How To Rehab Houses For Minimal Cost And...

construction Fail Hey Moguls, Lex Levinrad back again, continuing my informative series about rehabbing houses. If you’ve missed the previous lessons in this series, start here with Part 1.

Last time, we talked about the importance of why you have to separate labor costs from material costs, and I went into pretty good detail regarding some aspects of the materials.

Today, we’ll talk specifics about labor costs and the timeframe of rehab jobs.

Labor of Love

Let’s first discuss how much you’ll likely be paying your labor for a rehab project:

You need to find a handyman who will work for an agreed upon daily labor rate. The typical going rate in most parts of the country is around $15 an hour for a handyman.
Construction subcontractors make anywhere from $80 to $200 per day.
The $80-$100 pay per day tends to be more of the migrant, unlicensed workers you’d find at a labor pool or standing outside Home Depot looking for work. These people may or may not be legal to work in the U.S, so that’s one consideration to take into account.
Higher-quality, legal workers are going to want $150 to $200 or more per day for labor.

$120 per day works out to $15 per hour, which is a fair rate for an 8-hour day in many parts of the country. But that won’t work everywhere… in Manhattan, San Francisco or Hawaii, for example, the costs will be higher.

Time Is of the Essence

Once you have agreed to a labor rate per day, then you need to know how long a job is going to take.

See, workers know that if they’re being paid by the hour, then the slower they work, the more money they make. So imagine this from the worker’s perspective – if they’re being paid by the hour, there’s no incentive for them to do the job quickly. In fact, the longer they work, the more money they make.

However, if they’re being paid by the job (not by the hour), then the quicker they work, the more money they make. So you have to balance out these two opposing forces…

On the one hand, you want the job done quickly. On the other hand, you don’t want them to rush your job and not do it right. So, I find that the best thing to do is to simply ask them:

“How long do you think it will take you to do this job?”

And then ask them for what the shortest and longest timeframes are for expected completion.

Payment Please

Once you have agreed to a timeframe for how long the job will take, you need to break up the labor cost for that timeframe and commit to paying them that amount.

Here’s what I mean…

tree If a bathroom is going to take 5 days of work, and you agreed to pay $120 per day for labor, then you’ve agreed on a rate of $600 for labor for that bathroom. So, you let them know that you want the job finished within that 5-day timeframe, and you will give them $600 for the job. By doing it this way, what you’ve done is taken their labor charge and flipped it around – you’ve turned it into a total cost in labor for the job. So, now you know what the bathroom will cost you in labor, and all you need to know is what the materials will cost you.

By doing it this way, you can select the materials instead of having them choose the cheapest items they can find. Many stores like Home Depot and Lowe’s have Pro Desks for contractors where handymen can buy materials, and then call you to checkout with your credit card. You can even get credit card lines… for example, Home Depot offers $40,000 project loans, which are 0% for 6 months, giving you plenty of time to pay for materials, fix the house, flip it and pay back the project loan.

As we’ve previously discussed, you can also buy the materials yourself, and then have the handyman pick them up. Or you can go together. If you are rehabbing many houses, over time, your handyman will know which tile, cabinets, countertops, color paint, etc. you like. At that point, you will not need to go with them each time. But in the beginning, it can really help to give them a good idea of what you want.

Once you have agreed on labor, then the price can’t change unless something unanticipated comes up. If they open up the walls and there is wood rot or termites, and they tell you it will be another day or two of labor plus a little more in materials – don’t be one of those people who says: “But you quoted $600.” That wouldn’t be fair to them and it wouldn’t be a good way to start a long-term relationship. It is a great way, though, to taint your reputation.

Your labor will probably ask you for some money upfront, which is fine. But just make sure you don’t give them too much. Give the least amount you can get away with. Typical general contractors often ask for 50% upfront. Subcontractors will sometimes ask for payments in thirds, with one third up front, one third mid-way and the balance at the end. If you can stretch it out into four or five payments, then that is even better. The less you put up upfront the better, because if the guy runs away with your money or if he disappears with your material… well, you just lost your money. So make sure you don’t pay out too much money upfront.

Play Fair

Now, if a guy is working really hard and doing a great job on the bathroom, but at the end of the fifth day, he’s still not finished and needs an extra day to complete the project… don’t be, the person who says: “Well, I said I’m going to give you $600, so that’s all you’re going to get.” That’s not fair and it’s not right. You know what his daily labor rate is. You know what he’s expecting to make per day. He’s working hard. It’s not always possible to estimate all these costs exactly – that’s why it’s called an estimate, folks. Keep in mind that some jobs might require a little more detail or a little bit of a problem pops up.

