Question about Turn-key Flip contracts

[Alex R.]

Hello Guys

I am a new member to this forum and new to real estate too. I have a question about the flip projects.

Is that possible (or common) to sign a turnkey agreement with a contractor for the flip? So that they will provide all the materials and labors and get the project done for a certain amount with a specified deadline. If so what are advantages or disadvantages of this approach?

I think this will make it much easier for investor to know how much exactly his expenses will be and also saves him lots of hassles and expenses.
Also you can put a late fee penalty in the contract that if flip is not complete within deadline, for every day of delay there will be a fee that contractor will be charged.

What do you think about the whole thing? Is this good? Will contractors accept this type of contracts?

[J Scott]

Originally posted by Alex R.:

I completely agree with Steven and disagree with what John Mireles said here.

Unfortunately, after you do a few jobs, you'll likely change your opinion...

Here's the problem...

If you hire a retail GC who has decades of experience, hundreds of happy homeowner clients, a BBB rating of A+, contractors as employees, a full-time project manager (or multiple PMs), etc, there is no doubt you can find someone that you are describing. But, these retail GCs will generally cost between 2 and 3 times as much as the guy you're going to need to hire in order to get your flip done for a price that will allow you to resell your property and make a profit.

So, yes, these guys are out there -- but if you use them, you generally won't be successful in this business.

The guy you're looking for probably doesn't have employees (he hires all contractors), he doesn't have a PM (he manages himself), he should be insured and licensed, but he likely doesn't have any additional frills (no nice truck, no office, no heavy equipment), he likely doesn't do a ton of retail work, etc. These guys don't look as good on paper, don't have the same type of experience, don't provide the same level of service, but can provide pricing that is reasonable and will still allow you to make a profit.

And, despite all their flaws, they can still be an awesome asset to your team, if you manage them well, don't give them too much control and nip any problems in the bud immediately.

Trust me, I didn't want to believe that this is the way it was when I first started, but I quickly learned the truth. After 100+ rehabs across multiple states for both myself and other investors I work with, I've met many dozens of GCs, and every one I've met that does work for investors at a reasonable price has their drawbacks. That's how they get their reasonable prices -- they either have lots of jobs going on (in which case they don't spend enough time at the property, miss their schedules, aren't reliable, etc) or they hire low-priced labor (in which case the job is lower quality than you probably want).

Here's an example -- if you ask most retail GCs how much they charge to replace an exterior door, they'll probably say $100-200 for the labor. Then ask them how long it should take -- they'll say 30-45 minutes (if they're good). Do the math -- these guys are getting $200-500/hour for basic carpentry work. Most of that money is going to their insurance, their nice trucks, their offices, their marketing materials, etc.

Now ask a GC who does work for a investors the same question -- they'll likely tell you it's $50 or so to replace the same door in the same amount of time. The savings comes from not having all the overhead and also likely from accepting thinner margins (which they make up for by scheduling too many jobs and giving you less attention than you probably expect).

Again, you probably don't believe it (based on your quoted comment above), but that's the way it is. Personally, I overcame this issue by hiring a full-time project manager that does the non-technical parts of the GC job -- scheduling, budgeting, hiring/managing contractors, procuring materials, etc. And then use high-quality subs for the work. The money I save on the GC goes to the PM, the higher-quality subs and into my pocket. If you ever start doing multiple jobs simultaneously,I highly recommend this approach.

Oh, and you'll never find a reasonably priced GC who will float the costs until after the rehab. The good ones don't need to (they can get other work that pays on time) and the bad ones can't afford to (they need your weekly checks to pay their rent).