Ep 13: How do I structure my contractor relationship?

Tim's in Minnesota while Bob is soaking up the rays in Hawaii for this edition of the Value Driven Investor Podcast! And today, part 3 of finding a contractor you can trust, the boys are going to explain how to structure your relationship with a contractor. There are many ways, but they'll focus on the big three.
Tim and Bob, both successful developers, have different approaches with contractors.

It's a fascinating conversation that is detailed, and full of takeaways as you develop relationships with contractors and build your investing portfolio!

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In This Episode (timed with Video)….

4:00 Three ways you can develop a contractor relationship

5:15 The Partner Contract

7:00 How Tim has built a brand with his contractor

11:15 The biggest advantage to a partnership structure

21:55 For Service relationships

25:15 Robert Grand's approach

28:15 How to make sure contractors are accountable

38:30 The biggest question you should be asking yourself

40:14 The importance of starting local

Quotes to Remember

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Full Transcript

Tim Murphy (00:00):

Today. I have the privilege of talking with my buddy Bob grant, but you know, what's best about today is that my buddy Bob grant is definitely living life on his terms because he's sitting in Hawaii with his Hawaii Five-O shirt on. Well, I have a sweater in Minnesota and I think it's like 10 degrees. So the grand old how's Hawaii treat you buddy. It's going great,

Robert Grand (00:22):

Man. It's early here, but it's beautiful. The sun's out already and it's a, the waves are crashing. So I don't know if there's a better way of

Tim Murphy (00:29):

Surf waves crashing.

Robert Grand (00:32):

You could probably be hearing this. There's a guy paddleboarding right out in the water there, which I'd like to do that next.

Tim Murphy (00:38):

That's awesome. Yeah. You, I mean, you, you love to take your vacations. What is it like at least maybe once a month or once a quarter you're on someplace, right.

Robert Grand (00:47):

Trying to shoot for every other month. Um, but you know, smaller vacations too, you know, like just trips to Arizona and stuff like that, but probably Hawaii a couple of times a year. Cause we like coming here. Um, but really we haven't been able to travel internationally because of COVID. So, you know, over this year, things kind of ramp back up. We'll probably do that. And that's really what Shelly really loves to do is travel internationally. So, um, where did you guys get married? Uh, we got married in Bali.

Tim Murphy (01:12):

Yeah. Yeah. That was cool.

Robert Grand (01:14):

Most extravagant wedding of my life. So my first wedding, I was really young. My second wedding was pretty awesome.

Tim Murphy (01:23):

So, well, Hey, you do have a wedding planner for a wife, so it better be pretty awesome. Yeah.

Robert Grand (01:29):

And the cost was like a fraction of what you would have done if she were to plan that same way to here. It was crazy. So that's a cool

Tim Murphy (01:35):

Thing. That's awesome. Great. Well, I'm excited for you. I'm glad. Thank you for coming on today. Cause I think we have a really good topic and uh, and I know you're, you're trying to relax, so let's get on with it, the big topic today. So we're on part three of your contractor, Bob contractors, you know, and today we're going to talk about how do I structure my contractor relationship. Uh, last week we talked about how do I, um, create a relationship? How do I find a contractor? I think that we gave you guys a lot of really good insight in part two about where to look, uh, whether you go to the pro desk at home Depot or you go on a Google search, or like we said, you know, odds are, you're going to find your best contractor from a referral, from someone that you know, or that you can trust.

Tim Murphy (02:21):

Um, but I think the meat and potatoes last week was really a deep dive in. How do you interview that contractor? How do you really know if you're working with the right person? So if you did listen to a part two on contractors last week, I definitely recommend that you do that. Now this week, we're going to start talking about how do I structure my contract relationship? So you obviously have vetted a contractor and now you're like, okay, this is the guy I'm going to give a shot to. And so now how am I going to structure that relationship with him? I'm going to try to keep this short and sweet. We're just going to talk about this today because I think it's very detailed now, Bob and I, this is the beauty of having a podcast with another guy who is doing things just a little bit differently than I'm doing it.

Tim Murphy (03:03):

Um, grand, it looks at it and he has his own general contractor license. I do not have a general contractor license. Grand can go out and actually build a house on his own. I cannot, I'm dependent on a partnership or my contractor to build the property. So there's going to be three different topics that we're going to talk about three different ways. You can structure it. Now I might be talking and we might be talking about three different ways to structure this. There could be 50 different ways to structure this, but I don't want to get too deep into the weeds. Cause I just think it comes down to how you want to run your business and what are your goals? So the three things that we're going to talk about, the three ways that I want to talk about structuring a relationship would be number one, the way that I do that, which is a partnership.

Tim Murphy (03:45):

And so I'm going to go into how I structure my partnership with my general contractor builder. Because again, I'm a developer. I do not have a GC license. I cannot literally build a house for myself. I have to have a relationship with the general contractor builder. So I have a partnership I've chosen to do that. The next one is a fee for service now because I'm a developer. Yes, I can hire a builder. And I can say, give me a bid on what you think this will cost, who gives me a bid. And then I hire them and say, okay, I will pay you a hundred thousand dollars to do this job. Now there's a risk reward because for me, if it costs more than the a hundred grand, well then supposedly the builder is going to have to eat that fee. Now I'm going to tell you that it doesn't always work out like that.

