Are Contractors Draining Your Equity?
Let's be frank. Anyone can call out contractors, take bids and put them to work improving property. It happens all the time. But you'd be surprised (or maybe you wouldn't) at the disparity of prices people wind up paying.
John Doe may use contractors to rehab a house for $18,000, while Jane Doe might do the same rehab for only $16,000. Is there a chance John saw $2,000 of his equity siphoned away?
Yes, there is.
I am not saying contractors are crooks out to steal from you. It's the laissez faire marketplace -- people charge what they can get. What I'm saying is that there is a real skill to successfully hiring and managing contractors. Anyone can strap on a pair of skis, but gliding gracefully downhill is another matter.
The fact is, home repairs rank among the top consumer complaints heard across this nation (see Consumer Federation of America's survey, Nov 2003). And consumers are not only complaining about contractors, their objections are being heard by the various states' attorneys general, as well. The May, 2003 issue of _Consumer Reports_ noted that “home repair and construction rank third on NAAG's list” (the National Association of Attorneys General) of complaints. That ranks contractors just below used-car salesmen.
These are people-complaints, not product-complaints. Contracting for services is a people-to-people transaction. It is also a dynamic where it becomes all too easy for the average consumer to lose.
Here is a short list of how your equity can be drained in any one (or all) of these phases of a project:
1.The first time your equity is tapped can be in the initial meeting with a contractor. Contractors can't help but notice things about you. And their experience has taught them where the golden eggs lie. They may walk away from your meeting having cranked up the price by a couple thousand, just from the way you spoke.
2. Next your equity is tapped in the bid proposal. If you don't produce a good bidding package, so you can receive comparable bids from several bidders, then you are just shooting in the dark. You want to be able to analyze and understand the bids you get so you can negotiate them and trim out the fat. What might seem a low bid on its face may in fact be an incomplete bid that can wind up costing more than all your others. Conversely, what may seem a high bid might in fact be your best price. These are your equity dollars you're spending, so look closely at the proposals and especially look for any “exclusions” your bidders have noted.
3.Everyone knows about the infamous charges for “extras” (also known as “change orders”). These can drain away your equity dollars. And there are more facets to this ploy than you realize. Even expert managers continue to be stung. Here's a secret: something is not an “extra” just because your contractor says it is. But you need to know how to load your guns for this discussion.
4. Unforeseen conditions – the legitimate extra. This is what the change order was invented for: to address conditions that no one knew existed (e.g. termites buried in a wall...). But it's also a wide open door for inflated pricing and kicking in extra time to a contract. It takes real skill to handle a change order without losing something in the bargain, and 98% of people managing contractors don't possess that skill. Not because they aren't smart, but because they don't possess the specialized insights into the game. Ironically, that's why most contractors are pretty good about being (or seeming to be) pretty fair with their change orders. They don't want to appear obvious gougers (though really some don't care). But it is quite easy to inflate a change order so that you'll never know it. A few skillful modifications to the syntax of a description can add soaring prices. A good change order writer is an artist who can pump a lot of money into a contract.
5.Time equals money—that old adage. Contractors know it well and can use it to leverage against you. It's one more tool that translates into your equity dollars slipping away. When you arrive in the morning and find an empty jobsite because your contractor has shifted to a sweeter deal elsewhere, all you'll hear is the drip-dripping of equity dollars down the drain. Hopefully, you inserted a contract completion time and liquidated damages clauses into your contract (and didn't use the word “penalty”). [If you don't know the difference between liquidated damages and penalties, you're contractor likely will, and certainly his lawyer does.]
These problems are consistent at all levels of the construction business. Even laid-back contractors on low-end repair jobs know the tricks. It's inherent in the business. Percentage wise, you can be hurt just as much on a small project as on a big one, and maybe more, since time-value can carry a heavier burden.
Smart contractor management is among the required skills of top real estate investing. Just ask Donald Trump. You may be a negotiator extraordinaire in buying and selling properties, but the construction world is complex. And contractors know their game better than you do. It's their daily bread.
