How to do this right, please Advice!!!

Question

Hi there,

I am about to start a rehab next week, and I have a question about how should I do this right.

I am working with a realtor that is advising me and helping with the contractors. He met them, and we went over the bids together, he is very knowledgeable and I was recommended to work with him from someone I worked before. So far, we have a verbal agreement that he will charge a fix fee every time he must go to the site and oversee the work. That includes phone calls. We estimate he will go once per week. Basically he will be a sort of a project Manager, but I will not pay him a percentage of the rehab project. We agreed a fixed fee each week.

We contacted several contractors, and the one that he has more experience working with,  has the best bid...not necessarily much cheaper than the other one. I decided to go with them.

My question is that he told me my deal is with him, and he will pay off the contractors. So the deposits must go through him. I already told him that I want this things on written, and he has no problem with this. What kind of agreement should I write on paper with him? Anybody have a template?

Also, is that right to pay this contractor through him, or I should pay  directly the contractor by myself??

One more thing since  he acts as an advisor, Should I carry an insurance to him in case he hurts himself the site?

I already told him I want to check the insurances policies of the contractors, and that they are right. He already told me he will get them for me to review. he has no problem with any of this.

I honestly  like the guy, he seems to know what he is doing, he told me he invest himself. Also, he is a realtor, he works closely with someone with a great reputation. I just want to do the things right and structure our agreement on paper. Also, I want advice about if I should pay him so he pay the contractors, or I do pay the contractors myself. It is just our first time working together, not that I suspect him to not be honest. Not at all. I have no reason to be wary of him until date. I Just need a  little bit of guidance , or if other investors were in the same situation how they did it.

Thank you so much for all of you who can help me out with this.

Matthew Irish-Jones · Answer

It sounds like your Realtor is making it up as he goes.  If you have a contractor you should deal directly with him.  I would rather have a home inspector than a realtor checking on work.  At least the home inspector is trained on code.  Good contractors have ways to update their clients as well.  We use a software system with daily logs, pictures every single day of work done, notes on work, change orders that are digital with pictures and auto saved, etc.. It makes visibility on our projects easy and our owners can see the work we are doing on a daily basis from anywhere in the world.

If your realtor is super knowledgeable and can handle all of this I guess all is well that ends well, but this is an odd agreement.

Rob Beeman · Answer

@Juan T.  When I was flipping it became an advantage to gain a GC license to control the rehabs. This also supplied me leverage to fire a contractor if I chose to without losing the permit (since I pulled the permit(s) I wasn't held hostage by the contractor). Not suggesting that you take this route, but the reason for mentioning was that many of the investors that I networked with discovered that I had the GC license and "hired" me as a consultant to run their rehabs. Some of which I agreed to do.

I did what your contact suggested. I had the investor that owned the property pay me, then I paid the cost of labor & supplies, and charged a fee for my "management" of the rehab. This produced 2 issues:

1.) I never went back to the property owner to ask for more than the original budget of the rehab (not my style). So, if the project came in over-budget, I ate it. Trust me when I tell you that I do not waste money, so there was extreme focus placed on being within budget!

2.) Since technically my company was being paid the cost of the rehab & management fee, although I had deductions for labor & materials for federal taxation, the LOCAL government charged a 2% tax on the GROSS revenue. So, I was being hit with 2% of the rehab total (that's $1600 on every $80K rehab). This didn't sit well with me, so I changed it up and had the property owner pay the contractors/supply houses directly and then pay my management fee to me separately.

This seemed to be much more streamlined and the property owners seemed to be comfortable with it.

If I were to do it again, I would do it that way - pay the contractors directly. Plus what was already mentioned, this way you can verify (with paid invoices & lien releases signed as proof) that each contractor was paid as agreed, in writing to help alleviate any mechanic's liens (I have stories about those too).

Andy Sabisch · Answer

The "friend" is not a licensed contractor or project manager.  Not sure why the payments need to go through him . . . that seems odd.

I would be leery about paying someone you do not really have an agreement with to take money from you and pay the contractor that you have met.  As was mentioned, if something is not paid and documented as being paid, you can have a lien placed against the property preventing you from selling it.  Paying him a fixed fee to do what exactly?  He is not going to check the work of the contractor or subs.  IS he skilled in what they are doing to sign off as certain things are done and done right?  What about permits?

This deal sounds unusual to say the least.  Is there a reason you went with this person as an acting PM yet not being a PM and paying for that from visits to phone calls?

Personally I would say that draws to the contractor are paid by you to the contractor when the work is verified to be complete.  If you are using a HML to buy and rehab, they will require the draws to be setup and then who is going to say the work was done and ready to be paid?

Matthew Irish-Jones · Answer

The contractor you use should have a contract that you can review with your legal team.  If your contractor does not have a basic contract, that is a bad sign.

John T. · Answer

First off, thank you all of you that chime in and give me your opinion. I highly appreciate it.

I followed your advice, and I decided to pay the money straight to the contractor, and I told the realtor I want to do it that way. I also told him, I am gonna create an independent contractor agreement , that we both ( the contractor an I ) will sign. I also will continua my agreement with the realtor and I will pay him to check on the property once a week at least, and to verufy the work is done, since this is a rehab out of state, and I do need some boots on the ground.

He is fine with it, and I did not feel any animosity about this.

Now, the only think I will need is to find a template for this Independent contract agreement . I found some links from J Scott , but those are from about ten years ago, and for whatever reason they do  not work anymore.

Anybody has a template that would not mind to share with me? I want to do this right, and to follow a template will help me tremendously.

@Matthew Irish-Jones Wow, I am very impressed you have a software like that. I should look into something like that. May I ask you if you have a template for the independent contactor assignment that I could use as a guide?

@Rob Beeman Yeah, that pretty much what this guy is doing for me. To date , he has honestly giving  me good advice, and help me to understand some things.

@Andy Sabisch Thank you, I will follow your advice and I will pay straight to the contractor.

@Khari F. I will keep that on mind. Can you share with me how you put a draw schedule on paper and perhaps and independent contractor agreement template? That would help me a lot. Anyway, thank you, you hit the nail on the head.

Khari F. · Answer

Contractors can put a lien on your property for unpaid invoices.You will need lien waivers and draw schedule.

How to do this right, please Advice!!!

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