Tim Murphy (04:30):

But that's the beauty of if I go fee for service, is that I know I have a fixed bid and the builder knows that if he didn't bid it right, he might not make much money. So that's a fee for service. And then you have an employee structure where you own a company, you have your GC license, you own a building company, you have an entity and you're hiring people that work underneath your umbrella as employees. Um, no, Bob runs a little bit of a hybrid between like having his own company, which Bob, I want you to tell, tell a story, but having his own company and then outsourcing for labor. So today's conversation is gonna get interesting because I'm really curious to know about how Bob structure set up. And I think Bob might be interested to know exactly how my structure is set up.

Tim Murphy (05:17):

So I'm going to kick it off with the partnership structure. So again, you know, I've been doing this a long time. I've tried the fee for service. I've never jumped out on my own and became a general contractor and or wanted to build a business, um, where I was a general contractor slash builder and had that brand and then would hire employees underneath me. Now, why you might ask why, why would you want to have a partnership instead of have your own business, build your own brand? And you know what, that's a great question because I've been asking myself that same question for a long, long time. And the number one reason I haven't jumped out of the plane on that is because I don't really want to be a builder. Number one, because I don't want to take on the liability. There's a lot of liability when you're a builder.

Tim Murphy (06:05):

Number one, you have a ton of insurance insurance as a builder is expensive. Number two, you have the liability of employees and payroll and having to be there every single day to make sure that your guys that are on your crew are busy because if they're not busy and you're not keeping a busy, they're getting paid usually. And now they're sitting at home unemployed and that's a big, you know, that's a big weight to bear. Um, and then number three, is I a general contractor? When I think about Tim, if you had your general contract and tractors license, how exciting would that be for you? And it just doesn't get me excited at all. So those are the biggest reasons, but, but what does get me excited in that? I feel like I'm missing out a little bit on is I love to build companies with the brand.

Tim Murphy (06:52):

And so what I've done is I've had to kind of swallow my pride and I have literally built the brand for my partner, EHR construction.com. If you go to that webpage, we, this is how I typed on my relationship with him is because I'm literally the face of his company and he's cool with it. And the reason he's cool with it is because he doesn't want to do any of the stuff that I'm willing to do when it comes to creating content and having people understand, well, what product can you deliver? So I've taken that burden from him. He doesn't have to worry about being the brand awareness guy, being the guy on camera. Cause we do a lot of camera stuff being the guy that's trying to figure out how do we market all this stuff. He just gets to do what he loves to do, which is building.

Tim Murphy (07:34):

I don't want to build. He wants to build, I don't want to build. So that's part of the reasons why I'm picking the partnership now, how does my partnership work? I'm the developer. And then my partner, Chris has a general contractor license and he's the general contractor. Now we have a contract. So Chris comes to me. I say, Chris, here's what I want to build. Chris. Then bids out that build. He provides a sworn, um, and provide specs and plans. I then say, okay, you know what? I agree that, you know, you will be able to build this out for call it $350,000. And so then we go to contract. And so between my company called grownup development and his company called EHR construction, we have an agreement that EHR construction we'll build this structure at this price on behalf of ground up development. And then what happens is, is that we have to get financing.

Tim Murphy (08:20):

So there's a construction loan. Well, because I'm the developer, I'm the one that carries the construction loan. Chris doesn't have to worry about the construction loan financing. And so we go to contract, crisp, builds the property for me, pulling draws out of my line that I have with the bank. And then once the structure's built, uh, we do have it in the contract that there is some funds that he has to keep just because at the end of the day, I don't want him to have all the money that all the costs that he, uh, he wants out of the project or that he stated he's needs to get out of the project because I need to have a way, and this isn't because of trust. This is just business. I need to have a way to keep him going back to the house because when I'm building these projects, especially on my, on the high end, at 1.4, 1.5, the customer has a very high standard.

Tim Murphy (09:08):

And so I have to know that he's going to go back into that house. Now I know because we're buddies and I trust him, like, he's my wife almost. Um, so I know he'll go back, but if you're in a business relationship, you need to have a little bit of leverage to make sure that that person will go back and we'll service that client, you know, for the duration, especially if you're doing new construction. Um, so what happens is, is that I keep a little bit of, of the cost to build until we actually sell the product. So Chris will do, he has a warranty on the house, on the product. So if we're doing new construction, he has to have a one, two and 10 warranty on the project. So he has to stand behind that. That's another liability that I don't take on because I'm the developer and he's the builder.

Tim Murphy (09:51):

He has to take that on. Um, so what happens after the house is built, then Chris is still in the game and see that's part of the reason I like the partnership is because if I were to do a fee for service and Chris builds that house, I have no choice because the contract would state that once he's done his job, which is build that structure, I owe him what I owe him. And then I'm taking on the liability of whatever that house might sell for. Now, if it sells for less than what I cost me to get it built, then I lose. If it sells for significantly more than I win. Um, and I have done that before and it can work and it can work really well where I would tell you that, you know, my partnership, why do, why have I gone into this 50 50 partnership?

