We appreciate that our website isn’t read by just those in the construction business. We get a lot of owners visiting as well, many of them looking for information on whether or not their contractor is overcharging them.

We’d like to share a note sent recently by an owner, whose name has been changed to Mr. X.Rental Rehab Costs

Hi Michael,

My name is Mr. X. I am a real estate investor. I browsed your website and was very impressed with the wealth of knowledge and help that you provide to contractors and lay people like me.

I have a unique opportunity in front of me, which will require a general contractor to help take full advantage of said opportunity. Allow me to catch you up on the situation:

I buy rehab properties and get them up to a specific rental standard. The houses we do are not high end, and have pretty tight margins from purchase to final sale price. So far I have been on a 2 house/month track. I have been able to keep that pace with a decent crew that can do all of the work. And I have my good friend/ general contractor help with the permit stuff. The thing is the opportunity that has presented itself will require me to ramp up to 10 houses a month… Quite a large scale up and I will need my contractor to help manage the jobs.

The quagmire that we seem to have found ourselves in is this: My budgets are tight. I can afford to pay somewhat fairly but certainly not top dollar. His overhead costs are huge! Something like 40%. After reading your site, that actually isn’t too high but it is a hindrance to us working together to fulfill the potential.

To give you an idea numbers wise. The typical rehab budget is about 10K for materials and labor. That would include all cosmetic work (paint, drywall, floor etc.) and possibly a window replacement or two. Maybe something a little more in depth, depending on a can of worms, but nothing major like a re-wire or roof replacement, and no AC work either. I believe 2 to 3 solid guys could bang out a house in a week to 10 days. I believe his lowest paid guys are at $12 and hour.

Do you have any suggestions to reduce a contractor’s overhead costs? He is newly licensed so I realize they will reduce over time, but we don’t have the time to spare. The opportunity ahead will not be around for that long. Are there legitimate ways for a contractor to cut costs but still be completely compliant?

It made my day to read that Mr. X discovered from our website that a 40% overhead isn’t outrageous.

Mr. X wants the contractor to reduce his expenses so Mr. X can pay him less money and still maintain his profit margin for his real estate investing business. What is wrong with this picture?

As a contractor, it’s easy to jump at an opportunity like this because it looks like steady work. Steady work that isn’t profitable doesn’t help your business. Don’t confuse activity with accomplishment; if you aren’t going to make enough money to pay your job costs, all overhead expenses and make a reasonable profit, it isn’t worth doing.

You can certainly sharpen your pencil if you’d like the work, but I’m concerned that this will be the first of many requests to sacrifice your business needs for the developer’s business needs.

Appendix B in Markup and Profit Revisited has practice problems for review. Problem #4 on page 313 is called “All That Glitters Is Not Gold!!!” and it resembles this situation. Some contractors think that it’s a good thing when a developer comes along and wants them to do their work. It can be, but only if you can maintain your profit margins. It can also be dangerous if they become your only client; you don’t want to put all your eggs in one basket.

Business needs to be win-win. If the services of the contractor are needed and provide value, the contractor needs to be paid accordingly.

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