ForeclosuresMass - ForeclosuresMass Monthly - Success Strategies - Five Tips for Building Successful Contractor Relationships (June 2007)

If you're thinking of buying distressed properties with the intention of rehabbing and flipping them, but you're not a do-it-yourselfer, you'll probably be hiring a contractor to help you.

Now I know we've all heard horror stories about general contractors that didn't finish the job as promised. For the most part, contractors want to see a successfully completed rehab or renovation as much as you do. Our business depends on your good referrals!

However, renovations and rehabs can be difficult for everyone involved. Because they lack experience, real estate investors new to rehabbing don't yet know how to find the right contractor or how to keep costs in check.

And let's face it, mistakes happen, especially if an agreement isn't in writing or the existing agreement isn't modified when the scope of the project changes. Often it's these types of "communication" issues that lead to problems between clients and contractors.

* Next 37 17 investors only!

So how do you find the great contractors - without losing your shirt first? Here are my five "in the trenches" tips for building successful relationships with contractors.

If you're really serious about rehabbing properties, establish a relationship with a general contractor before you get into the market. Tell potential contractors you're interested in rehabbing properties and ask if they're interested in partnering with you.

It also pays to think outside the box when researching potential contractors. In addition to asking for references within your network, also call your local building inspector and lumberyard (a real lumberyard, not a big box retailer).

Tell the building inspector, "I'm rehabbing a property and need a really good construction company. Can you recommend one?" Ask the lumberyard owner or manager for recommendations and then follow up with, "Is this company current on its account? Do they pay their bills on time? Do you know of any problems relating to this company?"

You can also call the Better Business Bureau, but the drawback with this organization is that they'll only tell you if a company has any complaints against it. The Bureau can't tell you if the company is any good - or if it's a disaster waiting to happen.

Finally, ask the contractor for three to six current references - preferably for jobs in progress or those recently completed. Don't make the mistake of calling only one or two references. Call all of them!

What you're looking for are contractors that complete their projects and handle problems professionally and appropriately.

Before you purchase a property, determine that you can make a profit on it. Nothing sours a contractor - client relationship faster than a job that comes in over budget due to poor planning.

In addition to the purchase price of the property, you'll need to include renovation costs, insurance, taxes, closing costs, advertising, and realtor fees, to name a few.

Talk to any contractor and he or she will tell you the one thing they hate is having real estate agents or investors call them with, "Hey, I'm looking at a property and need a quote for a new kitchen and bath." Why? Because these types of people are usually looking for the highest bid for insurance or bank purposes - which can waste a busy contractor's time.

Set up a good working relationship at the outset by giving your contractor an incentive to do an estimate for you - either pay for the estimate itself or offer a small kickback once the property sells.

Alternatively, offer your contractor a percentage of the sale price if he or she can finance the renovation for three months. Successful contractors have deep pockets and are used to working with large sums of money; they can make more money by financing your renovation than if they put their money in the bank. (If you go this route, be sure you have an agreement in writing that's been blessed by a real estate attorney!)

Where people get into trouble is when they ask for estimates "on the fly." You're looking at a property and it needs a new kitchen. You get a couple of "ballpark" quotes and go ahead with the purchase. The problem with ballpark estimates is that the contractor has no idea what you had in mind for renovations - quick and dirty or high-end deluxe - which can lead to serious cost overruns and mismatched expectations.

Instead, ask your contractor for a "detailed estimate." What this means is that instead of getting a rough ballpark you'll get an estimate that lays out all the details end-to-end, including all material and labor costs. It may cost you to get a detailed estimate, but you'll save money in the long run.

You buy a gorgeous property in a wonderful neighborhood - and all it needs is a new kitchen. You rip out the kitchen and discover . . . structural deterioration, or mold due to water, or insects. Now the house has to be jacked up and the kitchen renovation is delayed while the contractor fixes the problem.

When running your numbers, be sure to include 10 - 20% more than you think you'll need for renovations in order to cover these types of conditions. You'll also want to ensure you have a good range on your comps and that you haven't cut things too close.

Building a solid relationship with a contractor takes due diligence and common sense. Do your homework, get everything in writing, and don't cut corners when running your numbers. You'll make yourself and your contractor happy.

Michael Burgess is the President of MDB Construction, a full-service residential construction firm located in Gloucester, MA. He can be reached by phone at 978-526-8560 or via the company's website at www.mdb-construction.com.