Episode 206: Estimating Repairs and How to Pay Contractors

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David: Today guys, we are going to be talking about how to pay a contractor as well as how to estimate repairs on our properties. Mike, good morning to you buddy, how are you?

Mike: Morning Dave, doing good man, doing good. Excited to get in and record again and we’re talking about one of my favorite things: writing checks to other people.

David: That’s right, that’s right.

Mike: Oh man, it hurts. It always hurts but those contractors do good work for us a lot of times and they deserve to get paid as well. So, you want to do so in a way that is smart, right? We hear about a lot of people getting burned, a lot of new investors getting burned when you know, oh the contractor stole my money and didn’t do the job right yada yada, and man it happens. It happens to even seasoned investors. We had- Dave I think you were driving for dollars on the day that Dan came in and he was talking about his huge deal that they had going on in the city, I mean hundreds of thousands of dollars he invested in this property and contractor didn’t do good job, failed to perform and he said man, we’re going back and forth, we got a court case. I mean, it just- it turns into- it can turn into a nightmare. I mean you’re talking about hundreds of thousands of dollars, your properties tied up, you can’t sell it cuz it’s not done, you don’t have the money to finish it, like this is a scary thing so, yeah. I mean, there’s definitely reason for concern or time to think about it.

David: I get a lot of people reaching out to me that say, I paid a contractor maybe you know, half or even all and the contractor skipped town, what do I do? And I feel so bad for people because they’re out that money yet they need the work done still, obviously that’s the most obvious thing but at the same time I am happy to hear that people have made the leap and they’ve taken some risk to do these type of things and get into real estate because that’s really where freedom is that I have an, you know, passive income that you don’t have to work for. So, there’s two sides to every coin.

Mike: And making big checks if you’re doing these flips.

David: That’s another thing, yeah.

Mike: Like, the market’s going up and flipping is I hate to say it but it’s a pretty saturated market. It’s- it makes me a little nervous because there’s just so many people that are getting into it and doing it and making money which is an awesome thing, that’s a great thing but you know, the market is just, you know, maybe we’re at the top, who knows? Maybe we’re still going up for another three years, I mean, it’s just tough to say. But yeah, the contractor thing is very scary. My aunt actually reached out to me a few weeks ago and she’s wanting to redo her bathrooms and she’s like hey, does this look fair? and she sent me a contract or proposal rather from a rehabber or a remodeler and said, hey does this make sense? And I said, yeah, it looks pretty good, but it’s difficult for new investors and homeowners to really determine what is good and what is fair. This contractor had payment plan like it was like you going to pay x upfront and you’re going to pay for all materials and then every two weeks you’ll make payments until it’s finished. Well, what I said is that’s really- that’s an interesting way to do it and I understand where the contractor is coming from, but I don’t want to just pay somebody every two weeks, I need a project milestone. I need to know that part of the projects getting completed so that I’m paying you for that because again if they say, okay I’ve signed this contract with somebody and I give him 50% up front and then I have to pay them in another three weeks and doesn’t say anything about progress on the project. Like that just- a timeline is very difficult I think for- to really just put in a contract, so I’d be wary of that.

David: That’s a good point.

Mike:  And that’s what I told her. I said I would want a project milestone like the drywall and all the fixtures are installed but the finish work isn’t finished.

David: Correct.

Mike: So I mean that’s something like that’s concrete.

David: Something along those lines.

Mike: You can actually see-

David: Yeah, tiles in, cabinets are hung.

Mike: Right.

David: Boom, that’s a milestone.

Mike: Right, the plumbing-

David: Here’s a check for whatever it is, right.

Mike: Right, the demo is done. I mean, cuz again starting out, so demo is done, cool. You can see that, you can walk through and be like yes, everything’s out of the house.

David: Right.

Mike: It’s all ripped out, then you can actually physically see oh, a plumber has been in and there’s like new connections. You can physically see that.

