How Do You Approach Contractors for Fix & Flips?

Question

Hey everyone,

I’m new to fix-and-flip investing and trying to figure out the best way to work with contractors. Yesterday, I walked through a property that needed a full gut, but I didn’t bring a contractor with me, I only brought a friend who's somewhat knowledgeable in some renovations. Now, I’m wondering—should I be paying a contractor to walk properties with me before I make an offer, or should I first get the property under contract and then get bids?

I don’t want to waste time (or money) bringing contractors to properties I might not even buy, but I also don’t want to go into a deal blind and underestimate the rehab costs. How do experienced investors handle this? Do you have a few go-to contractors who will walk properties for free in exchange for future work, or do you pay them upfront for their time?

Any advice on your process for evaluating rehab costs and working with contractors would be super helpful!

Thanks in advance!

Peter Mckernan · Answer

I would compile a list of contractors from referrals, and from Yelp etc. Once you have that list go out and find a property. Once you get that property under contract then get the contractor out there. This is a hard one for people to work with since a lot of investors that do not have a lot of experience do not want to get a deal, not know the full rehab, and fear that they will lose the deal/EMD.

The stuff above and how I would go about doing a deal like this without knowing rehab costs would be either two ways. Go to a ton of properties with a contractor that you know and trust, have them bid properties knowing that you are not going to get the deal (they know they are not going to get the job) so you zero in on a rehab price for any property. The second option and the better option (my opinion), partner with a more experienced investor on the first few deals that has the contractor, system and knowledge. You can do a few deals like this and also get some money from the deals too. This will give you the base knowledge of rehab costs, ARV, and overall knowledge of the flip process (invaluable knowledge). Then you can breakout to do your own deals with the information to estimate rehab costs by just looking at the deal at face value with all that new knowledge from the partnership.

Mike Martin · Answer

BRRRR is not just dependent on the interest rate. It's also dependent on the price-rent ratio. In the Bay Area, with price-rent ratios in the 30-50 range, you're not going to be able to cover a DSCR loan with no money down, regardless of how much value you added during the rehab. In the Bay Area, sales simply command a premium over rentals. People are wealthy and the ultimate luxury is owning your own home.

Walter Bowser · Answer

I have found some of the best contractors from Facebook groups in the local market for example "Real Estate Investors of Oklahoma City". When I was first starting out, I would walk the property by myself and try to come up with a highest budget possible and make sure I was taking into consideration the high ticket items like Roof, foundation, HVAC, HWT, etc.

Then during a due diligence period I would walk with a few contractors letting them know I had the property under contract and see if their pricing aligned with my estimate. I would recommend walking with at least 3 contractors at first, make sure to do them separately and see whose numbers align with your thoughts. Remember, cheapest is not always best.

Taylor Dasch · Answer

Its hard when your starting out and havent used the contractor as on their side they are likely wasting their time. If you cant get a contractor to go with you, there are guides to estimate rehab costs until you can get some solid numbers from a contractor. I normally do a rough estimate alone prior to the offer, then have a contractor quote it in option period - honestly I dont even do that anymore, I just go a little more detailed into the numbers and make sure they are around what my contractor normally charges. Then after closing I will give him the number that I was thinking for the rehab.

Scott E. · Answer

You will want to have properties under contract before bringing a contractor out to walk the place with you.

If I were in your shoes I'd have a 30 minute call/zoom/coffee with a couple of local GC's now and come prepared to explain to them exactly what you are looking to do.

For example when I first got started I was targeting single level, 3 bedroom, 2 bathroom, 1,800 square foot homes, with 2 car garages, that were sitting on 7,500 square foot lots, and that were built of block in the 1950s/1960s. Everything I made an offer on was very close to those specs. I met with a few contractors by phone or over coffee and I explained to them that this was the type of property I was targeting. I came up with the consensus from those meetings that it would cost around $40,000-$60,000 to complete a simple gut remodel on these homes, with the variables being condition of sewer lines, roof, windows, and HVAC system.

Going forward I made offers with these assumptions and when I got a property under contract, I'd walk it with my GC during the inspection period. Worked out pretty well and after a while I was able to estimate rehab costs more accurately on my own.

Matthew Becker · Answer

I would suggest you find someone who is a contractor that you know and partner with them.  If you don't know one, find someone that someone else knows.  You need a small crew.  One guy and a helper can do a lot.  If someone rolls up in a 100K truck and does not have a tool bag, don't hire him.  He will make all the money.   Many things don't need a contractor. They need a guy to lay floors, tile, set cabinets, and paint.  Hire an Electrician and plumber when you need one.   Contractors have difficulty getting loans, and you could be the money guy.  You can produce 5X as much and keep costs under control.  If you do enough, it is a full-time job for them, making great money.   I started over 30 years ago and did almost everything myself; I hired a guy who did it full-time for me.  That turned into between 35 and 40 people doing it full-time for me.  I am not a construction worker, but I learned how it is done.  I can't do what they do, but I know when it is done wrong and how to fix it, just not with my hands.   My ways are not as conventional as others, but I would put my numbers against anyone on this forum.  I won't touch it if I can't make $100K a few months on something.  I also think most people are better off doing BRRR than flipping.  Flipping is a poor man's game.  They eat all their profits because they have to live off it.   By paying a commission and taxes, you get more money from the property by doing a Refi.  You should be able to buy, value ad, Rent, and refinance and not have a penny into the deal.  So any cash flow is a return of infinity%.  People keep saying this is not possible with the interest rates, but I don't agree.  Markets are flat, and there are deals everywhere.  You make money when you buy.  If you can cash flow at 7.5% then you can kill when rates drop to 5%.

Matthew Becker · Answer

It was the same in Boulder when I lived there.  The average home price is similar.  I foxus on investments that cash flow.  I have always found flipping residential risky.  Interest rates effect that a lot.  Where rental are simple.  Rent x GRM = Value.  Where I live it is 150 on average.  In Boulder is more like 300 but in the upper end you might rent a house for $5K a month that is worth 3M.  3M/5K= 600 GRM which is of course a terrible investment.  At some point poeple just wont' pay $20K in rent.  So as invesments go I would say Bouder and SF are bad spots.  But for flipping maybe great.  Keep it small keep it all.

Caleb Brown · Answer

You can do it either way. If you offer first, I would factor worst case on rehab and offer based on that. During inspections bring a few GCs to give you actual line by line item bids. Once you do deals you'll be able to estimate better and it's faster. Initially it's spinning your wheels but that's part of learning. GCs don't like wasting their time so be upfront that the deal is under contract or not and make sure you are on the same page as them.

Joseph Kirk · Answer

Yes ive been offering first and ive been factoring wost case on rehab and then it hurts my offer price. for example i may estimate a $50,000 rehab when other investors know its only $30,000 and then i miss out on the deal because my offer price is 20k lower than it should be

Joseph Kirk · Answer

this is similar to the way I've been approaching it so far. i have a google sheets list of multiple contractors in my area. when i did my own walk through i would be very cautious with big ticket items. but my problem is i may be too over cautious and over estimate the rehab amount so i dont buy a deal and end up losing on it. then with my overestimated rehab costs, i submit an offer thats too low and it gets rejected. im in a tough spot but the more i do, the more i will learn

How Do You Approach Contractors for Fix & Flips?

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