Tim Murphy (10:36):

Um, because when Chris and I go into a project and he has built a project product, and now I am marketing the product, I know that I have my guy, my general contractor to answer questions, to help through the build process. I'm not just left there hanging, because I'll tell you this once. And I've learned this the hard way. Once you pay your general contractor, they're, they're checking out like they're, they're moving on. But when I have a 50 50 partnership, he is in the game until he gets paid. I mean, it's just, it's human instinct. And so that's the beauty, is that how our contracts set up is that he gets paid the majority, I would say 95% of the cost to build. So he's not really having to pull too much out of his own pocket, um, to build the structure. But then what happens is, is that he doesn't get paid like a profit until that, uh, project sells.

Tim Murphy (11:31):

So if we sell for a profit, he gets a profit. And unfortunately there has been, I think, twice in our 12 year career that he and I both had to write a check. So think about that. Think about if you're the builder and you put in all the time to build it, and you have to write a check because you're on a 50 50 partnership with your partner because you didn't sell the house for what you thought now, for me, that's great for both of us. That sucks. But for me, it's great because I have someone that's literally side by side, that's going to take the risk with me and is also going to bear the reward because the catch 22 to that is that when we have a killer deal that I find, and we make a pile shirt, we all human instinct. Gosh, if I would have done fee for service for this, oh my gosh, that check, I would've gotten would have been phenomenal.

Tim Murphy (12:20):

Right. But, but then I think back I say, yeah, but remember that one time when it didn't work out the way one, I remember that time or member when he had your back here, remember. And so it really come down to, you know what, I don't ever say that to myself when I'm in this 50, 50 partnership. I don't ever question how I have it structured because I always say, you know what, I would rather pay whatever it was to be in that profit because I got a guy that's got my back, no matter what happens. And so that to me has been something that you have to train your mind to think that way, that you know, what the partnership is more important than the dollars, because if you really are after the dollars, then I would say, that's where you want to maybe take the chance and do fee for service because there's plenty of times where I would have made a lot more money if I had a fee for service structure, then if I have my partnership structure, but there's also plenty of times where I could have gotten in really big trouble.

Tim Murphy (13:14):

So that's a little bit granted, do you have any other questions about my partnership structure? Because I think that'll be the best way to kind of have this conversation. Yeah. I know

Robert Grand (13:22):

A few questions. Um, one right off the top there just reiterating, you know, I think going for extra profits every single time, there's always that like, oh God, I could make more money, but you should always lock in what you want to make. And then not care above that. You know, like if I got extra money on the list of a sale, because the bids drew, you know, offers drove it over. That's awesome. You know, but I don't count on it and I can go right back to that sell price. And I still feel great about it, you know, where people tend to want that extra profit does not matter to me, you know? And I kind of, this it's a good philosophy to take, um, or a good stance to take. So you're not always chasing profits. Right. And I think Warren buffet says it like he doesn't lose, he wouldn't lose an extra night or it wouldn't lose any sleep over trying to get extra profits.

Robert Grand (14:05):

Right. He just locks him what he wants. So that's a beautiful thing that you said right there that I think is really important for investors to understand. Um, so your partnership though, um, from what I've been understanding, so it's basically, it's a business partnership that every single time you and, uh, Chris come together and sign a contract and that forms a partnership. You're not, you, you don't own any percentage of his company, but you're still the face of his company. Yeah. So you basically have to, I understand where you're coming from because like you're helping build his brand and his company that can go on for years and years and years. And, and you never can tell tomorrow, you know, what, where are things going to be in a relationship? And maybe he spends off and takes a different direction, you know, or find somebody else. And he's like, Hey, thanks Tim. This is, you know, now working out what holds that together? Is it just the relationship, a friendship

Tim Murphy (14:57):

I control? So I, because I'm the tech guy and again, another, you know, builders, general contractors, they do not really, they're not really super technology they like to build like, so you just, you have to understand the mindset of a builder, a builder likes to build houses, structures. He doesn't like to, they're usually not very good at running businesses and they're usually not super great at managing money. Um, and those are things that I really bring to, to Chris because that, those are the things that I'm good at running businesses, managing money and marketing and technology. Cause I have a MIS computer programming degree. So what I've done is how do I control that is because the website is under my control, every piece of content I've created, I put it on there. I manage that website. I, he, and he's totally cool with it. He's like, yep, that's your baby. You take it, you run with it because I don't even know what to it does.

Robert Grand (15:48):

Does that generate him business outside of what you guys do together? A lot of it, I mean, it must.

Tim Murphy (15:52):

Okay. And, and, and you know what, here's the thing I have to be cool with that because yeah, we'll, they will we get, when we now have this brand, will people reach out and say, Hey, I, uh, I don't want to build this house or it's something smaller. I want somebody to remodel a kitchen, or I want somebody to do a bathroom or I want somebody finished my basement. Yup. And do I ask her anything? Nope. And why, because the flip side to that coin is this, you know, I can, I am a real estate agent. So I want to stay focused on being a real estate agent and an investor. I don't want to focus on being a builder. So I have to understand that if somebody wants a kitchen done and that's not something I'm a part of, well, then he's the builder and I'm not the builder, but the flip side of the coin is this is that if somebody wants to list their house and then, and then work with us and do a build, I get to listing sites.