David: So Mike, we’re on the same train of thought. Lets put that into audio so everyone listening can understand. So guys, when you’re working with contractors, don’t pay them hourly necessarily. Try to put a timeline together and put as little as money up front as you can cuz I get a lot of people that are getting burned, right? So, and if they require money upfront then that’s okay, try to put it into the materials because that’s something that you can go pick up yourself if you’re new and deliver and know what’s going on. You’re also going to save money if you’re buying materials cuz they’re going to typically mark that stuff up but have a timeline like Mike suggests and put it in writing, you know, when they get to a certain point that they get x amount and then when they get to the next milestone, they’re going to get x amount and try to structure your payment to where it’s back heavy or as they get farther along, they get bigger and more amounts of money ideally. Now, some guys aren’t going to work without getting something down and Mike, that’s just going to happen, you know, try to pay as least as you can, but really the goal is when you’re working with contractors is to build a relationship just like we talked about with motivated sellers. We’re trying to make a friend and build a relationship, you know, you want it to be a win-win. You can’t be rehabbing houses and have a contractor that’s losing money every time like he’s not going to be in business for very long. Everybody’s got to eat so you gotta understand that but prevent yourself from getting taken. That’s really the goal here cuz that’s what I’m seeing the most, is people getting taken especially if they’re virtually investing or they work a full-time job or even two jobs and they’re doing this on the side. They don’t have time to manage these people and depending on how much you’re paying, that’s how much management you’re going to have to add. If you’re not paying very much, you’re going to stay on these people. You’re paying a lot for a quality contractor with lots of reviews, you know that has a ton of business in the area, you’re going to pay a lot more for that guy, but they’re going to be more reliable. So, while we’re on this topic Mike, I want to talk about the three things that come with every contractor, right? Price, quality and time, pick two.

Mike: Always.

David: Always.

Mike: Yeah.

David: You wanna explain that to everyone?

Mike: Absolutely. It’s- think of it as a triangle or whatever, you can’t get all three. You can’t get a low price, high quality and what was the third one?

David: Time, quality and cost.

Mike: Yeah, and finish very quickly. So, if you pay somebody a whole lot of money, there’s a pretty good chance they’re going to be a higher quality and they’re going to be able to do it faster. That’s just- it’s not- it’s not realistic to expect all three.

David: All three. You are not going to get a cheap product that’s a high-quality done very fast. It’s not going to happen, right? But pick two guys, you can always have two. Time, quality and cost. So, that’s really what it comes down to whenever you’re picking your contractor, you know. In some of our rental projects, time isn’t as important as you know, good quality and a low-cost so we’re willing to sacrifice. We also have to have seasoning built in sometimes for the rentals of three, four, five, six months, so if the project doesn’t need to be done right away, then we’ll choose somebody that can do it for cheaper.

Mike: That’s a really good point dude.

David: Yeah man, absolutely. If we’re doing a flip, time is of the essence cuz we’re typi- sometimes paying 12, 14% interest on our money to buy and rehab so we’re you know, maybe not sacrificing the quality but we’re going to pay a little more, that’s the cost that comes in. So, we want it done good, we want it done fast, it’s gonna cost a little bit more but it’s better to do that because that little bit more cost is going to be less than a crazy interest rate, right? There’s always scenarios where you’re going to want to pick two, but you really can’t have three right? You just can’t. It just doesn’t make sense for somebody to provide a crazy amount of value to you and charge you a low amount of money and get it done overnight, like it’s just- that doesn’t add up.

Mike: Okay, so I wanna just kind of recap what or just make it very clear what my suggestion is on how to pay contractors and I think yours as well.

David: Yeah please man.

Mike: Is like we said, you wanna put as little down or as little up front as possible. You wanna pay heavy on the back end, what does that mean? Well one, you’re going to draw up a scope of repairs. You absolutely have to have something in writing with your contractors to prevent yourself from getting burned. That’s the whole objective here is to make it fair between you and the contractor. Like Dave said, they got to eat too, they’re doing this for a living.

David: It’s gotta be a win-win.

Mike: Hopefully, you’ve got somebody who is a reputable person or trying to you know, build a business.

David: Yeah, and over time you’ll be willing to pay more to not even have to go to the project and that’s kind of how some of ours are. We sacrifice cost but we get it done at a good quality and fast, but we pay a lot right? But at this point in Mike and I’s investing careers and our journey, you know, we’re doing 12 projects at a time so it’s like I can’t go to every project every day. I can maybe get to every project every week maybe, but even that. So, you just get people that you trust and you pay a little bit more and you know the stuff gets done but in the beginning things may be different.