The risk is correlative to size, too. The larger the project, the larger the drain. You may catch some of it; but can you catch it all? When a single change order has you unknowingly paying $5,000 too much, outfoxing the foxes becomes a skill worth attaining.
Present yourself and your project in the wrong manner to bidders and you'll pay more than you should, and you will never even know it. I've seen bids range from $69,000 to $169,000 for the same project. What can account for such a spread if not *other* factors than merely the work items?
Dealing with independent contractors is an arena where specific skills equal dollars. Some homeowners deal with a contractor only a few times in their lives. Contractors are doing this everyday.
Sometimes owners subliminally prompt their bidders to jack up prices in their manner and presentation of the job. Act erratic and demanding and you can expect bid prices to rise. On the other hand, act wishy-washy and indecisive and prices might rise as well.
Successfully managing contractors is not about how much you know of construction. It's ultimately about people skills and savvy and specialized insights into the process—what I call the contracting game. You can play the game very well without knowing a lot about construction, that is, if you know a lot about the game. But unless you're an experienced contractor, the odds are against you. Playing chess is a about a hell-of-a-lot more than simply knowing how to move the pieces.
Controlling costs is one measure of good contractor management. I have met some very savvy engineers who had developed keen insights into the contractor game through years of butting heads with them on large government contracts. But even they, like an old pro on the tennis circuit, can still lose a game.
Taming a contractor is a skill that can be learned, and it is knowledge worth gaining since it translates imminently into money. Contractors, like anyone else, typically would like to earn more than you are willing to pay. So, there's your ever-present underlying dynamic. Take it as a given: when contractors come onto the job, your equity is at risk.
This is one great article and speaks on a wealth of information. We as investors learn all we can in dealing with motivated customers, contracts, investment strategies and the list goes on! We negotiate great deals but forget that a contractor can turn a great deal into a money pit by how we are dressed, how we talk and most importantly what message we send the contractor.
Let's face it contractors need to make money just like we all do! But some are just overpriced and some use the title without the experience.
I have used the following in my contractor selection:
Research your project in advance.
Get several bids for the project.
Deal with an established firm.
Check the contractor's reliability record with the Better Business Bureau.
Check the contractors credit references.
Ask for a list of previously satisfied customers.
Verify that the contractor carries adequate liability insurance.
Insist that everything be put in writing.
Be attentive to details, and make the contract specific.
Ask for contractor and manufacturer guarantees.
Insist that the final and total cost of the job be included in the contract.
Insert a final completion date in the contract.
Don't sign a standardized contract that contains any blank spaces.
Don't hesitate to have the contract reviewed by your lawyer.
Don't make the final payment until all work is completed to your satisfaction, including clean up.
Don't pay cash.
Visit the job site several times a week
Never tell a contractor how to do their job
Dress causal
This was shared with me some time ago and I wish I could remember who to give them credit as this has save me a lot of headaches and money.
Not to long ago I took a group of my students with me to teach the art of negotiation with contractors at a rehab project.
Session one:
I dressed up in my Sunday best with lots of jewelry and my jag and drove around the block till the contractor arrived and showed up fashionable late.
Project was a small home only 800 sq. feet and needed siding and a roof.
The contractor bided $8,000 for the roofing work and $12,000 for the siding. Home retail value was only $49,000.
Session two:
Arranged the time for 5 contractors to show up at the same time.
I dressed up in my levies, pull over top and my ball cap. This time I used my 1987 ford pickup (My work truck) and showed up fashionable late.
3 contractors showed up, 1 left within 5 minutes due to the crowed intimidation.
The contractor who got the job bided $3,700 for the roofing work and $2,495 for the siding. 69% less than session one.
It's all in the presentation.
JC,
You prefaced your article with, "I am not saying that contractors are crooks out to steal from you.".......then in your last line you say; "when contractors come onto the job, your equity in at risk".
The whole body of your article primarily deals with how contractors are going to rip you off.....charging for extras, change orders, sizing you up for the kill, etc.
Change orders or "extras" are just that.
Items that are not part of the original contract.
The contractor should not have to include this as part of their price. You are making it sound change orders is a secret way to rip the owner off............that's silly. Change orders are directed by the OWNER, not the GC.
