You’ve found a great fix-and-flip property in an attractive neighborhood and available at an affordable price. That was the easy part. Now comes a bigger challenge – finding a contractor who will deliver the desired upgrades on schedule and within budget. Hiring the right contractor can make all the difference between a profitable flip and a cost overrun disaster. Because of this, experienced rehabbers know that they should devote maximum effort to finding a good contractor.
Those with construction experience may be tempted to serve as their own general contractor, hiring subcontractors to handle specialized areas such as plumbing and electrical. This strategy can save money, but is also time-consuming since multiple subcontractors must be hired and supervised. For rehabbers overseeing multiple projects simultaneously, a general contractor is an absolute necessity.
Here are seven tips for hiring the right general contractor:
1) Begin with a concise plan. You should have a clear idea what upgrades you want made to the property before you even start talking to contractors. Being specific about the work involved and the types of materials you want to use helps the contractor create an accurate estimate and work schedule.
2) Screen for contractors who have an established business, good reputation and appropriate licensing and insurance. Check that no substantive complaints have been lodged against the contractor at the Better Business Bureau or the state Consumer Protection Agency. Also verify that the contractor holds the required licenses from state and local municipalities, and claimed designations from professional associations such as the National Kitchen & Bath Association, the National Association of the Remodeling Industry and the National Association of Homebuilders.
3) Request multiple bids. You’ve obtained contractor recommendations from family and friends and sifted through the list to rule out fly-by-night operations. The next step is to get at least three bids. Be wary of contractors who price their work thousands of dollars below bids by others. This could be a red flag that the contractor plans to either cut corners or come back to you mid-project, citing unforeseen problems and asking for more money.
Screening each prospect by phone can help further narrow your search. Request references from previous clients and suppliers, examples of previous renovations similar to your project, how many other jobs they will be working on at the same time and specific tasks that will be assigned to subcontractors. Their answers will reveal much about the contractor’s experience, dependability and the attention that will be focused on your job. Understand upfront that good contractors are often booked two to four months in advance.
4) Write up a contract. Your contract should spell out start and finish dates (including a time limit for fixing defects), describe the work involved, specify the materials to be used and outline a payment schedule. A typical contract breaks down the job by line-item for labor, materials, fees and other expenses.
Some contractors furnish a fixed bid; others contract on a “cost plus” basis, charging you for materials, time/labor, and an overhead fee. A “cost plus” contract should include a cap or other provision that limits cost overruns.
The contract should also cover applicable building permits and fees, which are usually handled by the contractor, but ultimately the responsibility of the home owner. In addition, the contract should address licensing, insurance and warranty of workmanship for subcontractors and spell out what happens if either party defaults. Verify that the contract requires lien releases be obtained, which protects you if the general contractor fails to pay suppliers and/or subcontractors.
Renovations invariably encounter unexpected obstacles that add to costs so don’t sign a contract that commits every penny of your renovation budget. You should plan on holding back 10-15% of the total budget to cover unanticipated expenses.
5) Don’t pay more than 30% of the job upfront. Paying too much upfront creates risk that the contractor will use your money to finish someone else’s project. Payments should be made periodically and tied to the completion of project milestones. Most contracts are structured to have three milestone payments across the life of the contract and a final 10-15% payment when the job is completed. Holding back a portion of the payment until the project’s end ensures that all work gets done to your specifications. Contractors are infamous for moving onto the next job before 100% of the current job is completed. You should also obtain copies of receipts for all materials and lien releases from all subcontractors and the general contractor before you make final payment.
6) Stay in regular contact with your contractor. While the job is underway, you should plan on speaking to your contractor several times a week. Major renovation projects may require daily phone calls and site visits.
Problems should be addressed immediately as they are encountered during the project. A mistake that can be easily repaired when it first occurs can also become expensive and time-consuming to fix after the contractor has left the site and moved on to another job.
7) Consider the big picture. Price is important, but it shouldn’t be your only consideration when hiring a contractor. You and the contractor will be partnered for the duration of the project, so you should choose someone you feel comfortable with and whose skills you trust. Challenges are inevitable in any large rehab project so it’s important to find someone who will take the initiative to solve problems as they arise.
A concise plan and detailed contract are great beginnings, but can’t offset shoddy work by a contractor who is sloppy, unskilled or dishonest. Choose your general contractor carefully since the person you hire may ultimately determine the success or failure of the fix-and-flip project.