Dealing With Contractors In Seattle

[Ryland Taniguchi]

Having flipped since 2004 in this market, I held the belief that the General Contractors were the problem. So in 2016, I decided to see if I could be my own GC and it turned out to be a total disaster. So as of August 23, 2016, I let my GC license lapse and going back to hiring GC. But there were some valuable lessons being a GC that can help anyone dealing with GC.

Verify all this info with your construction attorney as I am not an attorney.

Lesson #1. Have your attorney prepare all of your contracts. The contract should say that you are not a GC or if you are a GC that got GC license has nothing to do with this specific contract.

Lesson #2. If your GC does not put "We may lien your property" in the contract then they can't lien your property. You don't want this language in your contract. The GC has 90-days to file the lien.

Lesson #3. The GC will argue that you are in the business of flipping and so that you are a sophisticated investor who knows what you are doing. In Washjngton, an investor can only go after half the GC bond because they are an active investor.

Lesson #4. The subcontractors don't need a contract or "we may lien your property" disclosure to lien your house. If the subcontractor has no relationship with the owners, it is my understanding that they have to file a pre-claim within 10 days of work completion. They do have to give notice if the lien includes materials but no notice is required for labor.

Lesson #5. Whenever you pay a GC, make sure you get a partial lien release signed by the GC, the subcontractor and every employee in the job. In Washington state, any employee can lien a property if they can prove that the GC or suncontractor did not pay them. As a side note, the supervisor not performing physical work cannot lien the property. 

Lesson #6. If you are flipping, it is not worth being the GC and hiring your own crew or subcontracting out work. If you flip, you are required to be a GC or hire a GC under Washington state law. From being a GC, I now know that the risk part of a project (LNI, aesbestos, lead-based paint, injuries, employee complaints, milking the clock, OSHA safety compliance, safety training and meetings, litigation, construction defect warranties, etc) equals the cost of direct labor and materials. If you are doing BRRRR and holding all of your properties, then you work directly with subcontractors as the homeowner.

Lesson #7. You need someone experienced and savvy with permits. This will bottleneck if you do not know what you are doing. And yes you do need to pull permits as a risk management strategy.

Lesson #8. If your contractor under bids, it does hurt you. He will need to work another job to pay for your job and that's why only one or two workers are at your job. If you pay less than the market rate of $75 per sq ft for a gut out rehab, there is a high probability that it will take longer.

Lesson #9. Good luck suing the GC. They usually have no money and you will likely only get half of their bond. Nearly impossible to sue a subcontractor as a GC. Best practice is to only pay for work completed.

Lesson #10. Pay top dollar for electricians, plumbers or HVAC. Or expect delays. A good GC has a close relationship with their subcontractors.

Lesson #11. A GC cannot handle multiple projects. Usually a good GC has one or two good crews. You have to pay full market price to get their good crews. The GC will try to pick up labor but these guys are not as good in quality and speed. As a GC, I had 5 good crews. Would have done well as the GC if I was managing only 5 projects at once. I was trying to do 22 projects at one time and it was a disaster.

Lesson #12. Don't over rehab or keep changing things. If you change anything, sign a change order and pay for it. You are making it impossible for your GC to make any money if you keep changing your mind.

Lesson #13. The GC is usually not making any money with investors. Investors usually want to gut out rehab for $40 per sq ft when it costs $75 per sq ft. Or the investor wants a cosmetic rehab for $20 per sq ft when it costs $35 per sq ft. Because of this, there are no good contractors that want to work with investor. The contractors are not the problem, the investors getting into crappy deals is the problem. As a GC, it costs around $55/hour for labor when adding in risk (if their average wage is $22.50/he). After $55/hour, the GC then has to add 15% to 20% GC mark-up.

Now keep in mind that I found 52 deals last year. I have driven even street in my target areas, have thousands of dollars going out in direct mail every month, about 6-8 negotiators, a door knocking team and am targeting niche markets that you don't know about. If I have not found a single flip out of 52 deals found, chances are neither are you. I mostly ins BRRRR and land development deals now that pencil.

Lesson #14. Every experienced Rehabber is having contractor problems in Seattle right now. Because they want to pay under market rates. Pay market and get the better crew you can get your project done in 90-days to 120-days. If you pay under market, expect projects taking 7 to 9 months.