If you are a value-added investor, meaning you make some sort of improvement to a property in order to increase rents or increase the property’s value, or if you are a buy-and-hold investor, or if you are a developer, contractors are probably one of the hardest things you have to deal with.
Josh Simon, a seasoned investor and developer, has over $90 million in construction planned in 2017, so he will be dealing with a ton of contractors both this year and beyond. And with 12 years of investing experience under his belt, he already has the expertise and experience to manage all the general and sub-contractors required to effectively complete this year’s projects. In our recent conversation, he provided advice on how to best deal with contractors to mitigate as many headaches or issues as possible.
#1 – Don’t Hire the Cheapest Contractor
While this advice may seem obvious to most, when selecting between multiple contractor bids, don’t simply accept the lowest offer. Josh said, “let’s say you get three prices in anything in life, just like when you have a handyman at your house or if you are doing a remodel on a rental, don’t always go with the low guy, because you’re either missing something or he’s going to change order you to death and you’ll end up paying more.” In other words, the lowest priced bid upfront will likely end up being the most expensive option by the completion of the project because either the initial bid excluded certain parts of the project or the contractor will tack on extra costs throughout the project.
Instead, hire the contractor that is the best fit for the job. “If you need a foot surgery, you don’t call a heart doctor,” Josh said. “I think the same thing with architects and contractors. Have they built that product type before? We’re not going to use a single-story retail contractor to go build a two-story office building. It just doesn’t make sense.”
In order to determine who is the best fit for the job, ask. Ask both the contractor AND ask for referrals. Then call the referrals to see how the contractor performed on their project.
Pretty straightforward and simple advice.
#2 – Ask for Financials
When you are bidding out projects to contractors, you don’t only want to confirm that they are the right fit for the job, but you want to look at their financial history as well. Josh said, “What we really want to see is how much revenue are they doing. Are they making money? Do they have cash?”
If you are doing a $250,000 project, for example, do they have enough cash to pay a subcontractor who is threatening to not show up unless they get paid for their work? “We’re processing a draw for the contractor, which is how you pay the contractors. You pay them through a draw process,” Josh said. “If that sub [contractor] needs money and he’s only got $50,000 in the bank, is your job going to proceed as fast as you want it? Is he going to stay on schedule?”
Obtaining the contractors financials is important regardless, but it’s even more important for development or full rehab projects. Josh said, “When you’re building anything, especially what we do, our construction cost is probably 80% of the total project budget, so that’s one of your biggest decisions you need to make. If it’s not done right, you can end up with legal issues, with a delayed project, with loss of rent from the project being delayed.”
#3 – Check the Contractor’s History
Josh’s last piece of advice when hiring a contractor is to go to the registrar of contractor’s website and look them up. Do they have any outstanding complaints? Do they have task complaints? What does their history show online? “The registrar of contractors for every state has one. As a contractor, in every state you have to be licensed. And every state has an online database where you can look up that contractor,” Josh said. “You can pull up the contractor’s name, find their license: when does it expired? Do they have all their stuff current? And then also, are there any complaints that have been filed against the contractor? You can actually pull up that information.”
In order to mitigate the chance of running into contractor issues, developer Josh Simon recommends taking the following three actions:
- Hire the contractor who is the right fit for the job. Not the cheapest
- Obtain the contractor’s financials
- Check the contractor’s history online
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