Five Factors to Avoid Disasters When Working With Contractors

This blog is written by Jen Josey, Real Estate Investor, and REIGN Coach. She is not a professional writer and writes as she talks so put your red pen away.  Jen is extremely opinionated but reserves the right to change her opinion at any time because, well, that's the way she rolls.  She may also use colorful language so don't be offended.  Jen does not claim to be an expert, she is just sharing her personal thoughts and adding a perspective on investor topics that may benefit her readers.  Jen also finds it strange to write in the third person.  Enjoy!

I taught middle school for 16 years. I really loved teaching until I woke up one day and realized I hated children. Now, now...I am (kinda) joking. I did love 92% of my time in the classroom, I simply hated the part when I felt like an underpaid babysitter.

At the end of each day, I had to gather all the forgotten lunch boxes and sweaty gym clothes and take them to lost and found. I broke up many fights in my day, once even getting whiplash, and spent the next few months going to a chiropractor. My classroom was in the back of the building so I would have to call administration every time I saw a group of kids sneaking off-campus. During field trips, I would constantly count heads to make sure I didn't lose any kids...all while making sure Barry wasn't mooning the other bus again. (that's his real name)

When I left teaching, I was so relieved to think I would never have to deal with babysitting ever again. That was...until...I started flipping houses. Who would have thunk that dealing with some contractors would be just like babysitting middle schoolers, but in the form of grown-ass adults. But let me start at the beginning, here are five factors to avoid disasters when working with contractors...

1. Mandatory Musts

The first and most important is to make sure you hire licensed and insured contractors. The contractors that need to carry a license are general contractors, electricians, plumbers, and mechanicals, better known as HVAC technicians. If you are hiring a carpenter to fix your baseboards, they do not need to be licensed but they should have insurance.

I make my contractors sign the following six documents:

-Independent Contractor Agreement

-Scope of Work

-Indemnification Insurance Agreement

-Payment Schedule

-W-9

-Lien Waiver

The independent contractor agreement includes the amount agreed upon during the bidding process, time frame, 1-year warranty, services provided, and more. One item we include is a daily penalty for every day over their determined completion date. If they tell us the job will be completed by the 15th, we give a little buffer and then will start to deduct $100 a day from their pay for each day they go over. Yes...things happen...like weather delays, for which we do not hold the contractor accountable.

The scope of work is signed by both parties so it is completely clear what is expected to be done on the property.

The indemnification insurance agreement basically adds you, the investor, to the contractor's insurance policy which protects both parties. This is very common. All they have to do is call their insurance provider and add you to the policy (no cost to you) during the length of the job.

The payment schedule is a list of milestones or benchmarks that must be met before payment is distributed.

A W-9 is a tax document that needs to be completed by anyone you pay more than $600 a year. It is super smart to get this signed in the beginning so you are not chasing down contractors at tax season...ask me how I know...

A lien waiver is the only document signed at the completion of a project. It states that all work has been completed and paid for, including any material provided by the contractor.

2. How to Find Vetted Contractors

Contractors are everywhere, you just have to know how to find 'em. If I'm driving through a neighborhood and see a vacant property getting rehabbed, I will walk onto the site and ask to speak to the head contractor for contact information. Typically, these contractors are already working with investors or builders, not retail homeowners. If I'm invited inside the property, this gives me a chance to see their quality of work.

I also stalk Lowes and Home Depot for contractors. If someone is wearing a trade shirt, I will always ask if they work with investors. Sometimes, they say they only work with retail clients and aren't sure how it works with investors. I let them know that even though we pay wholesale prices for labor, we provide consistent projects that come with a detailed scope of work for a vacant property where they don't have to deal with a homeowner. You may meet a frustrated retail painter that is there for the third time because the woman he's working for has changed the color choice AGAIN and now he's losing money because he can only work three hours a day while her kid is at gymnastics.

The best and most vetted contractors come from my network of other real estate investors. If you are just starting out, I suggest you join every local real estate investor Facebook group out there. After a quick scroll through the posts, you will see who the real players are. When you need a specific contractor, you can send a private message to an experienced investor asking for a referral. I do this instead of posting a general inquiry in the group because investors may be willing to share their favorite chimney guy with you but not with everyone. That way the chimney guy doesn't get overbooked so the original investor can't hire him when needed.

On a side note, before you refer any of your contractors to other investors, you should always ask their permission first. I have one contractor that cuts me a deal on all my projects simply because he says I'm so easy to work with. He let me know that if I refer him to others, which he welcomes, that his regular price is a bit higher than what he charges me.

3. Code of Conduct

During our first large renovation, I received a phone call from a neighbor letting me know the police were at our rehab, breaking up a fight. This is when I quickly realized I was dealing with middle schoolers again, just in the form of contractors. Turns out my plumber refused to pay one of his subcontractors (from a different job) and that guy tracked him down at our property. My plumber is the one who called the police to have him removed and the neighbor was a little over-dramatic. This is when I decided to start posting the following code of conduct at all our sites...

Since I started posting this Code of Conduct at all our worksites, I have found it entertaining when contractors started to tattle tale on each other, another experience I don't miss from my teaching days. My painter has texted photos of Bojangles cups left on the counter that the flooring guys left behind. My landscaper let me know when the countertop guys left an old sink under a bush. My guys know that if they wish to continue working with us, they need to follow house rules. If I can't be there to bust them, someone else will!

4. Contractor Schedule

In addition to the Code of Conduct, I also post a schedule of what trades are working on what days. My painter is the one that suggested it and it has been a tremendous help. Since time is money, I schedule multiple trades each day. Having a color-coated calendar posted lets my plumber see when my tile guy will be working so he knows to complete the bathrooms before he installs the hot water heater.

I also condense the scope of work and add it to the bottom of the schedule. I briefly state what each trade is doing during their time at the worksite. This includes paint colors, which light fixture is getting replaced, etc, so there is zero confusion on what each trade is doing. Mistakes are inevitable so this is just one more point of reference so the wrong wall doesn't get demoed. This also helps reduce questions from other trades on what is getting done by the rest of the team.

5. You Get What You Pay For

All investors like to save anywhere they can during a rehab. When you are getting bids from contractors, taking the lowest bid on everything can cost you more in the long run. A perfect example is my tale of two flooring companies. I was working with a super great guy, Mickey, who was a referral from another investor. Mickey was so easy to work with but his prices were a little high. I had another investor talk me into using his new flooring company where he could get the same product installed for half the price. The first project was great, even though they installed the planks horizontally when I specifically requested vertically. The second project went two days past when they promised completion which held up the rest of my contractors. The third project was a total shit show. They swore by this new product for stairs and here's a photo of what $1800 got me...

This is what they installed in a half-million-dollar project! No risers or spindles, which was included on their bid, not to mention the exposed wood on the side. Thank goodness my amazing general contractor and his magical carpenter were able to step in and finish the job. Needless to say, I went back to my main man, Mickey.

With all of these factors in place, I have been able to establish an awesome team of contractors. It has taken a lot of time AND money to find them so I know the importance of keeping them happy. Every chance I get, I let them know how appreciated they are.

I am also proud to announce my babysitting days are over...

If you would like to read more blogs by Jen Josey, you can find them at www.REIGNmastermind.com/blog. or visit www.TheRealJenJosey.com.

If you would like to listen to some blogs narrated by Jen herself, search for "Real Estate Investor Growth Network" anywhere you listen to podcasts.

Now go out there and make it a great day!