Tim Murphy (16:37):

Right. Okay. So I get to list their house. I get to do the real estate services. Cause that's what I do. And he doesn't get a part of that, even though he is a licensed agent, we've come to that agreement that, you know, we gotta, we gotta have a line in the sand here. Like if it's real estate services, I do real estate services. If it's construction services, you to construction services. And so it's worked out well, no, there's been a little give and take in certain situations, you know, he might say, Hey, you know what, man, thank you for giving me that job. I mean, I just literally got them a $250,000 job the other day. And uh, you know, he's gonna say, Hey man, you deserve, you know, compensation as a, my sales guy for something like that. You know? So there's a little, a bit of that on bigger deals when I get them bigger projects like that. But if it's a bathroom or if it's like a kitchen and it's like a $50,000 project, I'm like, Chris, I don't, don't worry about

Robert Grand (17:26):

It. W what, uh, what's interesting to me, like, so kind of where me putting myself in the contractor, like basically saying, if I'm Chris, you know, why, you know, why does this relationship work well for me? And I'm sitting there thinking like, yeah, if I just get cost, you know, on all my employees and all the materials and I'm building something, and then we do the draw request. And at the end I have a shot at the profits. You know? I mean, that, that seems like a really good plan. So he wouldn't, I always think like contractors would tend to elevate the cost and then hit you with that. And then in the end they still get the profit. Right. But it sounds like, you know, he understands the relationship really well, which is, um, something that you you'd have to really develop over time with another contractor, um, to be able to get it to where you can get to that level. So he can be like, I need costs and everything. We have to have transparency on these costs. You gotta estimate it out. And I, now, you know, the numbers, cause you're a developer, you've done a lot of time. So you would know if something's elevated or something were jacked up. And, but your relationship strong enough to where that's not going to happen because you have a pretty good relationship, which is the most important part of almost anything that you're doing, right. Relationship.

Tim Murphy (18:32):

Well, and I think you nailed it. Like Warren buffet said, you know, focus on the profit. So I, I look at it and I say, you know, am I ma because he knows that if I'm not making my ROI that I need, and if this doesn't make sense, I'll walk, you know, cause I can go find another builder. And so I bring a lot to the table and, and if I walk away from him, that's, I mean, I would tell you that that would be very painful because from a financial perspective, like, like I said, I just handed him a $250,000 remodel. I have his website going leads, come in to his website, that he gets the benefit from fit from, at my expense. I don't even try, I charge a marketing fee on each deal, but it's nominal compared to what I'm doing to help grow his brand and whatnot.

Tim Murphy (19:13):

So that's part of it too, is like, does he want to burn? He has to live with that and see, this is the beauty of it is like, you know what? You guys, it's human nature. Like yeah. Could he be inflating the numbers? Yes. But then my return on investment goes down. Then I don't want to do projects anymore. And I would tell you that, you know, when we do six, seven projects a year, I mean, sure he does some other work, but he's working on what we're doing more often these working on usually other things. Yeah.

Robert Grand (19:40):

Okay. Yeah. That makes a lot of sense. So you, so do you carry any sort of, um, insurance or anything to back yourself on your development company? Like D does that development company carry like general liability, business insurance, anything

Tim Murphy (19:52):

Like that? Yeah. So I'll carry a general liability, but then I'm also a policy like I'm, uh, I'm not attached to each individual property underneath his builder insurance policy.

Robert Grand (20:02):

Oh. So yeah. He, additionally insured you. Uh, yeah. Yeah. Okay. That makes a lot of sense. Nice. Yeah. No, I think that's a great model. And what I see, like for both ways, like if, you know, I doubt there's a lot of slow time, you know, for you guys and what he's got going, he's probably built it up. Good enough now, but there's always that fear of the slow time. And if you have a project going where he can shift people back to her, stay on, you know, it's like, oh man, this, this one saved me. I'm giving him past and the end, I get a shot at the profits. So it gives him a little bit of, uh, kind of like being the investor also

Tim Murphy (20:33):

No consistency, you know, like every general contractor that has a company, a building company, again, he has to keep his guys working. Otherwise they're not getting paid and then he could lose his guys and now he doesn't have a business. So I can tell you the consistency of the deals that we do gives him, uh, gives him comfort that. Okay. I know I'll always have something going on.