When change orders come along, I stop the project, get bids....allow the owner to accept bids as well...........and then we (as a team....yes the owner and the contractor) decide how to proceed. If we do not come to an aggreement then the contract becomes null and void (as stated in the contract).
A successful contractor knows his reputation is more important then extra dollars you say they are trying to siphon off.
Unforeseen conditions do happen........such as weather or material delays. Should the contractor be penalized for such...........of course not.
I believe contracts should have a projected end date however unforeseens delays do happen.
In regards to empty jobsites........there will be down time at any project.........these should accounted for in the flow schedule. A good contractor will explain to his clients about this down time. Three days of rain does not mean 3 days of delay. Often subcontractors have numerous jobs going on......when they get delayed, those other jobs have to get finished up first.................so a 3 day wx delay can account for a 6 - 7 day delay over the whole project........3 days of bad wx pus 3 -4 days of catching up on previous committed jobs.
Trying to teach such delays is the contractor loafing or siphoning off the equity is silly.
Delays COST the contractor money......the longer it takes on a project the less they make.
Engineer and architects............I have never had a problem with an engineer.........architects are a different ball game. They are so abstract that it reflect in their blueprints.
It gets my gall when I see that stupid phrase they put on the prints about the GC being responsible for ensuring all measurement are accurate.
HELLO!!!!!!!!!!!!!!!!!........the GC did not do the blueprint.........yes he should check them however if the architect screwed up on his measurements then HE alone should be responsible. When I deal with local Arch's that continue to screw up measurements and layoff.........I explain to the owner that THEIR architect is costing me money because I have to spend more time correcting his mess..............and this is a legitimate cost.
You want to quote Donald Trump about contractor managment............the biggest Con Artist of all time...........the one that so many REI falsely fall at his feet and worship this scoundral. Lets go bankrupt and leave others holding the bag..........oh please.
How dont care how rich a person is.........it more important how they amassed those riches.........Im not impressed with those that leave others holding the bag or get leverage over their victim and then make them renegociate contracts so they do not have to account for errors. This is what DT is good at........leverage and renegociating.
Contractors that plan on being around for the long haul get there by not ripping people off but by figuring out what a product cost and determing how much ones service is worth in producing that product in the best professional and timely manner as possible.
My advice to people is not learning how to Tame Your Contractor as you put it .........but learning how to communicate with them so as to avoid problems.
If one is entering into a contract with distrust already at the forefront of the project then dont be surpised if problems do arise.......its their own fault for being foolish in the first place.
Many rehabs can be done without a contractor........some can not......at least in the state of North Carolina............being from North Carolina you should know this.
As a contractor myself I detest anyone, including contractors ripping people off.........however I do not appreciate one using a wide brush to paint a legit profession as a bunch of crooks that are out to screw people over.
You have done well at painting a terrible picture of contractors and the problems that are likely to happen....................but I see no solutions in your article about how to avoid or fix such solutions...............................oh, I see...........we need to BUY your book to find that out.
Now I understand where this article is coming from.
NC_Yank
NC, you wrote:
>>You prefaced your article with, "I am not saying that contractors are crooks out to steal from you.".......then in your last line you say; "when contractors come onto the job, your equity in at risk". >>
NC, yeah, I know it seems a paradox. I remember once Clark Howard (the national talk-radio consumer advocate) commented that used car salesmen are entitled to earn a profit like anybody else, and that they can essentially make whatever they can get. That's the reality of the free marketplace. I would not say that used-car salesmen are crooks; but I will say that when a consumer walks onto a used-car lot his or her wallet is at risk.
That's essentially what I was saying about home improvement contractors. It's a free marketplace. You'll notice I don't address whether or not contractors are entitled to whatever they can get. I'm only addressing the other party to this deal, and that is the consumer who is often at a disadvantage being somewhat unsophisticated in the workings of independent contractors. This makes them the weaker party in a deal that often involves a good length of their time and significant matters of their life and future.
