What is my contractor worth?

[Howard Gale]

Hi, I am a new REI and in the early stages of building my team for my first BRRRR project. I have found a skilled contractor that I trust. I have spoken with him regarding my interest in real estate investing. He is interested in partnering in a project. He would be willing to do the rehab work at cost and I would provide the funding. I am interested to know if any fellow investors have had a business arrangement like this and what is a fair deal to offer my contractor partner? I was thinking a percentage of the profit after the refinance. I would appreciate any thoughts on this.

[Lynnette E.]

I have a general rule to never split the profit with hired workers.  IF I can hire someone to do it, I can just pay them a fair wage and control the work situation.  When you partner with someone on a shared profit basis and the partnership does not work out its a royal mess!  What if he wants to do a different type of rehab, more or less than you want, what if he does poor quality work?  What if he is a perfectionist and wants to fix everything exactly as new?   What if he  does not or can not manage the timing?  You will be paying bills for the house to sit with nothing going on?  All these things are issues when you know the contractor and have done lots of work with them.  For a new contractor the expectations you talk about and what happens during the rehab are 2 different things.

It even gets difficult to define what is cost?  Is it the material cost and he throws in the labor?  Is it his labor and material cost?  If its that, of a general contractor I generally pay cost and material plus 15%.  So the general makes 15% over the labor and material costs.  What you are saving is 15% to maybe 20% of rehab.  You are putting in all the money, and all the risk and found the deal.  What is the rehab estimate, figure out what 12-15 percent of it is and that is what his effort is worth.  But you give up control of the work, releasing him if he does not work out, etc.

Its easy to talk to contractors and some of them are smooth talkers, but will take you for a ride in a heart beat.  Some can talk real well, but can not make a square corner if their life depended on it.  And some are great guys, but get in over their head with scheduling, budget, issues.  Really think about this.  For your first experience with a contractor it is not wise to put yourself in a place where its hard to fire him.

I'll tell you a sad situation that I got into.  I used a very well known contractor, the top, best one in my community.  He put in 4 roofs for me, including an apartment building.  He built a room addition on my personal house.  He did a lot of work for me.  His last job for me is his last job with me.  He was to put in a garage that could hold my boat for Winter 2018/2019 and camper van.  Its 30X30, and 14 feet tall, to fit the camper.  He started but then the ground got too soft then too hard, frozen, so we lost Winter storage of my stuff in the garage.  He was over booked.   Spring 2019 came.  I asked for the schedule.  I pushed.  My permits expired.  I had to get new ones.  He was over extended, but just made excuses.  No one here will take over a project from them, they are the best and people wait and beg this company to be their client, so other contractors think you have a problem with them, they won't touch your project.  I was stuck.  Finally in November 2019 they had it framed, doors in and drywalling. Really less than a month's work, but it took them over a year.   In January 2020 they were still drywalling.  I was paying cost plus 17%.  They were in no hurry.  The drywaller could have gold leafed that garage cheaper.   In Jan I told them that I would take it as was on Feb 1 to put my boat and camper in in before the ice storms came in Feb and March, since no progress was made since Nov.  (I had been in regular contact since Nov, paying my monthly bill, etc.)  So Feb 1 they were released from any other construction.  Just this month in May I got a $6k+ bill from them that they 'found' as they say they used 2 framers and I did not pay the other as they forgot to bill me for him.  I have no way to argue it.  My garage is now at $65k...and not done! But totally usable.   And that does not include pavement as I will be doing that when the plants reopen.  

And this is for a company that I personally was 5% of their income for each of the last 2 years!  But for this garage he tried out a series of new sub contractors he had not used before and they charged high and worked slow and many were not picked up as regulars.  He took major advantage of me.  And yes, he had done enough work for me I know what sub contractors he uses.  He does have 3 major subs to frame and he used 2 new ones for my work.  I got the same but new drywaller for the job, but he mostly sat in his car smoking and billing hourly.  No way it takes 3 months to drywall a garage.  He did not even get the ceiling done rough, nor around the one window.

And that happened with a contractor I know, trust and have done lots of business with.  I would have never have believed it could go so bad.