How to Negotiate with Contractors: The Definitive Guide

The Big Picture On How to Negotiate With Contractors in Real Estate:

Build relationships with contractors before you need them. Create a network of trusted professionals for different specialties to prepare you for issues.
Gather 3-5 quotes for each job, learning more about the work required with each conversation. It’ll you negotiate from a more informed position.
Buy materials yourself rather than letting the contractor handle it. This prevents markup and gives you more control over costs.

Image Credits: Sergio Santos / Flickr under a CC BY 2.0 license

Dealing with contractors is one of the hardest parts of investing in real estate.

The ones who actually return your calls promptly, show up on time for work, and complete jobs on schedule? They charge a pretty penny for that basic level of professionalism.

In fact, according to Remodeling Magazine’s 2019 home renovation report, not a single home renovation had a positive return on investment. All costs are more than what they add to the home in value.

But real estate investors can’t afford to make repairs and renovations with negative returns. Their very livelihood depends on making home improvements with the highest ROI and earning a positive return on every property update!

This means they need to learn how to negotiate with contractors and how to manage them until the project is completed. It’s one of the most important skills real estate investors have ever learned.

Here are useful tips to help you negotiate with contractors more effectively and get great work for a low price.

 

1. Start Building Relationships with Contractors Before You Need Them

There’s nothing worse than getting a phone call that a pipe burst and is blasting water all over your property – and not knowing who to call.

You end up frantically dialing whatever plumbers you can find in the Yellow Pages or Google. Never mind if they’re any good, never mind what they charge. And, of course, the contractor can hear your desperation all over your voice.

It’s all a recipe for being charged double.

Instead, start networking with contractors now, before you need them. However, you store your contacts and set up a folder for contractors and sub-folders for specializations like plumbers, electricians, HVAC specialists, roofers, and general handymen.

Because no matter how clear the skies are today, you know it’s going to rain sooner or later. The day will come when you need every single contractor under the sun. You prepare financially by budgeting for repairs in your properties’ and personal emergency fund; you also need to prepare by gathering contractors before you need them.

Ask for referrals from friends, family members, neighbors, property managers, other landlords, and real estate investors. Search Angie’s List and Google for the best-reviewed contractors in your area. Try them out on small jobs to see how they do.

The wider your network of contractors, the more choices you’ll have and the greater your negotiating position.

Key Contractors for Property Maintenance

Speaking of which, below are the types of contractors that may come in handy for your property’s future maintenance.

Contractor

Areas of Expertise

General Contractor

Overall project management, renovations, additions

Plumber

Water systems, drainage, pipe repairs

Electrician

Wiring, electrical systems, lighting installations

HVAC Technician

Heating, ventilation, air conditioning systems

Roofer

Roof repairs, replacements, gutter systems

Carpenter

Woodwork, framing, cabinetry, structural repairs

Painter

Interior and exterior painting, wallpapering

Landscaper

Lawn care, tree trimming, outdoor maintenance

Pest Control Specialist

Insect and rodent prevention and removal

Mason

Brickwork, stonework, concrete repairs

2. Plan Property Updates in the Slow Season

When do you think you’ll pay less to have your furnace serviced, in January or October?

HVAC contractors work around the clock in the sweltering heat of summer and the frigid cold of winter, fixing, servicing, and replacing furnaces, duct lines, and air conditioning condensers. They largely twiddle their thumbs in temperate spring and fall seasons when no one needs their heat or air conditioning.

“But Brian, sometimes the furnace just breaks down and needs immediate attention!”

Sure. But it’s a lot less likely to break down in January if you get preventative servicing in October. Like Scar says, “Be Prepared.” (Or is that the Boy Scouts? I can never remember.)

While emergency repairs do occasionally occur, you can dramatically reduce your maintenance and repair costs by planning preventative maintenance and property upgrades and improvements in advance. Write out a schedule for the next 12 months, indicating which upgrades you want to conduct at which properties.

Then, plan them in the slow season, when contractors are hungry for work rather than swamped. If nothing else, this will help you budget better for them in advance.

 

3. Never, Ever Look Desperate

If a contractor smells desperation on you, they’ll double their quote. And contractors are great at sniffing out desperation.