Robert Grand (20:53):

Huh? Yeah. That's cool. And that's, I mean, for us, our number one goal is to keep the people that we work with are essentially all subcontractors. Right? We have one person that's more of the lead, but we're still in control of the whole project. And, and um, you know, our goal is always just to keep them busy. So we're always giving them other

Tim Murphy (21:09):

People that want them we'll go into why don't we go into that? Cause like, so fee for service again, I don't think Bob and I really do fee for service either of us. Why? And Bob, you know, fee for service is like a fixed bid, right? Where Bob says, Hey, you know what, Jim, I want you to build this house. Here's all the specs. And the plans bid it out and he comes back and he says, okay, Bob, it'll be a hundred grand. And Bob says, great, let's go to contract on a hundred grand. And then Bob, uh, Bob, then hasn't built it out. But Jim, this is where it gets sticky is Jim says, okay, Bob, no, no problem. And then all of a sudden, one day Jim realizes, you know what, uh, this is going to cost me 110 grand. And Bob says, well, we went to contract at a hundred. So you needed to keep it at a hundred. Now you're going over grand. What do I mean, what are your thoughts on that? That fee for service.

Robert Grand (21:59):

Yeah. I'm with you. Like, I think it's such a thing where they say it to get the job almost, and then, you know, it's going over. Right. And so it's just kinda like, oh, and then they want the contingency put in there. It's like the contingency is going to get eaten up every time. If you have a number out there for a contingency, you instantly start thinking all still a little bit from there, I'll still a little bit from there. And so that's what I have a hard time with, with the fee for services, because then they have the all contractors like, well, I gotta make a profit. You know? It's like, well, you're paying your people. You're getting paid. You're probably an hourly employee of your own company too. But the company's got to make a profit. So it's like, oh cool. So you get 20% profit. Then I started asking, you know, what is that profit? I'm going to drive you down, you know, in your profit because I want to make more profits. So that's an negotiable thing for me, you know? And yeah,

Tim Murphy (22:44):

Well, and it's a never ending battle. I mean, you can just hear it in your, in your conversation there. It's like, that's why I don't like fee for service because there's always going to be jealousy because at the end of the day, he's going to be jealous because they know what you sell these properties for. They probably know what you buy it for. Uh, cause in Minnesota, they can, you can look it up. It's it's public record. So they're going to be able to put the number, reversed the numbers and say, wow, you made that. And I made this no way. And then that creates a tendency for them to want to fudge the numbers or their tendency to want to have a bigger contingency plan or a tendency to say, well, it went over, you're going to need a pit. And then all of a sudden you have to get attorneys involved because you're battling because people are getting worked up that it's not fair.

Tim Murphy (23:25):

And I think that's one of the biggest things for me in being in a, in having a partnership is that I found that it was the right way to be fair, where everybody could look at it and say, you know what? We're in this together. We started it together. We finished it together and we made the same profit together. So like, it's fair. Now you might be in my situation, the builder might say, well, yeah, but I have more hours than you, but then I could say, well, yeah, but I have more risk than you because I'm the one with the line of credit. I'm the one with. Cause he doesn't every once in a while, there are exceptions, but most of the time I'm the one putting the cash in the deal. He doesn't have cash into the deal. Uh, okay. So I'm putting the 20% down. I'm the one going to the bank, getting the financing again, in certain instances he has brought some in, but I would say generally speaking, that's how we've been doing. Most of our deals is that I bring everything. He brings the building. So he has more time in it, but I have more room.

Robert Grand (24:22):

Right. I think you're kind of like an evolved approach. Like looking at yours, like fee for service. It's like, you know, you realize you didn't want to go down this path because you didn't want to be a contractor and, but you still needed, you know, a good partnership with somebody. Um, and segwaying that back into what I do. I think that like, I'm probably, you know, cause I'm more predominantly and not that kind of ground up construction type thing. We're more in the, like the remodel where we can control like a lot of those projects. And we're just kind of hitting on the new construction world and thinking like, okay, this is going to be an avenue of the future. Um, but kind of, you know, realizing that maybe that could be an approach down the road, you know, for us to be able

Tim Murphy (25:02):

To do great, will let them know. Okay. How do you structure your business? Cause yours is pretty dynamic. So let them know

Robert Grand (25:08):

Basically like when we have, let's just take like a rehab project, you know, we have, um, we have our project manager who's paid right through us. So because I realized I can't manage, you know, 10 projects. I'm just not that person. My brother is not that person. So we needed a person who could manage projects so we could scale with that. So that's an employee, right? So under our company, you know, our company in grand real estate investments, we hold a developer contractor license. And then, um, in my state, you know, you can be a contractor. Um, but they also give you the ability to have a developer's license. Just basically saying you work on your own projects. You're not out there working for a front end customer, which is kind of what you do. That's kinda how you sit and you, that's why you can say you're a developer because you are, and that's what a developer means, but it gives you that layer of protection.

Robert Grand (25:51):

And I don't have to go through and now any more do the continuing education for contractor stuff. Cause they know I'm hiring other contractors, you know, they're all supposed to be, but I can't hire employees. Right. So they're just not supposed to be swinging the hammer on the project. Right. So I'm more of the professional management group, um, where our project manager designer goes in, does that, and works with, you know, the site contractors and stuff. So she's managing the overall project, paid employee now on site, you know, we have usually like the lead, the person that's taking, you know, the whole project on. Um, and they're just like, they're hourly that we pay them hourly basically time and materials. Right. So we pay for all materials

Tim Murphy (26:29):

And they're independent contractors paid on a 10 99, right? Yeah.

