My general contractor, who is also my tennis teammate, was making fun of me for spending $6,000 for replacing my 40 year old gravity furnace that was lined with asbestos. I needed to replace all my ducts and vacuum seal my house for a day to prevent any asbestos from escaping as part of the replacement and permit process.
“I could have done it for $2,000!” he said as he tried to make me feel bad about my decision.
So when my general contractor came back to me with a bid of $9,000 to paint the interior of my house, patch, tape, and sand all holes in the walls, I almost threw up in amazement. My house has some nice crown moldings and standard baseboards, but everything else is pretty normal. “$9,000 is a great price,” he said with a serious face.
Because I thought $9,000 was ludicrously expensive, I declined his bid and found another fella I worked with in the past for $7,000. After he discovered I was going with another fella, my general contractor then came back to me and said I was wasting my money because these new guys he knows can paint my interior for only $5,800!
What the HELL! How is it possible that he honestly thought $9,000 was a good initial price when he now says he can do it for $3,200 less (36%) after I found someone else? Once again, he’s trying to make me feel bad for spending more than I should. He was hoping I’d take his bait at $9,000, and was gambling that I had no other resources. Little did he know that I’m the most resourceful person ever. If I am wronged, I will go to any length to fix the situation.
Everything began to unravel after this incident.
THE NEGOTIATIONS CONTINUE
After I hired my guys for $7,000, my contractor kept on harping at me that I was wasting money even though he initially gave me a bid for $9,000. Unfortunately, after I paid my guys $1,100 to do two days worth of work (three guys one day, two guys the second day), they said the job was too much for them for only $7,000 so they quit. Unbelievably, they asked if they could have $200 more for materials, which I refused because I was pissed at them for welching on our contract. I later found out that my contractor was fighting with the painters while I was away at work and they couldn’t take him anymore. Another sabotage.
So now I was stuck without any painters. Logically I went to my contractor and asked him to do the job for $5,800 MINUS the $1,100 that I already spent on two days worth of work = $4,700. Of course now the contractor said he can’t get the $5,800 price. It was a one time deal and the guys are now busy. Such utter bullshit.
Instead of getting the $5,800 gross price, he offered up one of his painting buddies at my original price of $7,000 minus the $1,100 spent = $5,900. Then I got really pissed off because my contractor tried to scam me for $9,000, made me feel bad for paying $7,000, and then wanted me to pay $7,000 again.
I understand everybody wants to make a buck, but I was thoroughly disappointed in my friend for trying to screw with me. In the end, I negotiated directly with the painter for the gross price of $6,400; $600 more than my contractor had said he could get but $600 less than I was going to pay the other guys who quit (thanks to my contractor).
WHY HOME REMODELING PROJECTS ALWAYS COST MORE AND TAKE LONGER
The reason why home remodeling projects always cost more and take longer than agreed upon is because the general contractor and all the sub contractors are trying to extract as much money as possible from homeowners.
I talked to a number of guys in the business and this is how they operate:
1) The number one goal is to win the bid. To win the project, the contractor must highlight an attractive price and good quality craftsmanship. Competition is fierce, so contractors will say and do anything to win the bid. It doesn’t matter if the price is an artificially low price. The goal is to have the homeowner sign the contract and lock them in.
2) Create a hostage scenario. Once the homeowner has signed the contract, they are now held hostage by the GC. The deeper a project goes, the more a GC will highlight “unforeseen” problems that require more work. Even though there’s nothing really unforeseen for contractors who’ve been around long enough, homeowners don’t know this. Let’s say a homeowner is $60,000 deep into a project after two months. Contractors know the chances are low that the homeowner will balk at an additional $10,000 – $20,000 worth of work that is necessary to make the home better. If homeowners start balking, then of course the GC will do the homeowners a “favor” and lower the price of the extra cost.