Mike: So, scope of work. So, draw up a scope of work, either have your contractor or you do it, or you guys are going to do it together, you’ll go back and forth on it. We still do this with some of our newer contractors, say oh we can do this for this, and then we go back and forth and say well we take off this, you know. So again, you’re going back and forth with your scope of work, I suggest 25% upfront, no more than 25% up front and you can pay for materials. Like Dave said, you can save money if your shopping materials yourself. Also, you should be involved in your rehab. If this is your one project going on, you probably want to go pick out the finish materials.

David: Yeah, you should.

Mike: And you wanna work a little bit more hand in hand with the contractor, and they’re going to expect that as well. Now, materials is kind of tricky though because the contractor thinks about all the materials that go into it. Oh, I’ve got to buy drywall, I got to buy paint, I’ve got to buy screws, finish nails, all this stuff, so you want to put that out there as well. If they buy something, they can provide you a receipt to have that reimbursed, so there’s certain things like that. So, 25% plus materials then after a certain milestone, kind of like we talked about, they can be the demo and the rough finish work, so again, that means walls are up and some of the stuff is in but it’s not finished, so that would be maybe, pay another 25%. Then upon completion, pay the remaining balance. Again, it just kind of depends on the size, scope of the project, what they’re  willing to float out there, but that is my suggestion: put it in writing, have clear- have it clearly indicated who’s paying for what and have progress milestones as opposed to just straight time milestones for your payments.

David: That’s right.

Mike: So, don’t cut the final check, your contractor’s always anxious to get that last check. Don’t cut that last check until you go and walk the property, and don’t just walk it willy-nilly too. If this is a new contractor and it’s a little bit- test everything, flush the toilet, turn the sinks on, go down to the basement, make sure there’s no leaks. I mean again guys, double check all this stuff because this is your only chance to do it. You’re going to- you’re probably going to sell that house or have a tenant move-in and they’re going to be playing with this stuff everyday.

David: Right.

Mike: So they’re going to find the stuff that didn’t work.

David: Yeah, make yourself familiar with what the hells going on in the house.

Mike: Yeah, so go in, walk the house, take 20 minutes, 30 minutes, 40 minutes, walking through and checking and looking at everything.

David: Touch everything.

Mike: Then cut that final check, and that’s how you avoid getting yourself into trouble with paying contractors.

David: I agree, I agree completely.

Mike: I think that’s probably the quick summary of it. Scope of work, to find milestones, check everything before you pay, done.

David: Yup, love it. So, before we even get to the contractor, we’re going to kind of want to know our own repairs and that’s another question that kind of goes hand-in-hand with this is how to estimate repairs. Mike and I love using Rehab Estimator Pro, it’s an online tool that helps estimate the repairs. Basically, Matt Hedstrom, one of my good buddies, he’s the creator of Rehab Estimator Pro and he’s created a software to where you can use this anywhere in the country. You can adjust your prices up or down as needed but quite frankly, you know, a piece of lumber at a Home Depot in Nevada isn’t much different than one in New Jersey, you know, it’s relatively the same. The only thing that’s going to be vary the most is going to be the labor in that area, maybe the taxes on those materials in that area but the materials themselves are relatively the same cost, and he built this because he wanted his bookkeeper, literally somebody that knew nothing about real estate to be able to go on an appointment and get an accurate repair estimate in 15 minutes or less. So guys, check out rehabestimatorpro.com, use code DPI and that will give you actually 66% off this product, and the reason we love it and that we’re talking about it today is because it helps estimate repairs and you can do this literally by walking around the house and clicking little check boxes of what the property needs and typing in the square footage. It actually really helps estimate your ARV and then it does the repairs in real-time, but here is really where it gets exciting is it creates that scope of work once you estimate your repairs, and then that scope of work can actually be used to go into an agreement with a contractor. That scope of work can actually be, you know, what you’re hiring them to do and if there’s things that need to be added then you can go in and you can add them and then you can then also establish a timeline on how you’re going to pay that contractor from that scope of work, so that’s really one of the coolest parts of Rehab Estimator Pro is yes, it helps estimate the rehab and the repairs, but it also helps you generate the scope of work and it creates an offer based upon the ARV and the repair estimate, So, it’s got a calculator that helps you send offers to motivated sellers. It helps you use the repair estimate to create a scope of work and an agreement to actually go into a contract to get those repairs done with the contractor, and them last but not least, it has some really cool tools about helping you justify your offer as being a fair offer versus a low offer, cuz it has a sellers net sheet that’s built-in. So guys, go check it out, Rehab Estimator Pro. It’s basically the simplest and easiest way and really the only way that I found that truly works to estimate your repairs. Anybody can do it, you can learn how to use the software in less than 20 minutes and you can go and you can walk an entire house and come up with a very accurate repair estimate in less than 15 minutes. Again, Rehab Estimator Pro, so that’s really our secret weapon that we use to determine our repairs, create our scopes of work and basically will send our contractor our scope of work. He’ll go out and he’ll look at the property, he may make a couple notes of things that we need to add which, you know, great. We need to- we need to make sure that we’re being fair with these people, right? and then we’ll add those things in or remove certain things and that’s it, that’s the price that we’re willing to pay right there and if there is overage, then we’ll figure that out in the end and then we basically have our own timeline on how we- how we pay these guys. So, that’s really what it comes down to, you know, there’s really- there’s really not- There’s a couple of ways to go about you know, determining your repairs, of course as well as paying your contractor, but Mike and I like to just keep things simple, less is more. So, Rehab Estimator Pro is really what we do and use to determine them, create scopes of work and make offers, and then from there we just modify and that’s really it.

