ALWAYS PURCHASE YOUR MATERIALS YOURSELF or else!

[Steven M.]

Anyone, and I really mean anyone that is doing any form of construction/rehab, a word of warning: Always buy whatever materials (lumber, cabinets, flooring, sheetrock, plumbing, tile, sprinkler system, lighting, etc., etc) you need for a project seperately with your own credit card/checkbook. You own it. Not the contractor. In all due respect to contractors/subs, never ever let a contractor or anyone else purchase materials other than yourself, esp. if you don't know them well. You can go with the contractor, but the actual register purchase should be with your own credit card/checkbook as the rightful owner.

Reason: If you ever have a falling out or dispute with anyone working on your project who purchased project materials, that they could easily claim it as theirs, take off site (steal??) or whatever, and still they bill you for it even if they never finish the project or left the materials on site, good luck trying to get it back in a dispute or if they walk off the job. Let's say you get into a dispute, you fail to pay them or withhold payment or the contractor/sub fails to show up again or whatever, and you have paid them some monies already, well, technically, until you pay for all materials, under most state laws, those materials are not yours.

If you personally purchased the materials seperately from the contractor/sub, that is your property irrespective of any disputes/claims the parties may have. You want to purchase and own the materials yourself, even if you have to go with the contractor/sub to do so, and it may be a pain, but having rightful ownership will at least mitigate any future disputes that may arise.

On the same note in CA, and likely in most states, any contractor can put a Mechanics Lien on your property's title pretty much at will. Simply filling out a form, and for $15, can go into the County Recorder's Office and record a ML against the title of your property without notice to you (you won't know until you do a title search and see the lien). He/she doesn't need lawyer either in CA. Getting it removed is a whole legal process. Though recording one on title without just cause is fraud, but a lot of good that does you while fixing/flipping your house up quickly.

ALWAYS get a clear Legal ML Waiver and release stating essentially the contractor has been paid and full, and releases all future rights and claims. Furthermore, it is imperative that his/her subs sign a seperate release because if the sub doesn't get paid by the General Contractor, rightly or wrongly, they too can put a lien on your property, I am not sure what other states do, but in CA, there is no policing of ML. If a contractor gets p---sed off randomly, a simple trip to the Recorders/Clerks office for $15 will make him/her feel a lot better.

Never has happened to me but I know others who had nightmares. Watch your title and get waiver releases at the end of each project from anyone who set foot on your property that ever picked up a tool!

[Pete Milano]

There is a bit more to what you are saying then just going down to the supply house and ordering material.

If after delivered your material is not correct (ie. wood doesn't match in size, color, warped, wrong cabinets) then the installation will not be correct. Ie. You purchased the material and you told the contractor to install it and that is what he will do. Who should pick up the tab when the contractor has to work longer or be on the job longer due to your involvement?

Have a load of decking material (thousands of dollars worth) delivered and find that it doesn't all match. You will now eat the lost time, your time to get the supply house to pick it up and deliver a new load, and you still have to pay the contractor for time spent. Now, you may be left with conflict of schedules with ALL your contractors. All caused by you.

If a contractor screws up or his suppliers do then the contractor is going to make it right one way or another. If he doesn't then you now know you hired the WRONG contractor. 9hammers.com has solutions.

If you learn the business then get involved. Otherwise do entrust it to a qualified business.

Hope this helps a bit. : )

[Will Barnard]

Originally posted by J Scott:

Apparently, the purchasing of materials (by the investor) was just one fact that led the court to determine that the contractor was an employee. I imagine there were many others (such as no independent contractor agreement, etc), but the materials issue was documented as one contributing factor.

I hear you in this example, which is my point. DONT have ANY other factors to contribute to this determination by the courts. If you have a contractors agreement (whicyh you should ALWAYS have, in explicit detail) and insurance, and your entity, etc etc there should never be this problem.

Originally posted by Pete Milano:

If after delivered your material is not correct (ie. wood doesn't match in size, color, warped, wrong cabinets) then the installation will not be correct. Ie. You purchased the material and you told the contractor to install it and that is what he will do. Who should pick up the tab when the contractor has to work longer or be on the job longer due to your involvement?