3) Play on homeowners’ emotions. Most remodeling projects are by first timers. As a result, homeowners generally don’t have any idea how the process works. For example, a permit might cost $350, but a GC may charge $800 to pull the permit for their time and “extreme hassle,” even though it takes at most 3 hours to pull the permit (I did one myself and it took 1.5 hours of waiting around and signing docs). A new home is very emotional for most people. It might have taken a couple 10 years of saving to come up with the downpayment. Or maybe the couple lost multiple bids and finally paid a big premium for this home. All these situations help contractors make more money off of projects. If the homeowner overbid by $100,000, what’s an extra $20,000 in remodeling.
4) Rely on default thinking. Homeowners who enter into a remodeling project have this automatic, “It will take longer than expected, and I will pay more expected” mentality. Contractors love this type of thinking because it allows for them to take advantage of homeowners. It’s up to homeowners to cut this type of thinking out and make GCs stick to a contract. But GCs can be very intimidating some times. They use their intimidation to force things through.
5) Smile and charge. The most skilled gougers are the GCs who bring up new work to be done while constantly being nice and smiling. GCs understand that most people just want to have GCs who take the time to listen to their client’s problems and find beautiful solutions. They understand homeowners are busy with their jobs and don’t fully understand all the nuances. By just being responsive over e-mail and talking things through, GCs adeptly persuade and guilt homeowners into paying more than expected.
WELCOME TO THE JUNGLE
The residential building business makes the auto service business look like a girl scout lemonade stand business. Everybody needs to take their cut in the building business, sometimes even the city inspector who signs off on a project for your 3R report (home report card). I’ve heard plenty of stories where an inspector demanded payment for approving a project. So far the building, plumbing, and electrical inspectors I’ve been dealing with seem above board. But when I pay $325 for a roof permit, and the building inspector doesn’t even climb the ladder to inspect the roof, I begin to wonder. All he did was drive up to my house, look at the roof, and sign the permit card.
The number one bullshit excuse general contractors like to use to charge more is that the project will cost them money. They will always say something like, “I lost money working,” or “I’m working for free for you.” They will try to guilt you into paying them beyond the initially agreed upon contract. Don’t let them! They don’t lose anything if they have to work longer. It’s not like they have to spend more money out of their pockets for much more material. They just need to spend more time based on their agreement.
If you can navigate the shady building business and remodel fixers in strong real estate markets you’ll do very well. But chances are high that you will get run over and get buried in your backyard with cost overages. No wonder new construction and remodeled homes command such high premiums. If you’re middle-age or older and know all the crap that goes on with remodeling, you’d pay up no problem.
The best way to keep your general contractor and subcontractors honest is by having a detailed list of alternative people who can do the job. As in my example, I was able to get guys to immediately do the paint job for $2,000 less. Unfortunately, they realized the work was too much so they bailed. This is actually a good sign that I negotiated a decent deal, because if I negotiated a bad deal, they would have gladly kept going to take my money.
Don’t rush into anything, get multiple bids, and be willing to walk away. Be as detailed as possible when drawing up the contract regarding costs, time, materials, and work to do. Whenever a GC wants to charge you more, simply point to your iron clad contract and have them carry on. If they don’t, then you must be willing to fire them and hire someone else. Be aware that you are only required to pay for work that is completed. Don’t let a GC swindle you out of work that he says he’s planned for. Check your rights by state at the Department of Building Inspection.
Look into real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property or don’t want to tie up your liquidity in physical real estate, take a look at RealtyShares, one of the largest real estate crowdsourcing companies today. Real estate is a key component of a diversified portfolio. Real estate crowdsourcing also allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. Sign up and take a look at all the residential and commercial investment opportunities around the country Realtyshares has to offer. It’s free to look and discover.
Shop around for a mortgage: Mortgage rates have collapsed after Brexit, and US assets are aggressively being bought by foreigners due to our stability. Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. This is exactly what I did to lock in a 2.375% 5/1 ARM for my latest refinance. For those looking to purchase property, the same thing is in order. If you’ve found a good deal, can afford the payments, and plan to own the property for 10+ years, I’d get neutral inflation and take advantage of the low rates.
Updated for 2017 and beyond.