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Chapter 1:

The Pain of Hiring Unsuitable Contractors

Have you ever had an opportunity to be involved in real estate refurbishing in any significant way? Many who have owned homes may have done one form of restoration or another. These are typically one project here, one project there, and may not present major complications. Those in the real estate rehabbing business experience more turbulence than ordinary homeowners can imagine. The moving parts in an actual rehabbing project are many and varied. For beginners, these parts could take a long time to master. Without going through the rigorous process of learning, formally or informally, a new business owner may experience unimaginable stress and loss of investments.

For starters, rehabbing is the process of restoring and improving a property to a satisfactory or superior condition. The process can take weeks to months to years depending on the nature of the work to be performed and the exit strategy desired. The exit strategy could involve renting, flipping, wholesaling, or holding for oneself. Your exit strategy determines how many resources you may put into the house and the amount you can make from the endeavor.

The big picture of rehabbing a property involves purchase, restoration, and renting or selling. The actual steps involved are many and will become clear as you read on. Of these steps, hiring a suitable contractor for your specific job represents one of the most challenging parts of the process. Getting the hiring right can mean the success or failure of your job.

When you talk to seasoned investors, they will tell you that contractors come in all hues and shades. Some nasty. Some pleasant. Some somewhere in between. Whatever shade they come in, don’t be fooled by their outward look. Sometimes the ones who look and sound horrible can be the most pleasant to work with. Sometimes the ones who seem friendly and decent can be the nastiest. Please don’t let the outward appearance fool you. Look at every individual’s total picture, as you will learn later in the book. In other words, evaluate the personality and the contents of the application. After many false starts and deep disappointments in my business, I finally found my footing. The story of my real estate journey in the next chapter tells it all.

Diagnosing Rehabbers’ Main Problem

At a local real estate meeting in Baltimore, a speaker wishing to develop a consensus of what troubled investors the most in the rehabbing process asked questions to over one hundred attendees. Captured below are the answers from one of the investors, John Jacobs, which were in line with the majority of the answers from the other investors:

What drives you crazy in this business?

That many building contractors lie often, and I keep losing my investments because of them.

What worries you the most and keeps you up at night?

The fact that I keep losing money when rehabbing and also the struggles with contractors during construction. I have researched my problems and have come to realize one of my weaknesses is the wording of my contracts with the contractors. My contracts have loopholes which the contractors exploit. Many of the lying contractors know how to twist some of the wordings of the contract to get off the hook when they breach the engagement terms. My concern is that I am not running my business efficiently.

In fact, in one of my current rehabs, I have fired two contractors. The third one who came with a lot of promise now only shows up twice a week. He doesn’t even pick up my calls. This contractor calls when he wants to. Now I’m wondering if I am the problem or if it is these contractors?

What are you most frustrated by, John?

That I have been in the business for many years and still make rookie mistakes because I started and continue to run my business the wrong way.

If you were to complain to a friend, what would you say?

I am stuck in my real estate project. I am now on my third contractor in this project, and things are not going well. I am not satisfied. I wish there was someone who could take over the project and continue it to completion. At this point, I don’t care how much I pay a consultant. I just want the property finished.

What do you think the cost of not solving this problem is?

Sleepless nights, floundering business, and money in terms of holding costs—to pay taxes, heating, utilities, and general property conservation.

What do you Google when trying to solve this problem?

1 1.Investor support organizations

2 2.Suing a contractor

3 3.Breach of contract

4 4.Choosing the right general contractor

5 5.How to find a reliable contractor

6 6.Hiring a licensed general contractor

7 7.Contractor red flags

The Main Problem Defined

There were many varied answers, but a consensus seemed to point to a situation that the speaker summarized as, “I need to know how to find good contractors who’ll get the job done on time so I don’t lose my investment.” Again, as this investor has realized on many occasions in his real estate career, the caliber of a contractor can make or break an investor. A pleasant contractor who does not finish a project on time is just as horrible as a nasty contractor who may finish projects on time but ends up stealing materials or tools from an investor. So where is the middle ground, one may ask? Strictly speaking, the answer must be that it is the contractor who gets the job done well and on time. You have to learn to cut off the in-between crap. Be focused as a business owner. The judgment should strictly be on the results and completion time. However, the speaker in this meeting said, many things in real estate are neither that simple nor that straightforward. There are many grey areas that you learn to navigate through with experience.