So, you’ve really got to be fair with them. Especially if you want to work with them again in the future. If they’re working well and it takes an extra day or two, then pay them for it. Don’t be cheap. You certainly don’t want them to feel like they were not compensated. Negotiate the best rate and pay them for their work. Keep in mind that you want the job done cheaply and for the least amount of money – but you don’t want to be taken advantage of either.

fail Here’s how I like to handle things at the end of a job…

If a guy does a good job, he’s expecting $600. So I say, “Here’s your $600. And you know what? You did such a great job, here’s an extra $100.” Now he’s happy when he leaves the job. And the next time you call him, he’s going to want to work for you.

Rate Negotiation

Using our example of $120 per day for 5 days, we got a rate of $600...

When you’re first negotiating with a handyman, here’s the best way to make sure that the rates you’re getting are good. Once you know what the job will cost in labor ($600), then you factor in your material costs to figure out what the total job will cost. (This is one of the reasons why it’s so important to separate your labor costs from your material costs.) Then, you can search around to see if there’s someone else who’ll do the job for the same amount or less.

So, if a guy says he’ll take 5 days to paint your bathroom, and he wants $600 in labor, then the only thing you need to know is how much all the needed materials cost to paint that bathroom.

How many gallons of paint does he need?
How much does a gallon of paint cost?
Which paint is he using?
How much tape does he need to use?
How many drop cloths?
How much plastic does he need?

Once you figure out the components of the materials, and you know the labor cost, then you have the total cost of your job.

When you add all these materials together, you should have a round number. Let’s say its $130 in materials and $600 in labor. That’s a $730 total job cost. Now that you have your estimate, go shop it around...

You can call up another guy who does paint jobs and say:

“Someone said they’ll do this job for $730. Can you do it for less?”

And here’s a little trick... instead of saying, “someone said they can do the job for $730,” call them and say:

“Can you beat $600? Because right now, we have someone who’s offered $600?”

If the second guy comes back and says he can do the job for $580, well of course, that’s better than $730. Now knowing that he’ll do the job for less, you can call yet another painter and perhaps ask them if they can beat $550. If that third painter says:

“I’m not doing the job for $550, that’s crazy. I don’t know who’ll do a job for that cheap. It’s not worth it.”

So, once you’ve gathered some price-point info from various painters, you’ll have a pretty good idea of where your price should land… $550 was too low, but you found someone who’d do it for less than $730. Looks like something around $600 is pretty reasonable for this 5-day bathroom job.

But, if you really like the first guy, who quoted $730, and still want to do business with him, you might go back to him and say:

“Look, I really want you to have the work, but someone else is quoting me $600. Can you do the whole thing including materials for $600?”

Once again, there is a delicate balance there between offending and upsetting him or coming to an agreement. You know that the guy wants to make a certain amount in labor per day. Every guy in the handyman business knows how much he wants and expects to make. So, you are not doing anything unusual by negotiating.

yard If he’s used to working on daily rate of $150 a day, and you are only offering him $100, then he’s not going to be happy. He might take the job because he needs the money, but he won’t be happy about it, which means he won’t feel compensated. No one likes to be taken advantage of – including your handyman. So, you may actually be better off paying him his $150 daily labor rate. But again, you don’t want to be taken advantage of, so you really do have to find that delicate balance.

So, he might do the job a little cheaper, but next time you call him, he won’t call you back. If he has other work, you will be the last person he calls back. He will only call you when he has no other work. Think about how much will that cost you. Do you see how a delicate balance comes into play?

The key is for the handyman to know that you know prices. Keep that in mind… you can only shear a sheep once. If you take advantage of him or he makes barely enough money, then he won’t want to work with you in the future. So you want them to feel happy and compensated for their work. You don’t want to overpay, but you don’t want to underpay either.

It’s going to take experience for you to learn how to strike just the right balance, which you’ll improve over time.

Hammers Down

Well, I think that’ll do it for today’s lesson. We covered a ton of helpful info, and you’re hopefully feeling better prepared to embark on a rehab the right way. Don’t worry, there’s even more to come…

In my next installment in this series, we’ll talk more about rate negotiations and ways to ensure you’re getting the best rates.