Rehabbing Houses Part 5 of 5 – Never Give Contractors Money Up Front

One of my Golden Rules of Rehabbing Houses is… NEVER put money in a contractor’s pocket up front, no matter how many times you’ve worked with them. It’s simply not necessary.

Not ½ down, not 1/3 down, not $100 down, not $50 down, not anything! If the contractor needs materials to start the job, you will go to Home Depot (or wherever) and buy what he needs.

Presto! The age-old excuse that “I need money to get materials” has suddenly vanished. Magically, the extra money he may have used to get beer, cigarettes, or “controlled substances” while working on your job site ALSO vanished at the same time! So you have not only SAVED money, you have also increased the chances of getting a sober worker for a few days.

Its bad enough that they are likely to have an excuse for not showing up, at least you don’t want to feel as though you have FINANCED their day off from work! You must explain to the Contractor that you will be buying the materials, so there is no need for an advance.

And then there’s other age-old excuse: “I need money to pay my help (workers)”. If you have followed my previous advice, and this is their first time working with you, then they are doing a small job for you, which means one week’s worth of labor at the maximum.

That means they should be done in a few days and get paid in a few days. The money to pay “their help” will be available in a few days… when the job is done. It’s a win-win situation for everybody right? The work gets done, they get paid, everybody’s happy.

It takes mental toughness NOT to write out that check to Ferris Bueler’s Home Improvement. You will need to resist your natural inclination to be a “softie” and to be “fair” and to be “flexible” on this issue. You also don’t want to feel so desperate that you think you MUST hire this guy because his price is so “reasonable”.

Some of these guys have built an entire “business” of giving “reasonable” bids, getting “reasonable” down payments to start the job, and then leaving the would-be customer trying to “reason” why Ferris Bueler never showed up for work after the first day.

I would like to tell you that I had the mental toughness and the foresight to do business this way all along. Unfortunately I learned the hard way, and hopefully you can avoid that by learning from my experiences.

Previously Good Contractor Goes Bad

Once upon a time I trusted a contractor with 50% down at the start of a job, and guess what? He scammed me, right? Wrong! He actually did use the money to buy the materials and got the job done. He earned my trust. Again I trusted the contractor, let’s call him Steve, since that’s what his name is, and Steve did the right thing.

This went on and on like clockwork for about 7 months and everything seemed fine… until one day… I got a call from Steve saying, “I ran out of money, if you could just write me ANOTHER check then I can get the work done.”

Obviously, I wondered where the money from the FIRST check went. He actually told the truth since it was far more entertaining than any lie he could’ve dreamed up… “I used the money to buy my girlfriend a car at the auto auction.” Needless to say, another check was NOT forthcoming and I never saw Steve again.

Steve even had the audacity to call my (now ex) wife, on her job, to try to get her sympathy and ask her “Why is Todd being so mean to me?” Mean? I simply told him I wouldn’t write him another check, because he hadn’t performed on the first check.

The moral of the story is, even after you’ve worked with someone a long time; DON’T get in the habit of paying for work that has not been started AND completed.

Golden Referral Goes Bad… Very Bad

Once upon another time, I fell into the trap of dropping my guard because someone had a GOLDEN referral. A colleague of mine, who was running a very successful full-time real estate investment business, had a contractor who did a good portion of his work.

Let’s call the contractor “Jack”, since that’s what his name is. 😉 I just knew Jack was going to get my work done quickly, like he had been doing for my buddy, and help me take my business to the “next level.”

Jack and I went over the ironclad contract. Everything was meticulously spelled out as to what he would do, when he would start, and when he would be done. Jack was excited and I was excited. When I wrote that 33% down payment check to Jack A FEW DAYS BEFORE CHRISTMAS (hint, hint) I just knew Jack was going to bring in the New Year right and make me a happier, wealthier rehab investor.

Well, Jack had a “Merry Christmas” and “brought in the New Year” all right, but with the same Old Tricks I “had done seen before” (pardon my sudden lapse in grammar).

Jack only showed up to work one day, or maybe two, and he certainly didn’t buy any materials. The only reason I didn’t lose more money with Jack, was because I had simultaneously hired ANOTHER (more trustworthy) contractor to do the other half of the job.

Remember that thing I said in a previous article about not hiring someone to do the whole job if it’s your first time working with them? If I had put all my eggs in the same basket with “Jack the Ripper-Offer”, I would have lost all my eggs.

Conclusion

Folks, I don’t care if Bob Vila shows up to do your rehab, and Martha Stewart shows up to do your interior decorating… DON’T give these guys any money down!

If Bob and Martha absolutely insist that they need you to give them money for materials to start the job, then tell Bob and Martha to make out their shopping list of the materials they need, and follow you on over to Home Depot, Lowe’s, or your local hardware store. 🙂