So before calling a contractor, give yourself five minutes of meditation, breathing exercises, or whatever it takes to calm down if you’re feeling anxious. When you call the contractor, speak slowly and casually. Explain the scope of the work in a precise but relaxed way.

Wrap up by explaining your timeline. Ideally, this shouldn’t be “yesterday.” But if it is a more urgent repair, tell each contractor that you’re collecting four or five quotes. While you do want to get the repair done as quickly as possible, you don’t want rushed or shoddy work.

Ask for their best price and what their timetable looks like.

As you talk to each contractor, ask questions and take notes about the job requirements. The better you understand the repairs yourself, the better informed you are to the next contractor you call.

 

4. Gather 3-5 Quotes, and Learn As You Go

When you tell contractors that you’re gathering four or five quotes, that shouldn’t be a bluff. You need to actually do it, despite your protestations about how much work it is and how urgent the repairs are.

To begin with, you have better odds of finding the right contractor for the job if you talk to five contractors instead of two. And with each quote you collect, you better understand what “normal” pricing for the job looks like.

But talking to more contractors also helps you know what the hell you’re talking about. When the first contractor comes out, you might only know that the air conditioning isn’t blowing cold air like it should.

They look at your air conditioning condenser and give you their opinion on the source of the problem. When the second contractor comes out to the property, you can explain the symptoms of the problem and the previous contractor’s diagnosis of the cause. This second contractor gives you even more information, which you then bring to the third contractor, and so on.

You gain confidence with each contractor you speak with and can discuss the problem fluently and authoritatively, which puts you in a better position to negotiate.

Be sure to call the first contractor or two after speaking with the others so you can share what you’ve learned and give them a chance to update their quote.

When the time comes to choose an option, you’ll be well-informed and feel confident in your choice of contractors.

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5. Collect Credentials & Documentation Before Signing a Contract

Before you sign on the dotted line, you’re in a position of power, and contractors want to win your business. They’ll offer up their credentials and documentation to make the sale, such as copies of their contractor’s license, insurance bond, and customer references.

Afterward, contractors have no reason to give you any of that. They’ll stonewall you because there’s no upside for them in giving you that kind of leverage over them.

As you collect quotes, request copies of their license, insurance bond, and references. Spend ten minutes making phone calls to verify the license and insurance are valid and the references’ feedback about the contractor. Ask penetrating questions about what they liked and didn’t like about the contractor, the quality of their work, and whether they stayed on schedule and within budget.

Keep in mind that your municipality might require the use of licensed contractors for specific types of jobs. If you need to pull a permit, you need a licensed contractor.

In the event of a dispute, you can file complaints or claims with the state licensing agency and bond insurance company. The license and bonds help protect you, the customer, so get them while you can.

 

6. Check with Other Clients, Too

Contractors cherry-pick their references, just like every company. They want to highlight their most satisfied clients.

However, you should also get a sense of how their average client feels about their work, not just their happiest clients. Ask contractors what jobs they’re working on currently, and ask for the client’s name and phone number. Call them up and get their feedback.

Also, take advantage of online review platforms like Yelp, Home Advisor, and Angie’s List to read real customers’ reviews and experiences. Every business has the occasional negative review, so don’t discount a contractor over one client’s rage fest.

If half the reviews are negative, that’s a different story entirely.

 

7. Don’t Share Your Budget

Contractors want to get to know you before providing a quote. One way they do this is by asking for your budget; if the standard price for a given job is $2,000, and you answer that your budget is $4,000, what do you think the contractor will quote you?

Instead, you want to force the contractor to create the numbers. Ask them probing questions like how much they charge by the hour for labor and for a quote broken down by labor and materials (more on materials shortly).

If the contractor insists on your budget, tell them your budget is $0, but since that’s not realistic, you need their best price because you’re collecting multiple quotes. Put the onus on them to come up with the quote for you.

Dealing with Contractor Pushback

Interestingly enough, even the smoothest negotiations can have bumps. So, you need to learn how to handle when a contractor starts pushing back. 