This is not how I operate. My contractor picks the items needed and in most cases, orders it from Lowes/HD, so all the items are ordered by him. Any mistakes are on him and my contractors agreement with him stipulates it. I only pay for it with my business credit account there.

[Will Barnard]

On top of that, I do several items myself as well on occasion, and I pick up the supplies and install them. This save me lots of money at times.
Of course I am an investor first and a homeowner contractor second, so only if time is permitting.

[James Ward]

Thanks for all the advice and info about how you all purchase materials.

This is all very helpful.

[Jeff Tumbarello]

Originally posted by crosswind_:

For those that purchase their materials. How does this work? Could you please explain how this is accomplished? Also, how do you breach the subject with the contractor?

Thanks!

I get a call from Home Depot. I put it on a credit card

[Will Barnard]

More of that dry humor Jeff?
We love ya anyway!

[Timothy W.]

I have a question for those who promote purchasing their own materials.

Do you know when you need to buy SPF beams, when you need Dutch Fir Beams, when you need engineered I joist beams and when you need microlam beams to properly support different spans of different lengths?

Do you when you need particle board, oriented strand boar, and when you need plywood and when it's supposed to be either 1/4" thick, 3/8" thick, 3/4" thick or 5/8" thick and where each thickness and type of plywood goes on either your floors, walls or roof?

Do you know what size gravel you should use in your concrete, how many gallons of water you can safely add and whether or not your should use calcium chloride in the mix?

Some of you may know the answers to these questions....and they are different for every project. No problem.

Some of you don't know and hire a contractor, architect or structural engineer. No problem.

Some of you know enough to be dangerous. Problem.

If it's a small project not involving major trades, you can generally get away with buying your own materials.

If it's a larger project....believe me, just because a contractor doesn't get a college degree in construction doesn't mean it's easy. I have 4 puncture wounds in my feet, a puncture wound on my hand, 3 scars and a chipped vertebrae and I got them all before the age of 19. Construction is a trade people die in from mistakes made on materials. Don't kill yourself or someone else for the sake of saving a few bucks.

[J Scott]

Tim -

I don't think anyone here was advocating telling their contractors what building materials they should and shouldn't use (unless they are a contractor themselves).

I think the point of the discussion was more along the lines of who PAYS for the materials, and the tactical aspects of getting the materials paid for.

As an example, my contractors can specify all the materials, and then I can pay for them and have them shipped directly to the work-site, where my project manager can ensure that everything that was delivered was either used, returned, or put in our warehouse for future use.

At least that's how I interpreted this thread...sorry if I misinterpreted it...

[Timothy W.]

If the contractor has the labor hours into specifying materials, doesn't he or she deserve the overhead for obtaining them? We are talking about specialized knowledge at work here. Then again, if the contractor is willing to give that away for free it's their fault. On the flip side, having been a contractor I know we'll get our profit out of you one way or another.

I guess it's alright if you listen to your contractor's specs on the material and don't try to cut corners there. You're already trying to cut corners by buying it yourself so don't get too used to it.

Just be aware you're trying to save money on what accounts for 25% of the project's cost - materials. If you cheap out on materials or don't get what the contractor specifies, the 75% remaining cost in labor hours will go up and the quality of the materials certainly impact the amount of time it takes to install them. It's no good spending 75 cents for every 25 cents you save.

[J Scott]

Originally posted by Tim Wieneke:

If the contractor has the labor hours into specifying materials, doesn't he or she deserve the overhead for obtaining them?

Excellent point...

Personally, my contractors have all been with me for a while, so I completely trust them to buy all their own building materials and build it into the cost.

That said, it takes a while to get to that point. I remember when I was first starting out, and didn't know if replacing a roof was a $4000 job or a $14000 job.

I can certainly understand how someone new at this might be concerned that their contractor is taking advantage of them with materials markup, so they'd want to buy the materials themselves. It's a catch-22 for new investors who don't know what they should be paying for a job.

Of course, your point that a contractor deserves to get paid for the time it takes to specify and pick out (and maybe pick up) the materials is a good one. And you're right that he should get compensated for that time and effort.

