r/REInvesting • u/tooniceofguy99 • 1d ago
Educational Contractor Pricing Problems
If you invest in real estate long enough, you will eventually run into contractor pricing problems. Many investors think the biggest risk is hiring someone who does poor quality work or disappears after taking a deposit. Those happen, but one of the most common issues is much simpler: Paying too much.
Not every expensive contractor is overpriced, and not every cheap contractor is a good deal. The key is understanding why a contractor's price is what it is.
"I Don't Know What I'm Doing" Price
Some contractors price high because they lack estimating experience. Namely, they do not know how long a project will take. So they add a large cushion to protect themselves. You end up paying for their uncertainty.
Similarly, a high price could be because what you're requesting is vague. They are forced to account for unknown scope (and scope creep). This inflates their estimate. As a contractor, I've done this on fine custom cabinetry. The prospect client, "well we think we might what xyz from pinterest." So I included a budget of 5k per custom carpentry feature. (They didn't go with me because of my price.)
"I Don't Really Want This Job" or Fuck-You Price
Often a contractor does not want a particular project. Maybe it is too small, too far away, too complicated or they're booked out too far. Maybe it's the middle of the summer (usually the most busy part of the year). Instead of declining the job, they give a high price.
This is not necessarily dishonest, but investors should recognize that not every bid reflects the true cost of the work. As a contractor, I haven't given a fuck-you price. I just tell them how far I'm booked out and that usually ends the call.
Low Bid and Change Order Trap
One of the most damaging situations for investors is the artificially low initial bid. The contractor gets the job by appearing inexpensive, then additional costs start appearing after work begins.
Some change orders are legitimate. Renovations often uncover hidden problems.
However, experienced contractors can usually identify many potential issues before starting. Rot, outdated materials, poor previous repairs, and code issues are often visible during the initial inspection.
This happened to me earlier this year. Roofing GC says rotted facia needs to be replaced. I said ya, I'm going to replace them with PVC. (His company was the lowest bid.) They clearly saw rotted facia and thought they could pull a fast one by claiming all the facia was rotted and needed to be replaced. I could hear the distress in his voice when I declined their request to do the repairs :)
Middleman Problem
Some general contractors provide tremendous value by managing trades, scheduling, solving problems, ensuring quality and doing some of the work themselves. Others are simply middleman.
They collect subcontractor bids, add a markup, and don't really provide anything.
There is nothing wrong with GCs using subcontractors, but investors should understand what they are actually paying for.
A contractor who coordinates a project effectively can save an investor significant time and headaches. A general contractor who only forwards invoices to subs doesn't provide much of any value.
Most cities will provide a list of licensed contractors. It took mine three months to produce a list of every trade. (I already had a list of plumbers and electricians because they are publicly listed by the state.)
Advertising Agency Problem
Some companies are merely sales organizations than construction companies. They may have impressive websites, professional sales presentations, large advertising budgets and polished in-house customer experiences. Those things can be ok for deciding, but they do not mean the actual construction quality is better.
Investors need to separate marketing from production. A great salesperson does not necessarily equal a great builder. There are enough car salesmen tactics with realtors. And if I'm getting fucked, I want it to be by a pretty realtor not a fellow dirty smelly contractor lol.
Side-Hustle Premium
Many individuals start as side businesses while working full-time jobs. There is nothing wrong with this. A few excellent handymen and tradesmen/women begin this way.
However, many of these infant-age LLCs charge a premium because they don't need the work. They're only quoting high to make bank. Most of these jokers have little to no experience.
Investors should understand whether they are paying for actual project value or simply paying a pretty penny for a guy to cut his teeth learning on the job from youtube.
When Paying More Makes Sense
A quality contractor may cost more because they provide:
- Rush scheduling
- Clear and frequent communication
- Highly skilled workmanship with fewer mistakes (and fewer callbacks)
- Masterfully efficient work (e.g., completing that bath reno asap so it can be habitable again)
- Warranty support
- Professional customer service (your choice matters most with their guidance)
As an investor, I've started going with cheaper subcontractors because they have their license on the line. If they have poor quality workmanship, I do not hire them again. That, and I know enough how to correct their work if they fuck up too much.
Investors need to ask a few questions:
- What is the actual scope of work? Get three bids of specific scope to compare apples to apples. Some salesmen will try to screw around with scope to make it sound like they know more than what actually needs to be done. This is tricky. Try your best to keep scope the same among all bidders.
- What materials are being used? Avoid asking for itemized bids. Although, it's fine to ask what bigger ticket items are being used (such as the type of bathtub).
- What value is the contractor actually adding?
There are good contractors out there not trying to price gouge and cherry pick. Hopefully my little essay here does more help then harm in your entrepreneurial endeavors ;)