When you view your real estate journey, picture the path as paved with thorns. Your question and answer should be: how should I walk on thorns? Cautiously and methodically! There are no two ways about it. As the speaker said: verify, verify, and keep verifying both your steps and the people you interact with in this business.

The high dollar amounts involved in real estate investing dictate that an investor proceeds carefully and meticulously. Apart from hiring and managing contractors, you will be dealing with realtors, mortgage brokers, your city, government regulations, attorneys, tenants, and managers. A breakdown in any of the processes or dealings can result in a massive loss of income unless corrected in a timely manner. That is why many people don’t recommend starting a real estate business without some formal education in investing in real estate. In the absence of that, they recommend getting a mentor or being involved with some form of consultancy or another. You need to understand that a high dollar business like this may also have a high number of opportunity seekers who may take advantage of you as a newcomer.

At one point, the speaker approached one of the participants and asked if she had tried other ways to solve this problem of finding a good contractor who’ll get her jobs done on time so she doesn’t lose her investment. “Everything,” the participant responded quickly and added that she now feels lost in the business. She said she still gets the hiring wrong, going by the caliber of contractors she gets. At that point, the speaker told her she may need a one-on-one with a seasoned investor, and he suggested they have a discussion at the end of the session.

Still, at the same meeting, the speaker asked everyone who has ever invested or considered investing to outline what their dream come true was. After perusing many answers, he again picked on John’s answer. It was in line with the general idea of many in the group: to hire great contractors that get my real estate projects done on time. Many in the group agreed that if someone can get a good contractor, put in place the right policies, and manage the process well, then money will come. Such well thought out and properly designed policies will, in many cases, minimize the pain that may come during the rehab process.

The speaker said the initial thought process in any new business should not be to become profitable from the get-go, but to put in place proper business and management procedures, and then money will come. He also said the weakness of many new rehabbers is to worry about making money straight from their first rehab. This focus on profitability takes away from building your business on sound structures and understanding. These sound structures and understanding become your solid foundational bedrock that contributes to your future peace of mind, longevity, and profitability.

Another desire for many in the room was to learn the importance of managing the investor—contractor relationship in a way that reduces the deep mistrust that sometimes occurs between the contracting parties. To this, the speaker presented case studies of some successful investors. From analyzing the paths of these successful investors, you will realize that many of them spent time upfront learning about the business. “Knowledge is power,” people say. The consensus is to spend time learning about the business you are in so you can hire the right contractors. That successful path may take engaging consultants to help navigate the rough waters until you know what you are doing.

Another way is to be involved is continuing education and spending time with like-minded individuals through membership in the local and national chapters of the real estate investment associations, meet-ups, and other networking groups. Attendance at such group meetings may also keep you updated on the regular changes in the real estate environment, including the basic legal requirements of the industry. You may also learn some key characteristics of a good contract, as John had mentioned that this is one of his problems in the business. Contracts are covered extensively later in the book. Poorly structured contracts represent one of the ways contractors will cut corners and lie to you just because they can, and also because they can tell from what you accept of the wordings of the contract that you have little knowledge in the business.

The bottom line is that you may experience problems as you commence your real estate investing business when you start on shaky grounds. When you start on the wrong footing without knowing where you want to start and end, you may experience a myriad of problems that may include sleepless nights, floundering business, and loss of money. However, if you start well, with the right education, consultancy and a good team around you, you will progress well. You will get grounded in the correct methodology of hiring the right contractors who will get projects done well and on time so you don’t lose your investment.