I was thinking from the perspective of a new investor who was trying not to get ripped off, but ignored the fact that the contractor needs to not get ripped off either... :)

It would seem the solution is for investors to do their due diligence. If you do enough due diligence to ensure you have a good (and fair) contractor, you should just trust him to supply his own building materials and not rip you off on the pricing.

Now, my attitude on finishing materials is completely the opposite. I select, purchase and pay for those myself, and they get delivered directly to the work-site, so the contractor doesn't have to do anything but install them...not only do I get them cheaper than my contractors would, but they don't need to waste time shopping for materials and then charging that time back to me.

But, you're right about building materials, both for the reasons you mentioned and because it's just less complicated that way...

[Timothy W.]

I think that's a fair compromise Jason. Finishing materials on the whole tend to involve the less dangerous aspects of construction (with obvious exceptions on electrical and gas) and yes your time building the relationship with your contractor really is the key in the end.

[Will Barnard]

Originally posted by Tim:

Do you know when you need to buy SPF beams, when you need Dutch Fir Beams, when you need engineered I joist beams and when you need microlam beams to properly support different spans of different lengths?

Do you when you need particle board, oriented strand boar, and when you need plywood and when it's supposed to be either 1/4" thick, 3/8" thick, 3/4" thick or 5/8" thick and where each thickness and type of plywood goes on either your floors, walls or roof?

Do you know what size gravel you should use in your concrete, how many gallons of water you can safely add and whether or not your should use calcium chloride in the mix?

I don't need to know Tim, my contractor decides which of these materials (and how many) is needed, calls in the order (or gives me the order) and I go pay for it.

You also asked if my contrator should be paid for doing this work. I feel he does get paid through all the owrk I give to him and thus, I should not have to pay mark-up on materials. That said, sometimes I do pay it, as time does not always permit and I incorporate that cost into my budget.

I am not really sure if one way is better than the other, I just know how I prefer to operate. I see nothing wrong with either side, so long as investors avoid the potential problem of the IRS which J eluded to.

[Larry Mason]

It seems that the solution is simple. You need to have a good relationship with your contractor. You need to "trust but verify" as an old politician used to say. But it goes both ways. You also need to treat the contractor the same way you want to be treated. They too, have been ripped off by many clients. Making changes after you agree on a project, and then expecting no delays or extra expenses is one of the big problems for them. Buying materials that they are not used to working with may slow them down, and end up costing you more in the long run. If everyone agrees that they want to do a good job, at a mutually beneficial price, and within a certain timeline, that should happen. If it does everybody wins.

If either the contractor or the investor causes this agreement to be broken then something is not right. Both sides end up losing. The contractor will probably not be rehired and may have some negative publicity, so they will lose some money. The investor will lose some money. If both sides work together to meet the agreement both sides win, and both sides make money (hopefully). b Doing a rehab shouldn't be a competition but a team project! /b

[Ivan Carroll]

Steven, people can disagree with you without you having to yell at them. Please stop typing in all caps. It makes it annoying to read (at least for me) and I hear you yelling in my brain. Thanks.

[Timothy W.]

Something just occurred to me as to why contractors would agree to letting some customers buy the materials. Back in the day when I did contracting with the fam biz we had to outlay the cash up front and though we had 30-90 day accounts at most suppliers because we were contractors, carry the debt service for the purchase of materials until the job was done and everyone was paid out. I guess if the customer wants to lay the cash out up front and carry the debt service that's not a terribly bad idea for the contractor. Certainly a lot less risk when waiting for a draw.

[Will Barnard]

Thats exactly right Tim! Just one of several reasons why mine agree to do so. By tem not having to front the costs of materials, I can get better pricing on their services.
Of course I now am fronting that cost, but it is worth it to me in the long run as I front the entire costs of the acquisition already.

Another advantage I gain by doing it this way is the contractors draws are spread apart more and are much less as his only expense is in labor. This saves me money as he charges me less, that and because I give him a lot of work!

[Dennis Treacy]

Just my 2 cents as a HVAC contractor for 30 years. If you buy your own heating equipment, I loose my markup.

The mark up is how I cover my overhead, and make a profit. Without the markup I am working for wages. If I wanted to work for wages alone I would work for someone.

Another negative of buying HVAC equipment comes when there is a warranty problem with the equipment, you are on your own, as I did not supply the equipment.