Mike: Yeah, so the tool is really neat guys. We have off the cuff ways of estimating repairs and we’ve done that for years and we usually come in a little bit light.

David: We always come in a little light that way.

Mike: I look at all my projects and you can look at some of our case studies that we do, like yeah, we came in about 5 grand light, we came in- So, when we started implementing this and using a tool for it, we’re so much closer to the actual number, it’s astonishing. So yeah, check it out. Again, you can use the off the cuff methods, absolutely but again, to get something in writing, this types it up for you like Dave said, puts it all together in a scope of work, helps you do that much more quickly. Yeah, it’s definitely hands down the way to do it.

David: It’s a game changer. So guys, that’s how to estimate your repairs and that is how you should pay a contractor. You need to have a scope of work. If you don’t have a scope of work and you’re paying a contractor, you’re gonna be throwing money away or you’re going to be getting robbed cuz you’re not going to really know what you’re paying for and on what timeline, so that’s very very important to have a scope of work and then of course an agreement with that contract. So, don’t pre-pay your contractor all upfront, don’t even give him half up front, at a minimum 25% but if you can get away with paying weekly or even based upon a timeline, that’s going to be the way to go. I really don’t want to see you guys get burned by contractors, but you gotta also understand not everyone is out there to get you, there’s a lot of reputable people that you know, do this work day in and day out. They have a lot of positive reviews and ask for references. That’s another good thing that I didn’t even really think of but when you’re hiring somebody ask for references, call those people, ask them how they’re timeline went with that, you know, most recent job that they did with that guy and how it went with the pay and you know, are they happy in the end or are they upset that they feel like they got taken or over payed, you know, just talk to people. It’s really that simple. So guys, we hope you learned how to estimate repairs as well as how to pay a contractor and set up that agreement. That was one of the questions that we got sent to us to make a podcast on so I think our secret weapon here and this is the takeaway is go over to rehabestimatorpro.com, use code DPI- DPI and that’s gonna save you 66% on the service. Not only is it going to help accurately estimate repairs, but it’s also going to create a scope of work and a sellers net sheet, which is going to be used with your contractor and your seller to justify those repairs. A lot of times too, sellers will want to get involved in the process of estimating repairs so you can just use an iPad or your phone even and- or give it to them. I’ve even done it where I’ve given it to them and we walked down the house and I’ll say what do you think about the trim? and they’ll say yeah, dog chewed it up a little bit so they clicked that little button, and then we go into the bathroom and I say, ok looks good, it’s dated though. Wouldn’t you agree that we’re gonna need a vanity and a toilet and probably a shower surround? I agree, they click those buttons and they are adding up those repairs and then they hand you the phone back and it says 36,400 and they can’t really argue. They can’t say oh I can do it for 20, well not really, we just looked at every little item. So, Rehab Estimator Pro guy, go check that out, DPI’s the code, save 66%. You guys are going to be a pro at estimating repairs and hiring contractors in no time. I’m confident. Signing off.

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