Rehab Tip: Types of Contractors

September 9, 2008 · 0 comments

As part of my blog, I’d like to start relaying tips and tricks I’m learning for those who are house flippers or those who are interested in getting into house flipping. This will be the first in that series of blog posts, and if you have any feedback (or want me to cover any specific topics), let me know! Keep in mind that these tips and tricks are based on my experience in real estate; they may not match your experiences, and they may not necessarily work for you in your specific location or types of investments. Okay, that’s enough disclaimer for now…

The point of this tip is help those who are just starting out finding contractors and don’t really know what to look for. In my experience so far, I’ve realized 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.

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). Then I started to see the bigger picture…

There are different types of contractors and contracting services, and if I had to categorize them, I would define three 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:

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.

Turn-Key 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 turn-key contractors who are licensed, insured, and can manage themselves and their team. Most turn-key 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 expected credential (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 turn-key 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.

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.

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