Robert Grand (26:32):

Independent contractors paid on a 10 99. And to be honest, like I would not hire contractors like onto my company to be like paid employees when they can just have a contractor's license, they can have their own insurance, everything like that. And I can always just keep them there. Cause there's a lot that goes into like having an employee and dealing with all the wages and everything and like the insurance and all that worker's comp and all that stuff. It's costly, you know, it's, it's not free to have an employee. Um, so you know, the, the contractor we have and so he'd be like our site GC, right. So the site general contractor will be there and it's just it's time and materials. And I really like, like my favorite thing is like the guys that are like the really good, like almost like the handyman that have evolved.

Robert Grand (27:11):

And they're like go into the next level, you know, where they were just kind of doing little projects everywhere, but then they get a kitchen remodel, then they get this and then they start doing house remodeling and stuff like that. And so those are my bread and butter. Like when I can lock into people like that, I really like them because they're really realistic. They're used to working for an hourly cost and you know, I'd bear the risk of time. Right. So like on a site, if they run into an issue, you know, it's, and it's taking more time, we're there to see. Cause we kind of know how long things should be taking, but we'll be there and he'll be like, I know it's taken longer than expected. We hit this and this and this hurdle. And I'm okay with that. As long as there's honesty and everything, you know, involved in the process, but I'm trying to like, you know, plan it all out, knowing how much time it takes for him to do all that work. Um, but also like to make sure that it's within my budget, that I had built out for it. So

Tim Murphy (28:00):

Do you ever get concerned? I mean, cause one of the things that you can walk around a job site, we've been walking around job sites for quite a while and there's a lot of guys sitting on lunch pails or taking extra long breaks or getting caught up on their phone. I mean, that's kind of like the subcontractor mindset. I mean, when you're trying to control people's time, how do you, how do you do that? Knowing that like every minute, every hour they're working your pain.

Robert Grand (28:24):

Yeah. It's a trust factor. I think, you know, like, uh, we've gotten rid of people that don't work out like that. And it's that testing that we talked about in the previous episode, um, where I go through and test them on small things and realize that they're not wasting time, but there's always that risk right down the road. They might have a bad week and just be like something going on in their life. Instead of telling me they shouldn't be at work, they are just showing up and they're just checked out, you know? So there's always that risk. Um, our fixed costs though, you know, our fixed people are always plumbing, electrical, HVAC, you know, installation. We, they don't do everything, but they're more like, you know, in cabinets that's another fixed cost, but that site person just kind of like managing that whole project all the way through doing all the pickup work, doing all the odds and ends laying in like, you know, just like the S the, the luxury vinyl, plank flooring, all that type of stuff, where you can really easily kind of judge what it's going to cost like per hour.

Robert Grand (29:13):

He kind of rolled that through. Um, I'm not saying that we'll probably work forever. You know, I, it, I think it works really well on the entry-level homes that we work on. Right. And that's our bread and butter where you're like that million dollar guy and building these big, beautiful homes. I'm that entry-level guy. And that's right now in my investment world, you know, that's kind of where, um, you know, comfort.

Tim Murphy (29:34):

So Granda let's go into the, um, why don't you just, cause I think this is a very important decision why I don't become a general contractor or have my general contractor license. What, why don't you want to have someone on your, like an employee underneath your umbrella as a business? Why

Robert Grand (29:54):

Don't I want to have someone as an employee, like, that's basically

Tim Murphy (29:57):

Why I keep them as a 10, 10 99 contract,

Robert Grand (29:59):

Well costs, you know, so then I'm uh, yeah, well, yeah. I mean, like when you look at like an employee, like you have, uh, you know, employer taxes, you have liability insurance, you know, for them workers' comp insurance, like all these things like you, you, when you have like, I think like say you're paying somebody $20 an hour, well, it's, it's another, like $3 an hour to keep them as an employee. Those are just your taxes, payroll taxes, all that stuff. And so there's a lot of, yeah. So I like the, so what I really like is the ability to use that person's time, but, and I'm, my goal is to keep them as busy as possible. But if I ever hit a lag period, I don't want to bear like a sink hole, you know, of, of money just going out every single month, why I'm looking for the next project, because, you know, we we'd stack up three projects and then there might be a lower, right.

Robert Grand (30:49):

And then we stack up three projects and there's a little, and that's just kind of how the evolution of our business is going as we grow it. And so that's kind of, for me, it's kind of like a stop gap so I can control my costs, you know, and I can keep things rolling, but I don't have to bear the cost of four. Cause there's four guys that pretty much work for us, like all the time and it's going great right now, you know? Cause we have the apartments that they're kind of working on those things and you know, they can come and they can do the framing on that. And so we put them on that, you know, when we have a little bit of lag time, but you know, cause like with any project you've got the phases and there's somebody else like on one of our projects, the electricians working this week, well, they can't work there with the electrician.