It's apparent you have taken personal offense, but it has never been my claim that ALL contractors are bad people. I expect that you are probably among the good ones. I believe most contractors are good and honest people. But that statement may not comfort a reader who has just endured anguish and loss in dealings with a contractor.
As to your technique for change orders, I will admit I've never heard of stopping a job to get competitive bids for a change order. But if that is fine with the homeowner I believe it is the best way to get good prices. I admire you for the technique. It is honest and straightforward.
A typical change order scenairo often brings an air of urgency with it, however. Walls being torn open might reveal massive unforseen water or termite damage. Stopping and calling for competitive bids can involve an unsecured house for many days. So, typically change orders are negotiated instruments with the contractor at hand.
Professional construction managers are usually sophisticated enough to do that (tho' sometimes not). Homeowners will have far less success at it. Should a contractor decide to gouge, it will definitely be problematic. I favor a straightforward approach just as you do, taking pains to account for actual time and materials, or as in your case, getting 3rd party bidders to come take a look is great.
You think I have painted a terrible picture but I've seen how easily the average consumer finds him-or-herself perplexed in dealing with their contractor. The solution is not just a matter of "communication." It's a matter of real knowledge of techniques that work and knowing that these tools are the STANDARD in construction contracting everywhere... except most of the home improvement industry.
And when you say:
"If one is entering into a contract with distrust already at the forefront of the project then dont be surpised if problems do arise.......its their own fault for being foolish in the first place."
I disagree with you totally. I've never met a construction superintendent or a project manager who was "trusting." Why do you think a homeowner should be?
JC,
You said; "A typical change order scenairo often brings an air of urgency with it, however. Walls being torn open might reveal massive unforseen water or termite damage. Stopping and calling for competitive bids can involve an unsecured house for many days. So, typically change orders are negotiated instruments with the contractor at hand. "
This very scenario happened to a project I was working on in Virginia. The homeowners had a very limited amount of money to work with.......they were very worried about how to finish. I did in fact stop the work for a few days in order to get several bids while at the same time I allowed them to contact several independant contractors. My change order was still cheaper then their lowest estimates and we went on with the job.
It is not advantageous for anyone to play the power / leverage game. If a contractor wants to play hardball and screw even the best negociator over.........he can do it.
What you should be teaching is not how to get leverage but how to recoginize not only a good contractor but how to put together a FAIR contract for all parties involved.
The best advertisement a contractor can obtain is satisfied customers.
I wrote;
"If one is entering into a contract with distrust already at the forefront of the project then dont be surpised if problems do arise.......its their own fault for being foolish in the first place."
JC, you wrote:
"I disagree with you totally. I've never met a construction superintendent or a project manager who was "trusting." Why do you think a homeowner should be?"
It is evident by your statement that you or whoever is in charge of picking out contractors to conduct business have not learned the techniques of finding a good company to do business with.
Just as I and others have taught people here at TCI how to find good tradesmen, the same principle can be applied at finding good contractors. All you have to do is talk to subcontractors about who are the best GC's they like to work with.
A good GC knows that if he can get his subs on a tight schedule then not only will the GC and the owner be happy, the subs themselves will be able to keep their commitments with other GC's and projects that are going on.
It serves no purpose to drag a project past the allotted time frame.
I could write an article on how most rehabbers have their head up their butt and are good at wasting a GC's time, are penny wise and pound foolish..............I can go on and on but what purpose would that serve.
Rehabbers and owners are best served when you teach them at what point should you bring in a GC, what to look for in a GC, how to communicate with a GC and what should be in the contract, how to develop a trusting relationship with a GC so that all parties can benefit......etc. etc....
The best investors have a TEAM of players that they know they can rely on. A good team knows they can rely on each member to take care of their respective task.
If more investors, rehabbers and owners would use this simple concept then they wouldn't deal with so many headaches.
I get repeat business because my clients trust me, they trust me because I educate them...............it has nothing to do with leverage or some crazy power struggle between us.
