Setting Up Arrangement With Contractor...
Hey gang.....I am looking at my first rehab. I am probably going to tackle a project that needs more TLC than anything, instead of a major rehab, just to get my feet wet.
My REA has found what looks to be a pretty good deal.
My best friend is a builder for a large volume builder here in Atlanta. He really wants to start his own biz as a rehab specialist. He is awesome in every aspect of building. He manages about 10 starts a month, scheduling everything, supervising the subs, completing punch out lists, etc. He also has some great connections with his subs that want to do more side work.
For my first few projects, I am going to work hand in hand with him, learning as much as I can about how the work is done. He will schedule the work, supervise the subs, basically make sure that they do the job right. We are even planning on paying the subs upon completion of the work. I am going to use a HML and the repair money will be escrowed, so I cant get a draw until the work is completed, right? I think they (the subs) will be ok with this...they all know my friend very well, and know they will get paid. I am trying to do the project with as little money out of pocket as possible. I should be able to have purchase, repairs, points and CC under the 65-70% ARV threshhold. I already understand the importance of verifying ARV, comps, times on market, etc. I have a rock solid REA that deals with REI only, on my team.
My question is...what is fair compensation for my friend the contractor? He will go along with whatever I say, but I also want to be fair. He works fulltime, so he will be at the projects after work and on weekends. I will also be there all the time...my schedule is wide open right now. I thought perhaps $1000-$1500, payable when I sell the finished product. In the event I go with exit strategy #2 (repair and hold -rent/LO) I would stipulate to pay him the agreed amount in 3 monthly incremments, starting 60 days after repair is fully completed, perhaps with a 10% increase.
What do you guys think? I am in the process of buying a home, and turning the current home into a rental property ( closing 4 months from now), so I really need to try and do no money down deals...I am just trying to be creative!
One last question....how difficult is it to turn around and refi after the repairs are completed? My HML note will be $1691 -(14%, 3 points, interest only), so I really want to refi as soon as humanly possible. I definitely want to know all my options before I pull the trigger on anythng. I do not want to have a holding cost of $1700 a month if the homes sits for 3-4 months.
Thanks in advance for the feedback.
Brian
Anyone have any thoughts?
My two cents... been there done that... friends that go into business need to have a better "contractual" agrement than somebody you don't know. Friends seems to expect more out of each other than straight business contacts. How much do you value your friendship? I'm not saying that it couldn't work for you but communication between a contractor and an owner is one of the most important things in doing jobs. Jobs have gone sour for me when communication was not clear... frine or not. Sounds like you need to sit down and talk about best case, worse case scenarios and see if you are all on the same page. Maybe three cents.
As a builder, I make it a point to do very little work, if any, for friends.
I value friendships more than money and the later can and often comes between the former.
In regards to what is a fair compensation. Well, quite frankly, 1000 - 1500 would be a slap in the face to me.
He would be not only bementoring you and teaching you the in's and out of the business, but you also are getting his subs, which is one of the keys to a builders success, plus his knowledge and expertise in scheduling...............all for 1000 - 1500.00 .................hmmmm, that sounds like he is being taken advantaged of.
I know of builders here in NC that would pay him 1000 - 1500 a week to run their business without the headache of "teaching" someone......yet alone a friend. If he does not recognize that himself then he is being to kind or naive.
I believe what you say about your friend....but I wonder why is he working for someone when he has all this expertise and connections?
Financial limitations aside, it has been my observation that such people are weak in one of two areas........"faith" in their own abilities and / or not wanting the financial responsibility that comes with running a construction company.
Either way I hope it works out for you....
NC
[ Edited by NC_Yank on Date 03/05/2004 ]
I have to agree with NC here as working for/with friends can be a disaster. I would also say the compensation you mention is not worth a builders time. If someone were to offer that to me, friend or no friend, I would tell them to get lost If I were you, you might want to reconsider what you are offering him. If he's that good, I doubt he would give his knowledge away for free. Perhaps you should go 50/50 at the least. Building isn't as easy as most think and you definitly aren't going to learn how to be a builder off of a couple of jobs. Good Luck.
Why not ask him what he thinks is fair compensation for his time and knowledge. He should have a good idea as to what he should get.
As for how often you should pay them, I think weekly is fair and even throw in a bonus if the job gets completed ahead of schedule, under budget, etc. On the other hand if they/he are behind then maybe a deduction of some $$ for being behind.
When I was single and didn't have kids it was different, I had a lot more spare time to help out friends that needed a hand so this was the formula we came up with $200 a day. It didnt matter if you were there 6 hours or 12.
I usually didnt mind helping out my plumber buddy or my electrician brother because I knew they would be getting there money back from me soon enough.
How can this can be applied to your situation? The 2 of you together should decied what is fair compensation. Maybe a %?
Good Luck
Hey gang, thanks for all the replies. I am not trying to say my friend is not the greatest builder in the world. He simply is good at his job (scheduling, managing subs very handy, etc). He would be doing this part time, stopping by after work, maybe on the weekend to check on the work. Another contractor told me that he usually charges 10-15% of the repair costs as his fee. The project I am looking at is maybe 12k at the most, mostly cosmetic. 10% if he is really scheduling work and making sure that it gets done, 15% if he is totally involved.
His connection with his subs is that he knows them personally ( I do not) and knows they will be willing to work for less than what most would charge and also that they will do the work and not ask for payment or partial payment up front. This is important as I am trying to get my first couple done with very little, if any, out of pocket. Most subs I have spoke with want 30-50% up front. I believe my HML will set the repair $$ in an escrow acct to be drawn out when the work is completed. Does that sound right?
I am going to start another thread asking about rehabbing with little out of pocket.
I will sit down with him, he is a close, close friend and talk with him about everything. I want it to be win win for everyone. His intentions are to get started building a porfolio, while helping me with my first rehab as well.
Any other feedback is greatly appreciated.
Brian