The 3 Types of Contractors
Are you looking for contractors? Do you have no idea where to start? The goal of this article to introduce the 3 major types of contractors you’re likely to cone into contact with, and give you some ideas of which is right for your projects…
Keep in mind that contractors run the gamut, from jack-of-all-trade types to high-end specialized artisans who focus more on art than on function or practicality and everything in-between. I remember on my first flip, I spent weeks interviewing contractors and getting bids. Strangely, I was getting bids ranging from $18K all the way up to $70K for the exact same Scope of Work! I couldn’t imagine that there would be a such a large range, and I couldn’t figure out what caused it. Especially considering the fact that I was only getting bids on Labor Costs, not Materials (which I specified and priced separately).
This is what I soon realized…
There are different types of contractors and contracting services, and if I had to categorize them, I would define three major categories. The differences in these three categories of contractor largely account for the differences in price, and have a very large impact on the amount of work the investor will be required to exert himself. As you might suspect, as you move from the more expensive to the less expensive contractor solutions, the amount of effort that the investor must exert increases quickly.
Here are the three buckets of contractors you’ll find if you’re planning on doing property rehab:
1. General Contractors
The term “general contractor” is used in two ways, in my experience. From now on, I am going to differentiate “general contractor” from “General Contractor” (note the capitalization). A general contractor is someone who has the ability to tackle a lot of different aspects of a rehab project; most general contractors are good at carpentry, sheet-rock, basic electrical, basic plumbing, basic HVAC, and other general areas of home renovation and rehab. This type of general contractor might be referred to as a “handyman,” though if he is licensed and highly experienced, he’s likely a lot more than just that.
When I use the term General Contractor, I am referring to someone who has all the skills of a general contractor, but also manages all the aspects of the renovation that he doesn’t actually execute himself. A General Contractor will often hire sub-contractors (contractors with specific skill-sets) to come in to handle the work that he is either not skilled enough to complete or too busy to complete. For example, General Contractors will often hire plumbers, electricians, roofers, foundation experts, etc, to cover those aspects that require specific expertise.
Not only does a General Contractor hire the necessary sub-contractors, but he will often manage the schedule, the project budget, and all the payments as well (if you want him to). For big projects, the General Contractor might spend all his time managing schedules, budgets, and sub-contractors, and therefore might not have time to do any of the work himself. The General Contractor is also responsible for ensuring that his subs are properly licensed and insured, to protect you and your investment (as well as to protect himself).
As you can see, having a General Contractor makes your job as an investor very easy; you hire one person (the General Contractor), you pay only him, and everything just gets done. (At least this is the theory; in actuality if you don’t have a trusted General Contractor, you may need to be very hands-on and manage him to make sure he’s doing a good job, which dilutes his value tremendously)
The downside to working with even the best General Contractor is that he will charge you for all the extra work he does. If he hires a plumber for $1000, he’ll likely charge you $1100-1200 for that plumber’s work, because he had to find the plumber, hire him, manage him, and take responsibility for his performance. The General Contractor is also managing schedule and ensuring that the project is on budget, so there will be extra overhead charges for that. In all, having a General Contractor manage your project can cost you an additional 10-30% on your rehab labor costs.
2. Turn-Key (Specialty) Services
If you don’t like the idea of paying someone to manage your schedules and hire sub-contractors, you can do this work yourself. But you still need to hire contractors to come in do the actual rehab work.
When hiring your own contractors, you have a couple options. The most common — and most reliable — is to hire specialty contractors who are licensed, insured, and can manage themselves and their team. Most specialty contractors list themselves in the Yellow Pages, and they include those popular businesses such as Terminex (pest/termite) and Roto Rooter (plumbing); of course, there are likely thousands of these kinds of companies in your area that you’ve never heard of, but are just as reliable and hold the necessary credentials (license, insurance, Better Business Bureau Rating, etc).
While these guys may not be the cheapest laborers (they spent a lot of time and effort getting the experience necessary to get their licenses and credentials, and want to get paid for their efforts), they will likely get the job done without you having to “babysit” them or watch their every move. That said, you’ll still have to call them, get estimates, schedule their time, and make sure they have access to the property and the information they need — these are the types of things that a General Contractor would normally do, and that you would normally be paying to have done for you.