Robert Grand (31:24):

So they're on another project. And so that's the goal is just to keep them kind of going down the road and doing that. Um, but there's no guarantees for them, right. So if I say, Hey man, it's like really dead this week because we're in a low between projects. I don't have to guarantee their 40 hours. Right. They're not going to go file for unemployment. So that's why I like that model. And that's why I wouldn't have a whole bunch of people kind of like as employees, you know, right now who knows, you know, I, I'm kind of like we're deciding, you know, do we down the road, would we be that model? Like we're, we're just a construction company that we can bear our at costs for our own projects and work for other

Tim Murphy (31:58):

People. That's kind of leading right into what I was going to ask you because you're kind of at that fork in the road. And I think as you go maybe another year or two, you're going to look at it and you're, that's where you're going to make that decision because it's like, okay, do I now take on that liability of other employees? Or do I go like maybe more of what I have, which is more of like a partnership developer and I'm more hardcore like developer investor than I am even the builder. What do you think will help you make that decision? Because for me it was, I didn't want to be a builder. Like I want nothing to do with managing guys subcontractors or having to build a thing or deal with the city and all those different defined things that builders have to do.

Tim Murphy (32:40):

That's why I've never jumped in it. The only way I would ever jump in it is if I found someone that said, Hey, I don't want to run this business, but I will be the GC and now we can own this company together. But again, then you got to get married and that's like, for me, I just don't know if I want to ever get married to anybody. Cause that's very difficult concept and getting divorced in, in a business partnership, I've done it and it's, uh, it's messy and it's complicated and it just doesn't ever go well. So that's why I've always tried to keep it separate. But what do you think is going to make that decision for you as you move into the next two, three years?

Robert Grand (33:14):

I think type of project is going to really do that. Like, so, and that's kind of where I'm looking to the future, like I'm crushing the single family entry-level market and I'll probably always be doing that. Right. Um, but it's like, I want to start doing bigger things. So that's kind of the evolution of an investor. Right. And so I was like, and I keep thinking of right now I'm bidding out my duplex project that I'm working on and that's a keep for us. We're going to hold it, you know? But it's like, you know, now it's like, well am I going to, are we going to completely manage the saying in house or down the road? How's that going to look? You know, so, so I could see that evolution happening because we want to start doing knock down in fill development, you know, um, because our area is finally supporting that right home prices are getting really high.

Robert Grand (33:53):

They've just switched zoning to make it really easy, to be able to do that in the state of Oregon. So it's like, there's a huge opportunity. Right? So now it's like, well, we can still project manage. Right? Like we can still be doing that. Cause we want to watch everything we're doing and keep our numbers in check, but we might need, you know, like a person that just exactly like you're saying that we potentially split profit with profit share or something like that to control those costs. And, and I think, you know, probably for me, like the biggest thing has been trust, right. Building that up over time and I've been burned a few times just as you have. And so I'm very hesitant to partner with a contractor and they've asked, you know, it's like people like, Hey, I want to work with you this next.

Robert Grand (34:28):

Cause we start giving them business really makes a lot of sense. They're like, yeah, let's keep this going. And then, you know, the, the one contractor then like six months later is Gonzo, you know, like nowhere to be heard of. I get the notice that his, because I track all their CCBs, uh, he no longer has an active license cause he got popped on something, you know? And you're like, so he just runs, you know, instead of dealing with the issue, he just runs away, probably moved states, you know, and goes, gets a contractor's license over there. So, and then like if we were partnered, right, you know, I'd be left holding the bag. If I were like part owner in that company, I'd be left holding that bag and I'd be left holding they're bad, you know, they're bad work and everything and dealing with it.

Robert Grand (35:03):

So I like the idea of what you're talking about doing that. Cause I still like, you know, if I built something new construction and I sell it, I would bear that risk. Right. So if it's an organ it's only a one year, you know, so that's kind of nice, but you know, ultimately at the end of the day, you know, thinking like how as you grow, which path do you go and, and the other thing too, like what would lead me towards your path is, um, expansion, right? Different areas. Like I was thinking about that as you're talking, I was like, well, you know, Tim's model, I could find a really good contractor, like, uh, you know, in Southern Oregon and be doing projects down there because I know it's good area or bend Oregon because that's a really good area and we can still, you know, um, manage. And we're what we're really good at is running the numbers, managing it, you know, uh, working with the banks, getting just like you're doing, you know, it's like, there's a skill set in handling all that stuff all the time. And so that could be worth it, you know? And you could do more. Well,

Tim Murphy (35:56):

Another thing is like I have school, I have a full-time admin. So like he does it, he has a part-time admin. So my full-time admin essentially is partially his admin. You know what I mean? And it's like, so I have really a lot of the business structure as far as like dealing with the clients. So like she manages the client, he doesn't have, he has to deal with the client on certain instances, but then like the design team, I'm the one that put that whole design team together. And the whole concept of the design team, which now, and the reason I did it was for him because I go, you just need to focus on building. I don't want you to have to focus on all these other little details in these other decisions. And I have to worry about, Hey, you need to go here and here and here.