HVAC is a different trade then carpentry, and building, I don't think they mind the customer buying the materials. One because it saves them the time of picking them up, two because they are not worried if they get stolen off the job site.

If I had to choose between installations, I would always do the ones where I was suppling the equipment first.

Just one other caution when buying equipment online, most HVAC equipment manufactures void the warranty on equipment sold on the internet.

Your ownership of the materials would not stop a contractor from placing a lien on the property.

[Jason Fant]

So here's a couple of points in support of buying your own materials.

First, I agree with Dennis around HVAC equipment (and other specialized equipment). You should purchase these through your HVAC contractor. Why? Because this is different from building materials in that the HVAC contractor is going to be an authorized dealer for that equipment and not simply a 3rd party going to a materials supplier for merchandise. Why is that distinction important? For the reasons that Dennis stated concerning warranties as well as it eliminates the risk I'm about to describe in my second point. Bottom line, if your contractor is an authorized dealer buy through them. If they are not, you might as well buy the equipment yourself, but I'd likely look for another sub at that point.

My second point is in support of the original post in that you ABSOLUTELY should buy your own materials. To illustrate my reason why this is important I'll tell a story from my early days of rehabbing.

I hired a siding contractor to do the vinyl siding on a 130 year old home I was rehabbing. I had used this contractor twice before with great success and he came recommended by my step-father who had used him for years. Like before, he did a great job and I paid him in full. Got a ML waiver and was good to go. Or so I thought. 90 days later I got a certified letter from ABC Supply. They were placing a lien on my property for an unpaid materials bill. What happened? I paid the contractor and got a ML waiver, how could his supplier come after me? Well as it turns out my sub had gotten in over his head on a large job where the client went bankrupt. He couldn't cash flow his business so he stopped paying his trade accounts and guess what, he just disappeared, Literally. Packed up, left town, whatever, he was gone. Meanwhile ABC wanted their money and we were just finishing up the house, so I needed a clear title. My attorney advised us to pay ABC and try to recover from the sub since we had a lien waiver. So that's what we did. I ended up paying the $4500 materials bill twice, and wasn't able to locate the sub to serve suit. Even if I had found him, my chance of collecting was pretty much zero since he obviously was insolvent and judgement proof.

My point? When you allow you contractors to purchase the materials for you, you are putting a lot of faith in them. While I agree your contractors are trusted members of your team, you unnecessarily expose yourself to risk when you put that much trust in them.

Regarding the point about contractors buying cheaper through Stock and supply houses rather than you going to home depot, that's a simple problem to solve. As a rehabber I have trade accounts with Stock, Sherwin Williams, HD Supply, Ferguson, ABC and many other supply houses. As you do more business with them you will get the same discounts. I have net-30 terms with all my trade accounts, so I can float the materials just like my contractors can, except I can control that they actually get paid. There's no mystery to doing business with trade suppliers, you just go there and set up your account. Just because you're not a GC doesn't mean you are relegated to paying DIY'er materials prices from HD and Lowes. If you are rehabbing houses, you are in the trade.

Bottom line is that I will never let a contractor provide building materials again with the exception of HVAC and a couple of others that are direct materials dealers. Mine was an example of a trusted contractor, not just some guy from craigslist. Bad things happen to even the best people sometimes. Why expose yourself to the risk.

[Louise Jackson-Marquez]

I work as both a contractor with investors and as an investor.

I could never deal with an investor purchasing the materials.
Here are some reasons why:

An average rehab of 30k takes us about 2.5 weeks to complete with us buying the materials.
The same 30k rehab would take double that time with an investor who isn't available daily when we need additional paint or maybe anothr box of tile, or wait, what if the faucet he bought won't fit the undermount sink or what if the extra gallon of paint didn't match, etc, etc.... I would NEVER work with an investor who insists upon purchasing his own materials.
Next, I never buy anything at home depot or Lowes... I get materials 50% cheaper than what the HD or Lowes cost is. I do add 15% on to my price but the investor is still saving $ by allowing us to get materials.

I don't want anyone to know my sources for materials because it is how I always win the bid... If I told every investor where to get the materials then why would they need me? They could just hire cheap labor and totally cut me out.
Sure, they would probably suck at it and not do nearly as good of a job at managing the rehab as I do but money makes people do stupid things.....