The major downside to working with a bunch of specialty contractors is that you will be responsible for managing schedules and ensuring that the rehab progresses in the most optimal fashion. For example, if you hire the painter to come out before the cabinet installer and the flooring professionals, you’ll likely pay less for painting, as the painters don’t have to spend as much time protecting the new materials from getting paint on them. If you do it the other way around, you’ll find that the rehab takes longer and is more expensive. While a General Contractor will know these sorts of things to keep a rehab moving along quickly, you might not, and getting that first-hand experience of having to re-sheet-rock a wall because you had your dry-waller work before your plumber, can be both frustrating and expensive.
Btw, I would consider an experienced handy-man to be part of this Specialty Contractor group, and as I’ll discuss in a future article, a good handy-man may be the most important of all contractors in your arsenal.
3. Freelance Workers
The cheapest — but most time intensive for you — avenue for getting a rehab done is to hire what I call “freelance workers.” These are guys who might have some experience in some aspects of rehab (they might even be general contractors), but don’t have enough expertise and experience to trust them to complete even individual parts of a project without management. Whereas a turn-key dry-waller can be trusted to finish up a room while you head to lunch, you probably would want to stick around to manage and instruct a freelance worker who was doing the same thing.
Freelance workers are often called “unskilled laborers,” because while they work very hard, they don’t have the expertise to know how to solve tough problems themselves. They’ll look to you to do that, so it’s required that you would have the knowledge and expertise to solve those problems. For example, a freelance worker might be happy to install carpet or lay tile for you, but may not know how; it would be up to you to demonstrate proper technique and then ensure that he is following it and getting the job done correctly.
Freelance workers are by-far the cheapest labor costs for a rehab, but will require the most time, effort, expertise and patience from you.
Many investors will choose a combination of these three types of contractor for their project. They may choose to hire a GC for the large projects that they couldn’t handle themselves, and then use a combination of turn-key service contractors and freelance workers for the smaller projects. It’s all a matter of balancing the cost, time, and effort required to get a job done.
Hi mr scott Iam ready to buy my first flip but I work a full time job and so does my wife can you give me some insight on where I should start and what kind of contractor I should use.
J Scott,
I am a college student. I want to be debt free before I graduate in Spring 2013. I will probably need around $50,000 dollars to do so. I have been reading books about real estate, but I need to start applying what I am reading in some form or fashion. What should be my first step to get experience?
Hey Anthony –
My best suggestion would be to find a successful investor near you that you can “apprentice” for for the next several months. Basically, someone who will teach you the business in return for you doing grunt work, helping out, etc. You likely won’t get paid, but the experience you can achieve by working hand-in-hand with someone who knows the business will far outweigh anything you can learn from a book.
what are your thought on duplexes. side by side single family homes. I think its a no brainer if you can find a complete building worth rehabbing.
Hi J, A problem I’m having is the uninsured contractor whether #2 or more likely #3. I check insurance, workmans comp, but I worry about someone slipping through. Conversations with my insurance agents all confirm my investors insurance or even vacant insurance does not cover any accidents. Given the later fact I don;’t know how a real business with assets to loose can afford to use any in the #3 catagory who are nearly 100% un-insured or they’d be #2’s.
tnx curt
Hey Curt,
There are plenty in the #3 category who are insured…you just need to find them. In my area, you only need to be licensed to be an electrician, HVAC, plumber or GC, so most contractors aren’t licensed. But, still, many are insured.
To ensure that a contractor is insured when he says he is, ask for his insurance company to fax you a copy of proof of insurance. They will send you a standard form that gives all the information on the contractor’s insurance and you can call the insurance company directly to verify. The nice thing about going this way is that the insurance company will then keep you on the list of contacts in case the insurance lapses or changes — if it does, you’ll be notified automatically. That way, you’ll know if the contractor changes insurance or stops paying.
Always make sure if you hire a 1, 2, or a 3, that their insurance company
Lists you as the certificate holder. You can also request that you are notified of any changes that occur within 30 days. Simply asking for proof of insurance will not always ensure you are covered.