NC_Yank
NC, you wrote:
___
>>Rehabbers and owners are best served when you teach them at what point should you bring in a GC, what to look for in a GC, how to communicate with a GC and what should be in the contract, how to develop a trusting relationship with a GC so that all parties can benefit......etc. etc....>>
___
NC, actually, it's a bit more complicated than just that (though I agree with you wholeheartedly).. Most homeowners are very patient and nice in their dealings with contractors. Sometimes that's the problem. I've had people call me and ask me basic questions about their contractor and their project because they simply lacked the cognizant framework from which to judge whether they were being reasonable, and they weren't sure what they should truly expect or just learn to live with from their contractor.
For instance, a neighbor of mine once told me her new HVAC installation made an eerie noise and that it bothered her, so she called out her installer. He couldn't account for the noise but said the equipment was fine and he left. She was still unsettled at the sounds coming from it. Communication between her and the contractor had been fine. She was now at a loss what to do.
You want her to "communciate." Well, she doesn't know what her next "communciation" with the contractor should be! He's gone. And she simply lacked the mental framework to judge her situation.
So, I gave her one. I told her she should find out (by starting with the manufacturer's area rep) whether she should be expected to live with that particular noise, ...that is to say the manufacturer made the machines to behave in that way, or if indeed it was an unusual situation, in which case she might reasonably expect that her installation should be as quiet as anyone else's using that model.
This told her how to find her own *reasonable grounds* on which to either realize everything is fine and to live with it...or on which to take a stand, and indeed, to fight, if needed. This helped her tremendously. And she got her problem solved.
You further wrote:
___
>>I get repeat business because my clients trust me, they trust me because I educate them...............it has nothing to do with leverage or some crazy power struggle between us. >>
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It's obvious you've misread the intenions of my article, and you haven't a clue about the book. It's funny, but right after I finished my reply to you yesterday I opened up an email from a reader of mine. It was interesting to be battling with someone of your perspective one moment, and then to see it from the consumer's perspective another. Here's what he wrote to me:
Hello Mr Chandler,
I recently purchased your book to help me better manage my contractors in my real estate investment business. Even though I knew better, I recently let a contractor get a head of me on his draw schedule and he walked from the project. I had a "good feeling" about this guy and didn't use good practice in drawing up a contract and having a specific draw schedule. I was mad at the contractor for cheating me, but I was really madder at myself for not using good business practices for working with contractors that you detail in your book. Your advice/techniques on how to answer contractor requests for unearned money have been invaluable to my business and I wanted to say thanks.
_
NC, I'm sorry you've taken offense at my article posted here. But that email sums up exactly what I'm talking about. I'm not telling homeowners how to "leverage" or engage in power struggles against contractors. I'm talking about essentially the same things you are. Only a litle differently.
I frankly believe consumers having problems with contractors is more the norm than consumers having good experiences with contractors like yourself who won't leave a problem unresolved. You may disagree with me. If so, let's agree to disagree.
"It was interesting to be battling with someone of your perspective one moment, and then to see it from the consumer's perspective another. Here's what he wrote to me:
"Hello Mr Chandler,
I recently purchased your book to help me better manage my contractors in my real estate investment business. Even though I knew better, I recently let a contractor get a head of me on his draw schedule and he walked from the project. I had a "good feeling" about this guy and didn't use good practice in drawing up a contract and having a specific draw schedule. I was mad at the contractor for cheating me, but I was really madder at myself for not using good business practices for working with contractors that you detail in your book. Your advice/techniques on how to answer contractor requests for unearned money have been invaluable to my business and I wanted to say thanks."
Let me get this straight, this emailer states that he works with contractors (plural) in his REI business. Which tells me he is not new to the business. Yet, when his GC ask for an advance on work that is not completed.........he doesn't know what to tell this GC?
How about , NO!, the work isnt' completed for money that you are asking.
This guy has to purchase a book on how to say no. (excuse me for laughing)
He as with the other cases you stated, needs to purchase a book on how to be more assertive.
Maybe my yankee side is coming out but saying "no" is not that difficult....anyone who has kids knows that word all to well......or at least their kids do. (laugh)
You would do him a favor by turning him on to TCI. If this guy needs help on saying "No", then rest assure he will need help in other areas of his REI business.
regards
NC_Yank