Keep your cool: Always…Always stay calm and professional. A level head can keep the conversation on track, even when things heat up.
Stand your ground: Restate what you want and why. Sometimes, a quick reminder is all it takes to solve an issue.
Get them talking: If the contractor resists, tell them to explain their concerns to you and listen to them! However, expect one of two outcomes: uncovering the real issues or hearing petty excuses.
Be flexible: Tell them that you’re open to alternatives when it’s necessary. If there’s a genuine problem, work on meeting halfway.
Remind them of your options: Casually mention you’re considering other contractors if they can’t take your request. This can nudge them to cooperate or show you it’s time to move on.
Be ready to walk away: If they’re still being unreasonable, don’t be afraid to look elsewhere. There’s not much you can do except find somewhere else.

Remember, negotiations should aim to find a mutually beneficial solution.

 

8. Get Aggressive About Structuring Draws

If you’re financing renovations or a large-scale renovation project costing thousands of dollars, the payment will be released over several draws. After each set of work is done, you release money for that draw.

The problem is that contractors want to structure the draws so that as much money gets released to them as early as possible. If possible, they want to get paid before doing the work. And you want the exact opposite: you want to pay them only after the work is completed to your satisfaction.

Unfortunately, they know their costs and trade far better than you do. So you get extremely aggressive about pushing money to the back end of the draw schedule.

Release as little money as possible in the first few draws, for the maximum possible work. Hold as much money as you possibly can for the last draw, which will be released after the project is finished.

If the contractor gets ahead of you in terms of money, there’s no reason for them to finish the job. They can simply walk away and leave you hanging with a half-finished job and more than half of your money.

 

9. Buy Materials Yourself

Far too many contractors charge a premium for materials and earn a margin. They quote you material costs at $2,000, even though they’ll actually cost $1,400.

Don’t play that game. Before negotiating with contractors, ask for the initial lump sum quote and then ask them to break it down by labor and materials. Then tell them you’ll buy the materials yourself and simply pay them for labor. Watch their reaction carefully—if they hesitate and try to argue, you know they inflated their materials quote.

It also removes their argument for an up-front “materials” deposit. It helps prevent them from getting ahead of you on the draw schedule.

After hiring a contractor, go with them to the supplier and buy the materials yourself. Watch what they buy carefully, and question any materials you don’t understand or look out of place for the job.

As an extra perk, you can charge the cost of materials directly to your credit card, helping you partially finance the renovation costs. Depending on the size of the project, you may be looking at a lot of reward points!

And if you’ve taken out an investment property loan to finance the renovations, it gives you more flexibility to buy the materials on your own, with your credit card, and decide yourself when you want to reimburse yourself for it.

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10. Demand a Discount for Sign Marketing

Contractors want to use your property for free advertising. They want to put up their enormous, tacky yard sign saying, “Another great job done by XYZ Contractors!” or some other such nonsense.

As you negotiate with contractors over price, ask if they want to market their business with a sign on your property. If they say yes, tell them that using your real estate for marketing isn’t free, and tell them they can either compensate you for it through a discount on the quote or they can leave their huge sign in the truck.

They’ll object, moan, and complain that it’s “standard industry practice.” Stand your ground, and respond: “It’s my property, and using it for your marketing campaign isn’t free. If you want to advertise on my property, it will cost $___ discounted off my quote.”

Your goal isn’t to be their best friend or easiest customer. You aim to negotiate the best possible price for your repairs and renovations. That means being confrontational and holding firm, even if it’s not in your nature.

 

11. Pick Over Every Single Word of the Contract

Is it boring? Yes. Is it dense legalese? Certainly.

Do you need to read it extremely carefully? Absolutely.

First, ensure the contract lists the contractor’s license number and insurance bond information so there’s no ambiguity later. Their license and bond policy are on the line, and they need to know it before they start work on your property.

While every word of the contract is important, pay special attention to the list of materials used, the warranty on the work, the draw schedule, and the scheduled timetable. These should be outlined in clear, black-and-white language—no legalese, no confusing prose, just the cold, hard facts.

And don’t be afraid to get creative with the terms. Consider offering a bonus for completing the work early, by a specific date, and including a penalty for failing to complete the work by the listed deadline date. It might read something like, “Owner agrees to pay a $500 early completion bonus if the work is satisfactorily completed by ______. The contractor agrees to provide a $500 late completion discount if the work is not completed by ______.”

Structure the deal however you like to feel confident that the work will be completed on time and within budget. But do it before signing while you still have the power to negotiate with the contractor.