We charge our investors 50% down, signing a waiver of ML, and 25% at the half mark of completion and the remainder at completion. It works well for us and we have their property back on the market in less than 3 weeks...

Most of my investors trust me completely to design the rehab, as well since I have always went with the thought that if I treat them right and do an outstanding job at a fair price, I will have repeat business and volume is what counts in construction. Plus, I know what sells... 75% of my projects go under contract within 30 days, the other 25% within 70 days, I have never had any go for more than 90. Numbers don't lie and if it ain't broke then don't fix it.

To each their own...

As an investor, I pay my company to rehab my projects and go along the same method of payment and cost as I would with any investor. Of course, it is in my best interest to do so for taxes but even if it were not, I would still do it that way because it's the right way.

[J Scott]

Originally posted by Louise Jackson-Marquez:

As an investor, I pay my company to rehab my projects and go along the same method of payment and cost as I would with any investor. Of course, it is in my best interest to do so for taxes

How does moving money from one entity to another impact your tax situation?

At the end of the day, the reduced basis in the investment should be exactly offset by the income coming into the construction business. Assuming both entities have flow-through income (LLC, S-Corp, Partnership, Sole Prop), there should be no net change in income, since both businesses would be taxed at your marginal tax rate.

Just curious exactly why it matters and how it affects your tax situation...thanks!

[Will Barnard]

Dennis, I agree, that while I do in fact buy my own materials for rehabs, HVAC stuff as well as roofing and a few other specialty items I do not. You point is well taken and I agree, however, the majority of material expense is not in these items in most cases and is a sideline to the topic at hand. Specialty items do call for the contractor taking care of it (in my opinion)

Louise, I see what you are saying, but in my biz, if an additional gallon of paint or a facuet does not fit, my contractor will certainly get a hold of me via my cell. I always answer his calls so I am always available. In the event I am not, I have someone else to take my place for that decision, so there is NEVER any wasted time, other than the fact that it didn't fit, etc which would be the case either way. Besides, my contractor is the one who did the measurements as well as the order, I only paid for it.

Jason,
Your point is well taken as well. In fact, I have a similar story, but is much too long to post here. The jist of it is that the contractor/builder was paid to build the units, but did not pay some of the vendors he used. While the lien release was given from the GC, that did not stop the sub from posting a lien to the new property owner. Unfortunatley for the new owners of these units, in TX, the sub has the right to place a lien on the property even AFTER the transaction has been completed and title has changed over from the selling party to the new owner. This is not the case in all states, but certainly the case in TX.
The seler should have demanded that either all the subs used provide lien releases or paid them direct. This is one HUGE reason to buy and pay yourself as the owner. Now, the new owners of these units are stuck with the lien on their property. The contractor did not realize that state law in TX stipulates that under these circumstances, he faces a felony conviction and could do jail time for taking money for the project and not distributing it to the appropriate subs as he was required to do.
Problem is solved/avoided by simply paying the subs direct and buying the materials yourself as the owner or builder!

[George Bloom]

Maybe I am missing the point but all this agitation about buying vs. not buying your materials leaves me confused.

When we a rehab deal and hire a good reputable contractor we enter into a written agreement as to what the rehab cost will be. The contractor provides us with his cost estimates and we review them and perhaps negotiate them a bit, but in the end we agree to a fixed cost for the rehab.

I could care less where the contractor buys the materials and I certainly don't want to be involved in that process. Our contract is clear and simple, the contractor has to bring in the rehab at the agreed to price. The contractor is granted drawing rights at various stages of completion and he either performs or not. Incidentally we also throw in a clause that diminishes the rehab price by a certain percentage for each week that they go past the agreed to finish date.

So what is the big deal.

[Will Barnard]

Originally posted by George Bloom:

Maybe I am missing the point but all this agitation about buying vs. not buying your materials leaves me confused.

So what is the big deal.

The big deal as you call it is that you can save costs by taking on this task. I agree 100% with you that it is much easier to contract in writing (very specifically) what the costs are and what the responsibilities are of your contractor. If that meets your budget after negotiating the best price, than great. I go a step further and take more of an active and controlled role in my rehabs. That may not be the case always, but for now, it is.