Any recommendations for a reliable computer program for a General or Turn-Key Contractor; to set up and maintain schedules with E.O.D., monthly, quarterly, yearly reports and manage project budgets, etc.. Any feedback would be much appreciated.
Hi Cristie,
Unfortunately not…I do all my bookkeeping with QuickBooks and all my scheduling with Excel…
J Scott,
Your blog is unbelievable. I love it and am so glad I found it. I have been devouring it over the past couple of days. Thanks for putting such effort into helping others.
I live in a smaller population area and almost every contractor I contact is either 1) booked solid for the next two months with people waiting in line, 2) are astronomically expensive (which eats up all my profits), or 3) falls in your freelance category above that needs to be managed heavily (I have to be there with them most of the time). Paying too much and making little profit is out of the question. So, what do you consider the lesser of two evils between the other two? Or is their a strategy to negotiating with high priced contractors that are way over charging (for instance: charging you $200 to hang a “pre-hung” interior hollow door which takes them about 20-25 minutes)? These issues have been my biggest struggle so far and I am starting my 4th rehab (my 2nd flip — I rehabbed the other two to live in). Thanks for any help you can give.
Hey Todd,
This can be a major challenge in these types of areas. In my experience, the best thing you can do is to look for deals where there’s a bit more room for renovation costs — in other words, instead of fighting to find the lowest-priced contractors, just factor the higher prices into the analysis.
Do you happen to live someplace where the winters tend to be harsher? These are the locations where contractors tend to be very busy (and very expensive) during the summer months, as that’s when most of the renovation work is happening. If so, you’ll find that winter prices (and availability) is much, much better than the summer. If you can start using the contractors in the winter, by the time summer comes around, they’ll tend to be more loyal (and give better prices) than if you started using them in the summer. Plus, if they know they’ll get work throughout the year from you (and other investors you refer them to), they’ll be more reasonable during the summer, as they’ll appreciate the year-round work.
Other than that, my best recommendation is to find other investors and ask who they’re using as their contractors. I’ve found that contractors who are accustomed to working with investors are a lot easier to deal with than contractors who aren’t accustomed to working with investors and have to be “trained.”
Thanks J,
I live in south Louisiana where it is hot or warm most of the year. The winters are milder than most areas and don’t last as long. So, the winter thing may not work as well for me. But, I will definitely try to find some other investors who might can give me some leads.
On another note, what would you do if the only people available in the next month (so that your property doesn’t just sit) are contractors that aren’t licensed/insured but who have good reputations. Would you go ahead and use them for the sake of time or would you hold out for several weeks until the licensed/insured ones are available?
Todd –
I would keep looking until I found the right contractors. Don’t settle…but don’t just sit around and wait either…they’re out there!
Hey J,
You said above that the best starting point for someone looking into Real Estate Investing would to try to ‘apprentice’ under someone for a period of time to learn the trade… My question is, where/how would I find an opportunity like that? I really have no existing network or experience with real estate, and I have heard of a lot of scams that try to rope inexperienced investors in to use their money, and obviously I’d want to avoid that.. Where can I find someone who’s willing to teach me?
Thanks,
Jordan
Hey Jordan,
Find a local real estate investors association (REIA) in your area and start attending the meetings. There will certainly be some people there you’ll want to steer clear of (the “sharks”), but there will likely also be some very serious and trustworthy investors who are looking to network and build relationships.
In addition, check out the community on BiggerPockets.com, where you’ll be able to network with literally tens of thousands of investors through their forums.
Hey J,
Thanks for the advice. I started to look around to find an REIA in my area, and there is one. I plan on checking it out. But in my research, I also saw some ads for Keller Williams, saying that they are hiring and training real estate agents in my area with no previous experience necessary. I was wondering what you thought about that; whether that might dovetail well with a career in real estate investing, or at least offer some good training, similar to your ‘apprenticeship’, for a couple of years.
That is a good tip particularly to those fresh to the blogosphere.
Simple but very accurate information? Many thanks for sharing
this one. A must read article!
Am kevin munene ,a college student taking building technology ready for my attachment