 

12. Carefully Manage Contractors Until the Project Is Complete

Make no mistake: hiring a contractor isn’t a passive activity. Screening, hiring, and negotiating with contractors all take a lot of work.

And it doesn’t stop when you sign with a contractor. You need to stay on top of them daily until the work is finished to your satisfaction. That means visiting the property every day to check on the work.

While there, ask the contractor how the project is going. Leave it open-ended first, then ask whether they’re on schedule. If they hesitate at all, pounce on them immediately.

“It sounds like you’re not 100% confident that you’ll finish this job on time. Keeping this project on schedule is extremely important to me, so let me ask again: What do you need to do to make sure this project finishes on schedule?”

My experience with contractors is that they wander off schedule and over budget when left to their own devices. Therefore, it’s your job to ensure that doesn’t happen, and it requires diligent, attentive management.

Because ultimately, just because you’ve finished negotiating with the contractor and signed a contract doesn’t mean you have what you want. What you’re paying for is the result, the finished work at a high level of quality. And until you get what you’re paying for, you need to stay on top of the contractor to ensure it happens.

It’s not fun. It’s not easy. If you wanted easy, you should have found another profession.

Communication Tips for On-going Projects

Once work begins, clear communication is important to keep the project on track. For the sake of your property, make it a duty to ensure that everyone stays on the same page, and this can be done through multiple means aside from regular check-ins.

When discussing changes or concerns, give them the full details. The clearer you are, the less likely there will be mix-ups on your project.
Write down all the important conversations and decisions, or, better yet, record them with an audio recorder. Trust me, you’ll thank yourself later if things get sticky.
Don’t let minor issues turn into massive disasters. Respond quickly to keep your project progressing.
Stay firm, but remember to give props when they’re due. A little goodwill goes a long way when you need to iron out conflicts.
Agree on how and when you’ll touch base. That way, everyone’s on the same page about staying connected.

The goal here is to find a solution that works for everyone. You’ll be surprised how clear communication usually resolves most disagreements.

 

Pitfalls to Avoid When Negotiating

It’s easy to fall into common traps that can weaken your position when negotiating with contractors, especially when you’re not the “assertive” kind of person or a real estate newbie. Awareness of these pitfalls can help you go through discussions and secure a better outcome for your project.

Announcing your budget: I’ve mentioned this and will mention it again. Keep that info under wraps. If you reveal your maximum budget, contractors will inflate their prices. Why? Because you indirectly allow them to.

Skipping the paperwork: Verbal agreements are a no-no! If you want to avoid headaches, always get a detailed written contract. That way, you can avoid any “he said, she said” drama down the road.

Speeding through decisions: Don’t rush it, people. Come one. Take your sweet time to weigh all the options. Trust me, as I’ve fallen into this pitfall several times. Feeling pressured to decide ASAP will most likely lead to buyer’s remorse.

Opting for the cheapest ones: I know. It’s tempting to go for the most affordable option, but don’t forget that the quality of their work is the bigger deal. I’ve dealt with many contractors in the past, and boy, the likelihood of getting shoddy work is much higher with the cheapest ones. I’ve learned my lesson: Just find the perfect balance. 

Ignoring potential roadblocks: Maya Angelou, a famous author, once wrote the line, “Hope for the best and be prepared for the worst.” The same principle can be applied when dealing with contractors. Hash out how you’ll handle delays or challenges before they happen to avoid future misunderstandings.

Trust me, you’ll be better positioned for a fair agreement when you learn to avoid these common mistakes. 

Final Thoughts

Real estate investors and even homeowners sometimes need to work with contractors. Investing in and owning a physical rather than a paper asset is a reality.

You need to budget for repairs and maintenance when you forecast a property’s cash flow with a rental income calculator. When you decide to build real estate equity faster, one of the primary ways to improve the property is to raise its value.

If you want to find good deals on investment properties, that usually involves buying fixer-uppers that need work.

All of these require you to learn how to negotiate with contractors. How to hire them, screen them, and manage them effectively. And that, in turn, means holding them accountable and being more confrontational and firmer than you’re used to being with the maid or nanny or other people you hire.

Welcome to being a real estate investor!

What have your experiences been with negotiating with contractors? What’s your favorite tip for how to negotiate with contractors? Share your thoughts below!

 

 

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