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How to Keep Your Contractors on the Job | By: Mike Fallot

Mike Fallot
By Mike Fallot

Mortgage Man Funding, LLC

Since 2005, Mortgage Man, a private lending firm based in Louisville, Kentucky, has provided short-term financing solutions to experienced residential real estate investors.

Read more about issues impacting real estate and lending on Mike's blog at his site. 

 One of the lingering effects of the housing crisis from a decade ago is a shortage of skilled and dependable contractors. The surging housing market, fueled by low inventory, an improving economy, and an influx of new investors makes this problem particularly acute for rehab investors. Contractor “fatigue” is an increasing issue we see with many of our borrowers as they deal with this challenge.

Savvy investors we know are adjusting their business to address this new reality. Here are some of their strategies and practices:

Pay More: Competition is fierce, particularly for licensed trades that serve investors, consumers and businesses. Chances are your contractors have plenty of inquiries from your competitors – make sure the prices you negotiate are sufficient to keep your contractor committed to finishing your job and meeting your schedule. Project delays due to contractor no-shows are an increasing problem. Higher holding costs and re-work often far outweigh the increased cost needed to secure reliable skilled contractors.

Structure for Success: Always use a detailed, written scope of work and a written contract that protects you. Phases of work should be clearly outlined with expected completion dates. Change orders should be written and agreed to. Payments should be based on completion of milestones (i.e., demo, framing, paint, etc.) that are well defined and relatively simple to verify. Many contractors are not skilled at billing – investors often have to take the lead in this regard and can use this as an opportunity to educate and build trust with the contractor. Be prepared to deviate from the payment schedule to keep the project moving, but investors should always know how far ahead a contractor is in payment versus performance so they can make fully informed decisions.

Permits: Know and understand permit requirements reasonably well, so you are well equipped to navigate the “gray zones.” Always get permits when clearly required to, and never solely rely on an unlicensed contractor’s advice regarding permits – particularly when they say a permit is not required.

Inspect, Verify and Adjust: Frequent inspections and dialogue with your contractor regarding work quality and schedule are critical. If you don’t have the expertise to discern quality of work, consider asking a more experienced investor for help (there are plenty of them in KREIA). Keep in mind that rehab contracting work can be exceptionally challenging due to the inevitable surprises and unknowns of rehabs. Build a healthy contingency into your rehab budget – and don’t expect your contractor to absorb these excess costs. Understand that small contractors have difficult jobs, and investors who make their life easier (pay on time, provide regular work, offer good dialogue, etc.) also increase their probability of a successful project.  (Kentuckiana Real Estate Investors Association) does not give legal, tax, economic, or investment advice. KREIA disclaims all liability for the action or inaction taken or not taken as a result of communications from or to its members, officers, directors, employees and contractors. Each person should consult their own counsel, accountant and other advisors as to legal, tax, economic, investment, and related matters concerning Real Estate and other investments.   

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