. If you’ve approached
ten contractors who say it will cost $1200-$1500 and
one who says $750 or $800 but they need half upfront,
pay a little more and go with one of the ten. You’ll
be saving yourself a lot of time, headache and, in the
long run, money. Comparing
Rehabbers often obtain multiple quotes and then use
a quote from one contractor to negotiate a lower quote
with another contractor. The problem in many of these
instances is that the rehabber is not comparing apples
with apples. For example, a quote to install a Trane
furnace is not the same as that for a Ducane furnace.
Materials and methods can vary widely, and you need
to be able to convey specifically what you want.
Solution to Comparing Incomparable Quotes
Most importantly, when seeking quotes, you need to
ask each contractor for the same thing. Providing a
Scope of Work or “spec sheet” outlining the details
of the job in terms of quality of materials and workmanship
to each contractor from whom you would like a bid is
a great way to accomplish this. Also, in doing this,
each quote that you receive will be very comparable
to the others.
Mismanagement of Repair Funds
This is also an area that has derailed many a rehab
project in the past. Either investors advance too much
money and the contractor disappears without completing
the job, or the investor fails to meet his obligations
and pay a contractor for their work when it has been
completed. In order to ensure that both sides receive
what they need, a draw schedule should be drafted and
agreed upon before work on the project begins. Let me
A draw schedule is important to you as the investor
for the following reason. It protects you by preventing
the advance of too much money to the contractor at any
time throughout the project. For example, if an investor
has paid a contractor for the entire job before their
work has been completed, there is no incentive for the
contractor to finish the job.
Here’s an example from my personal experience. I’ve
done this many times (and always much to my regret),
and many of you probably have also, but as a human being,
my desire to help another person often made me forget
past experience. So, often when my contractors would
come to me on a Friday and say that they needed some
money to pay their help, I would give in. They were
usually about 90% done with the job and wanted to be
paid for what they had completed. So rather than holding
back the entire final draw, I rewarded them for what
they had finished and gave them enough money so that
the total amount they had received from me to that point
equaled 90% of the contract price. I did hold back 10%
of the budget until they completed the job, thinking
that I was still protecting myself.
Well, giving a contractor 90% of their due has proved
to be the biggest mistake I have ever made as an owner.
Once a contractor receives 90% of their contract price,
there is very little incentive for them to return and
complete the last 10% of the job. The reason for this
is that all of the little details that make up the last
10% can be as difficult and time-consuming to complete
as the first 90%. The final tasks of a project are tedious,
require attention to detail, and take a special person
to finish. Therefore, since a contractor has most of
their money, they would rather leave and take another
job than finish the last 10% of the work.
Since I was sympathetic to their plight and thought
I was “protecting” myself with a 10% holdback, I made
the mistake of not holding back the entire final draw
time and time again. That is one of the main reasons
this contract exists today, to ensure that I (and anyone
who uses this agreement) implements a correctly drafted
draw schedule to ensure that the investor always owes
the contractor more money than the contractor then owes
Now, the contractor, on the other hand, holds the exact
opposite view as the investor. They always want to owe
you more work then you owe them money. They have been
burned by people who haven’t paid before so they want
their money upfront. This way, if you fail to pay them
at any time throughout the project, they can cease working
on the project without losing any money.
As a result, at the signing of an agreement, you may
need to do a little convincing. Tell the contractor
that one of the reasons for the agreement is to arrive
at a mutual understanding so you can manage your draws
well and build trust by paying the contractor on time.
Also point out that your draw schedule will ensure that
the contractor receives his money in a timely manner
and to protect them by ensuring that they are paid in
In terms of putting money into the contractor’s pocket
at the appropriate times, the draw schedule can be very
beneficial to the contractor. They are spending time
and money to complete your renovation. Most don’t have
an endless supply of resources and need your money to
pay their bills, feed their families and stay solvent.
In addition, just like you feel great when you receive
a paycheck, obtaining a check in return for their efforts
is rewarding to your contractor.
The draw schedule also protects the contractor by ensuring
that upon completion of their tasks, they will receive
payment in full. It forces you as the Owner to live
up to your obligations and pay the people you have hired.
When your contractor has finished their work, they should
receive a timely payment IN FULL. I do not advocate
the distribution of partial payments under ANY circumstances.
Pay your contractor 100% of their money when they are
done with 100% of the work they have agreed to perform.
So sell the contractor on the benefits of the draw schedule
to him and be reasonable (being too firm may ruin the
relationship). Don’t agree to advance more than a normal
deposit to the contractor to start the work and don’t
deviate from the draw schedule once the work begins.
Break either of these two rules, and you’ll be sorry.
Follow them, and they will assist you on the path to
NOT ALL CONTRACTORS ARE OUT TO GET YOU!
At this point, I’d like to caution everyone not to
lump all contractors into one category. Not all contractors
are poor money managers and not all contractors fail
to keep their word. There are plenty of qualified, reputable
contractors available who have built strong companies
and stand behind their work.
Most quality contractors won’t have a problem agreeing
with the language contained the agreements that I use.
The reason for this is that they take pride in their
work, stand behind their finished product, and manage
their money well. If you present an agreement like mine
to a contractor for his signature and they have a problem
with acknowledging it, then that should be your first
red flag indicating that you will have trouble with
them in the future.
About the Author: Steve Cook
Since 1998 Steve Cook has flipped hundreds of
houses as an active Baltimore-area real estate
investor. Steve’s unique specialty is the “flipping
homes 1-2 punch”, a proven system of real estate
investing that powerfully combines wholesaling
houses. Also the founder of www.FlippingHomes.com,
Steve is dedicated to helping others in this thriving
online community succeed through understanding
and aggressively applying his time-tested, step-by-step
approach to flipping
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