There really is no big deal or argument, just a difference of opinions and ways of doing business. Plus, if you read all the posts, you will notice some problems that can occur with giving all the control to your contractor.

[J Scott]

Originally posted by George Bloom:

The contractor provides us with his cost estimates and we review them and perhaps negotiate them a bit, but in the end we agree to a fixed cost for the rehab.

As Will pointed out above, you may be selling yourself short here...

First, what incentive does your contractor have to use anything other than ultra-low-end materials, cheap fixtures, builder-grade flooring, etc? Sure, 2x4s or Hardiplank boards are pretty much the same wherever you get them, but light fixtures, plumbing fixtures, paint, flooring, etc is what is really going to sell (or not) your house. If you leave those decisions up to your contractor, you get what you deserve.

For our flips, we want to have control over every aspect of the finishing design and materials. WE choose the lighting, WE choose the specific flooring, WE choose the kind of windows we want, etc. Ultimately, this is what the buyer is making their buy/no-buy decision on, and I'm not leaving that to the contractor.

Plus, because we specify our finishing materials right down to the SKU number, we know where we want to buy them, and don't want the contractor to substitute.

Lastly, as Will pointed out above, because we buy many of the same materials over and over, we actually get much better prices on these things than our contractors do.

No, I don't spend time at Home Depot or Builders Surplus walking the aisles...but I do place the order, charge it to my account at that store, and then either have the stuff delivered or have my contractor pick it up.

[Jason Fant]

Originally posted by Louise Jackson-Marquez:

I don't want anyone to know my sources for materials because it is how I always win the bid... If I told every investor where to get the materials then why would they need me? They could just hire cheap labor and totally cut me out.

Louise, you totally selling yourself short when it comes to the value of a GC. If your only value as a GC is providing cheap materials, then you aren't doing very much as a GC. Based on your answers below, I don't think that's the case. While I wouldn't encourage you to give up your supplier resources, you have much more value to your customers than this, so make sure you give yourself credit where it's due.

Originally posted by Louise Jackson-Marquez:

We charge our investors 50% down, signing a waiver of ML, and 25% at the half mark of completion and the remainder at completion. It works well for us and we have their property back on the market in less than 3 weeks...

Wow! 50% deposit? You would never work on one of my jobs, and I imagine that most experienced investors on this site would agree with that sentiment. Even if I trusted you completely, I've got no guarantee that one of your other customers isn't going to stiff you and put you in a financial bind, and with you having half of the money for the job before you even start, that leaves me with very little leverage with which to convince you to finish my job when you start having to "prioritize" work and robbing Peter to pay Paul. I'm not saying that you would do that, but I don't trust any contractor that much (and I'm a former contractor). There's just way too much that could go wrong. In many states that's even illegal to take that large of a deposit and is grounds for losing your contractor's license.

Note to newbie rehabbers - DO NOT EVER GIVE A CONTRACTOR THAT MUCH OF A DEPOSIT

Originally posted by Louise Jackson-Marquez:

Most of my investors trust me completely to design the rehab, as well since I have always went with the thought that if I treat them right and do an outstanding job at a fair price, I will have repeat business and volume is what counts in construction. Plus, I know what sells... 75% of my projects go under contract within 30 days, the other 25% within 70 days, I have never had any go for more than 90. Numbers don't lie and if it ain't broke then don't fix it.

It sounds like to do a great service for your customers, and if your assertions are correct, I'm sure that you'll be hugely successful with a very loyal base of clients. That being said, the argument you are making here certainly describes why it's beneficial for you, the GC, to not have your customers buy their own materials, but it does not address what benefits the investor receives in that arrangement. You are providing discounted materials (and I question your ability to get a 50% discount unless you are buying them direct from the manufacturers in HUGE volumes), but the investor is taking on the risk that you won't pay your suppliers for any unforeseen reason, and that your suppliers will have a viable claim against their property even though they've already paid you for the materials.

I stand by my point that investors should always buy their own building materials. If you wouldn't do business with me for that reason, than there are plenty of other good GC's that will, so I wouldn't expose myself to the risk.