Tim Murphy (36:30):

And when I implemented that, he's like, oh my gosh, that's awesome. You know? And so it's like, I've added all these little things to make his life easier and, and you know, and that's when he's like, got it. You know, like we, we, we look at each other a lot and say, you know what, man, we just make a really good team because we're willing to just do the right thing, you know, and just make decisions and, and be willing to, you know, uh, we'll try to create a win-win as much as possible. And I think, you know, that's a relationship thing and I'm a huge believer in relationships, but it's also hard to build relationships and you got to start someplace. And I think what you're doing is kind of what I was doing. I did a lot of independent contractor stuff, um, with smaller subs where I was like my own GC, cause I can GC my own project. I can be a project manager without having my general contractor license cause it's my property. So I did that for a while and I would do that 10 99 and I would do all that, but I just realized God, I'm spending so much time managing that when I just don't want to, if I can get past that and just do what I want to do, like that's how you scale and that's why I got into the toilet. Yeah.

Robert Grand (37:32):

I think that's actually a really good point, you know? And that's actually where I keep thinking to the future, you know, right now, you know, as you sit in like a place like Hawaii, you're like, well, can we manage stuff from here? And we have to have a really good site GC and the guide, like, you know, that I've talked about in the video, like I could actually see him just completely being that. And that's just giving him the keys and being like, let's let's profit share, you get this project done, let's do that. And let's start building that relationship like that. And I think he had a hundred percent do it and I trust him now, you know, cause he's looking out for my best interest when we're not there, he's managing those things. So it's, it's always that growth thing that you have to go through. And I think it's good to keep giving people those tests and ensuring that they can manage it and doing that. And you know, and I have no problem, you know, uh, managing the back end of everything and like, cause we could blow up, it comes down

Tim Murphy (38:19):

To opportunity cost. It's always, always, always the question you have to be asking yourself is what is my, what could I be doing that could create a higher return on my time relative to what I'm doing right now. That might be not as high of a return on time. And that's always the question I'm asking because yeah, I can sit here and say, oh man, look at, he made as much as I did when I could've made this. But the fact of the matter is, is I'm also doing three other things that he can't do because he's managing the build because he's got to do that and put his time into that. And I don't have to put my time into that. And so it's opportunity cost, I guess, is the biggest lesson for me. And I've sent it last, the last couple of episodes, but you always have to look at your time.

Tim Murphy (39:01):

Return on time is huge because you can do other things like maybe I can go find that a commercial, another commercial deal that I can invest in. I'm spending my time finding that with the profits that I'm going to make off this transaction. And so that I think, uh, if there's anything I would say, do you Grando, it's like just always keep your finger on that opportunity cost and your return on time because yeah, maybe you made a good chunk here, but how much time did it take? And then when you really break it down, did you really make as much or more than you could have made doing something else? And that's the, that's the big question of when you guys are thinking about structuring your relationship with your contractor, focus on your return on time, but then also focus on how you want to have that relationship because a fee for service, neither Bob and I love it because it's, it causes the most friction and employee situation can be great.

Tim Murphy (39:52):

But I would tell you that I feel like it brings on a lot of liability, which Bob talked about and then the partnership, you know, what the partnership for me is great. I wish I could make more profit on every deal because I'm giving 50% of the profit away. You know, sometimes that's a hard pill to swallow, but my return on time, because I can use my time doing something else while I have my builder doing the work to build the structure, I've come to the conclusion that for me, that just seems like the right fit. And obviously I've created a relationship where I can actually execute it as well.

Robert Grand (40:25):

Yeah. I mean, at the end of the day, that's what it comes back to you, you created the relationship and that's exactly what I'm a li I'm saying is I'm working to create those relationships so I can keep having that trust because you're not going to trust somebody there. You're crazy to think if you're going to go buy a house in Arizona and you live in Oregon and you're just going to call up some contractors and be like, oh, I got one. Yeah, he's going to go out there and bid it out. Great. All right, go, bro. This is going to work out awesome. And, and think that that's going to be a successful model, you know, without really knowing them, looking into them, being like able to contact them and start building that relationship because they don't have a relationship with you so they could drop you in a second, you know, and until there's that connection formed or they feel obligated to you, that's when you can start really kind of starting to grow. So please anybody don't go out and just buy a house in some other location and to try to do that. So work locally, maybe to start and build a relationship, to understand how it goes. It's like Tim and I are doing so

Tim Murphy (41:20):

Randall. I know I don't want to suck up too much of your time. I know you got to get on the beach buddy. And again, I really appreciate your time. And for all of you guys that are listening to our podcast, we appreciate you more than you will ever know. And if there's any way we can bring more value or if there's a topic that you guys want to learn more about, hit us up on our co or join us on our private Facebook group. Uh, and you can do that through the value driven investor.com where you can sign up there and then you can join our private Facebook group. And we hope to get more and more questions and an answer more and more questions about, you know, being a real estate investor in all the million different things that go go into it. But grand old man, I hope you enjoy Hawaii. And uh, and we'll talk soon. I'll be new on that.

Robert Grand (42:04):

Take care. Thanks Tim. See you, buddy.

Speaker 3 (42:09):

Thanks for listening to the value driven investor podcast, where we lead by giving for more information about our community and what's new visit value driven investor.com. The value-driven investor podcast was produced by digital legend media in Minneapolis. Build the or legend digital legend media.com.