Best way to handle building materials for rehabs?

Question

Hope everyone is well. I wanted to start by saying thank you so much for everyones help and your contributions to BiggerPockets! My name is Josh Ridener and I am flipping houses in the Los Angeles area. BiggerPockets really helped me get started and its been a great adventure so far.

There is one thing that I am really struggling with, that I’d like your advice on. My first flip, I did an all-inclusive bid with my contractor, that included labor and materials. The issue I ran into was the materials that he wanted to use, didn’t always fit into my idea of the design or quality. This caused me to have to spend quite a bit of money out of pocket to ‘upgrade’ to those materials. As a side note, none of the materials were extravagant or very expensive.

The second flip I did, I decided to purchase all of the materials myself. Except for plumbing, electrical, lumber and drywall. I found that this was very time consuming and actually came out to be pretty expensive as well.

My question is, what is the best way of going about this and what do you do?

I obviously want to be able to pick out the finishes but want to be more efficient moving forward.

Any insight would be amazing!

Thanks,

Josh Ridener

J Scott · Answer

It's actually not that simple.  There are a lot of factors that will come into play when the IRS considers whether someone is an employee or a contractor, and "who purchases the materials" is just one of them.  Of course, if other parts of the relationship (including behavioral and financial aspects) would lead the IRS (or the courts) to determine that a worker is an employee, that's one thing.  But, if there were no other factors that indicated that the worker was an employee other than the investor providing finish materials, it's not cut-and-dried that a court would rule this way.

Here's more info:

http://www.irs.gov/Businesses/Small-Businesses-&-S...

http://www.oregon.gov/ODA/shared/Documents/Publica...

Personally, I do what other recommend above -- I purchase all finish materials (cabinets, countertops, light fixtures, plumbing fixtures, doors, windows, etc) and I have the contractor provide all the building materials (wire, pipe, roofing material, drywall, paint, fasteners, lumber, etc).

To make the process easier for finish materials, I keep a Home Depot SKU list that I can reference when I'm ready to place an order.  My project manager tells me the quantities of every finish item we need, I create a spreadsheet using the Home Depot SKUs, and then I fax the sheet to the contractor desk at my local Home Depot.  My rep creates an invoice, calls me with a price, and I pay with a credit card over the phone.  I have them deliver the materials to the site.  I never have to step foot in the store.

David Robertson · Answer

I generally buy my materials similar to your second scenario, where I buy all the finish materials and the contractor provides all of the 'rough' materials such as plumbing pipe, fittings, wiring, lumber drywall, etc.

I try to buy all of my materials in bulk orders...generally two bulk order per project...

It depends on the schedule and the scope, but I will generally buy one bulk order upfront to get the project started & a second bulk order to get the project finished...

Quantifying materials, and walking around Lowe's seems to take a couple hours for each order, but if you do a lot of rehabs you can create a list of typical SKU #s, which should help shorten the process.

Also, if you buy in bulk you can generally send the order to the 'Pro Desk' and get 10% off the order.

Josh Caldwell · Answer

Ok thre are a couple things to consider.  First off, you can save money by buying your own materials.  You can also get sued.   the IRS rules that if you supply the materials then the person working on your house is your employee, and if/when they hurt themselves, you are on the hook.  From friends who have had that phone call, talking to the personal injury attorney is not fun.

On the flip side, if you dont buy the materials, then your contractor gets to pick, and that sucks also.

What I do, is I provide SKU numbers and contacts to call for the materials that I want.  That way I am protected from the legal end, and I get what I want in the house.  Now it has taken years to develope the list that I use and I am always updating it. If you have a good relationship with Home Depot or Lowes, you can go to the pro desk and request the top or most popular SKU's for each department.

I hope that helps

Josh

Moses Kagan · Answer

You should never, ever allow the contractor to pick finish materials... Otherwise, you will end up with units that look like every other unit in LA (awful).

All of your construction contracts should require the contractor to supply and install the generic stuff (drywall, etc.) but only install the finishes (which you purchase and provide).

Josh Ridener · Answer

Thanks you everyone for you help!  This is all really great information.  The one trouble i have is that my finishes vary greatly, depending on the price point of the house I am flipping.  I'll have to keep an eye on all the materials and categorize them as I move forward.

Wish everyone the best of luck and thanks again for helping me streamline my process!

Brandon Sturgill · Answer

@Josh Ridener, @J  Scott is being modest...read his book...actually you need to live in it for several months (or longer). It's available on BP under the learn tab. It may seem daunting at first, but it's a fantastic manual. And FLIP is a good book if you are a visual learner...lots of details you can relate to your question.

Other than that, becoming intimately familiar with your materials...you have to know SKU's, and this just takes time and practice (and a lot of frustration and trial & error).

Chris C. · Answer

We do very similar to J Scott.  I have a spread sheet we use to go through home and detail all finish materials and SOW's.  We then provide material list and SOW to contractors for bids.

The spreadsheet builds a materials list with Lowes SKU numbers that we give to the pro desk at Lowes.  They work up a quote (7-20% discount) and we pay with our LAR account which gives use another 5% off.  If we get our usual guy at Lowes then we use online gift cards to fund the LAR account and get another 8-10% discount.  Lowes then delivers all the materials to the site.  We go in the store once to drop off the quote and fund the LAR account.  I no longer waste time shopping around.  Quick, easy, delivered, and all while I am looking for more houses.

Manolo D. · Answer

In short, he needs to have a material list before hiring the contractor? lol. That won't apply to 95% of the rehabbers. Make that 99%. Even at a contractor level, I wont compile a material list of all of it.

Gilbert Dominguez · Answer

Assuming you are doing enough work and the type of work that requires permits I would say that you can simply state all rough materials and installation to be code conforming. Your inspector will make sure of that for you and then detail the finish materials to be purchased and installed per contract. You are contracting to have the finish materials that you want so no chance the contractor will purchase and install other than the finish materials you want otherwise you simply do not pay unless and until you get what you want. You just have to know in advance what you will want. This way the contractor is on the hook for both purchasing and installing what you want and you pay according to your contract draw schedules.

This saves you time and effort. You might add a clause that owner is to approve work and materials at whatever stages you find necessary for you to allow the work to continue. This also takes care of the specific materials you want and that is what the contractor is bidding on and they are aware of it from the get go.

Manolo D. · Answer

This is a simple problem, if you don't have experience, it seems hard. I would buy 90% of the materials with a contractor (in my case, my superintendent) before the start of my project, to do this, go meet at your local supply house, have him pick everything that he thinks he needs, pay for it, then get a credit line backed with your credit card at the same time, he could use this to purchase emergency materials, or small material purchases. If you elect your local supply house as homedepot or lowes, then they probably have a reloadable card.

Another type is what @J Scott suggested, in your case, have the contractor list whatever he needs and send the list to you, you send them to your supply house, pay.  Now, I don't know what your volume purchase is, but for me where an average ticket is > 5,000, I always get a bulk discount, I wont be happy if I shop at my local supply house (whitecap or homedepot), and they just give me 10% off the shelf price, I'd walk out and tell them I'll shop around more. Its good to have a rep to handle your needs, ask for one.

Side note for Home Depot fans: if you purchase bulk in home depot, not sure how much a regular customer qualifies for --I think its 2,500-- go ask for a bid room price, I have a territory rep to handle this, my minimum ticket is 1000 for them to give me a special price. I had a retrofit window order today, they're giving me 21% discount, I wasn't happy, still shopping around.

Best way to handle building materials for rehabs?

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