What questions should I ask contractors?

Question

I am in the process of getting cash out of two of my rentals. I am have been driving for dollars and located a few properties that I would like to buy to flip. So far, I have gotten one call back from a motivated seller. I will be meeting with her on Sunday to view the property. After the holidays I will start looking for deals via probate. I want to be proactive and make sure I have good contractors lined up so that the process can flow better. I have heard of many horror stories with contractors ripping off investors.

I am looking to get advice on questions to ask contractors. Potential pitfalls and warning signs to avoid. Are there any websites where I can check out contractors?

Account Closed · Answer

@Candace Ellison  It's difficult at this stage since you don't yet have a house or know what kind of contractor you need but referral is the best method of finding any professional. As a realtor, I would think you should easily be able to get recommendations from your colleagues.

Also, don't be unduly influenced by "...horror stories with contractors...".  Contractors are  no less honest than any other vocation.  There are always going to be bad apples but the vast majority are hard working people who are just trying to earn a living.

You should, of course, be wise and wary in your dealings with contractors but don't be so taken with fear, mistrust and suspicion that you poison the relationship.

Ryan Dossey · Answer

Make sure that they are licensed, bonded, and insured. Make sure that they can afford to buy materials. Ask for references.

Go to your state website and search their company name. Figure out who owns and it Google around to see if they've ever owned a different company.

Some "drifter" contractors will set up several LLC burn one and move on.

John Arendsen · Answer

Not sure how the Tennessee regulates its contractors but in California the California State Contractors License Board (CSLB) has some pretty stringent rules, regs and laws that govern licensed contractors.

These are some basic guidelines. As stated above make sure the contractor/s you hire are licensed, bonded have at least a 1,000,000/3,000,000 million dollar general liability policy and are insured in your State not just any State.

Never pay more than a 10% deposit up front and pay them on a progressive basis predicated on the amount of work that's been completed. As a general contractor for the past 3 decades I always control my subs by making sure that they have completed the amount of work agreed on before paying them. The worst thing you can do is let them control you by over paying them and then allowing them to move along at their own pace.

If a contractor is hitting you up for big cash advances to "BUY MATERIALS" you're probably dealing with a close to insolvent operator or a contractor who's operating by the seat of his pants. Don't go down that road. You have a right to get his banking information if you're going to hire him and he's consenting to perform services for you.

But most importantly, as others have stated, get several local references and personally go check them out. Knock on the door introduce yourself and tell them that you are considering contracting with the same contractor they used. Ask them how their work ethic was, did they come in at or preferably under budget.

Never take the contractors list of references for granted. I once checked out a contractor I was about to sub a large portion of a project to and almost all of the references with fancy well done photos and lots of lacy words proved to be totally bogus. He lied about all of them. Then when I told him the jig was up and I caught him in a big lie he threatened to sue me for slander of all things then got in his truck and drove off never to be seen again.

I could go on and on having spent 30+ years as a General & Manufactured Home Contractor, Manufactured Home Dealer, developer, investor, property manage but most importantly an EXPERT WITNESS for construction defect, mis representation and fraud by licensed contractors and unlicensed operators purporting to be properly and legally qualified.

William Robison · Answer

@Candace Ellison Hello Candace--Looks like you are paving a nice road map.

Regarding contractors, we manage an average of 8 renovations a month with our company.  We work as a buy-fix-hold company for out of state investors.  With this, there is a lot of transparency needed, as well as systems in place.  To that extent, we have created minimum standards lists.  Then, we ask the contractors what all they would suggest to do with various properties.  We can finally compare the lists.  One, obviously is just generalizations, but the other is property specific.  However, some contractors will suggest far fewer items than would be a good renovation.  These are also, often, the lowest bids, but they make me the most nervous.  We believe that they would skip corners.  We prefer properties to have strong durability for the future.  Conversely, you may have contractors trying to oversell a project.  Knowing in advance what your expectations might look like, you have a better idea when that one comes along.

This is obviously in addition to several of the comments above.

Bill Florence · Answer

Some things to consider, check with BBB, web search for complaints and reputation (google), see and verify business insurance, employees bonded and insured, do they sub out the work or do they hire employees ? check with county/city verify they have appropriate licensing. Be careful of the work being sub'd out, you might not know who is on your property or if they are insured. Ask for references, pictures of previous work. I am sure there is more someone else can add.

Candace Ellison · Answer

Thanks to everyone who responded. @Kyle B. you made a really great point. I never thought about checking with inspectors.

Account Closed I have asked colleagues but everyone acts like it's a big secret to divulge this information.

I found thumbtack.com today and have interviewed 2 contractors today. One requires 50% up front not licensed but has liability insurance.

2nd does not require anything up front, licensed insured, has references.

Will talk to the 3rd contractor Friday.

Trying not to ask all the questions on my list on the initial call. Don't want to scare them all away just yet.

Michael Boyer · Answer

Second john's point on a good scope prior to a project or bids, and check member blog today for a full post on this topic and a sample and great contractor comments...

Tom Shepard · Answer

@Candace Ellison

Also don't forget when working with an independent contractor (who is not incorporated, just a sole proprietor) you will likely need to get their tax info to issue them an 1099 depending on the cost of the project.  Give them a W-9 form to fill out BEFORE the project starts then you send a 1099 to the IRS and copy the independent contractor when complete.  Again this is only for independents not if their company is incorporated, and only if you pay them $600 or more.  Also a reason why you may want to or be asked to pay for the materials directly from the supplier, and just pay them for the labor.  Lots of debate on BP as to weather or not landlords need to do this, but seems to be an agreement that flippers do.   This will also scare off some of the shady ones and may also suddenly turn a $750 bid into a $599 bid!  Funny how that works!  Good luck!

Michael Hayworth · Answer

Remember that old advice "good, fast, cheap - pick two"? It applies to contractors, too, although sometimes you don't even get two of the three.

An investor really has two choices in terms of type of contractor. You can get the cheap "two guys and a truck" type off Craigslist or somewhere, or you can hire a reputable, established firm.

The problem with the first type is that you're not always sure what you're getting. Sometimes they do great work, sometimes they're scammers, sometimes they will start well, then stop in the middle of your project because they need to get someone else's deposit to make payroll..

The problem with the second type is cost. We have overhead, and we also understand how much gross profit it takes to actually have net profit at the end of the project. We're not going to be as cheap as someone with no overhead. That makes it tough for an investor sometimes on a project where margins are tight. Most investors end up looking for the most reputable of the first type they can find. References and walk-throughs are your friend.

Also be aware that a reputable contractor of either type probably has plenty of work. They're not likely to spend loads of time with you answering questions until you actually have a project. But there are a lot of us contractors here on BP (many of us are investors ourselves) and you'll probably find more at your local investor groups, which gives you a chance to meet them in a setting where you're not taking them off a project.

Bill Florence · Answer

I will also add,  from my experience , never pay a contractor % of project in advance. Pay for materials when delivered (on your property not theirs) and labor only when satisfied. If anything goes wrong, like wrong materials delivered, damaged materials, missing items or no materials, contractor tries to increase costs or just disappears with your deposit - getting your money back can be very tough,  time consuming and expensive.

What questions should I ask contractors?

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