You get a bid back from a contractor. The number looks reasonable. Then you see the line: "30% deposit required to schedule work." On a $50,000 rehab, that's $15,000 before anyone picks up a tool.
That deposit is the biggest single risk in many flips. This post covers why contractors ask for it, how it compares with a draw schedule, what it does to your margin when a job goes sideways, and how to pay for a rehab without fronting it.
Why contractors ask for deposits
Some reasons are legitimate. Contractors get burned by clients who walk away mid-project. They need to buy materials. They want to hold crew time for your job.
But a deposit also works as free, unsecured working capital. Nothing stops a contractor from using your money to finish someone else's job, make payroll, or cover last month's bills. When that happens, your project is funding their business, and your leverage is gone before day one. (Illinois doesn't cap deposits, so the number is yours to negotiate. Here's how much to pay a contractor upfront.)
Draw schedule vs. large deposit, side by side
| Large upfront deposit | Draw schedule | |
|---|---|---|
| When your money leaves | Before work starts | As work is completed or in progress |
| What it pays for | Mostly work that hasn't happened yet | Work you can see, or the current week's work |
| If the contractor stops | Your deposit is with them, and recovering it can mean a demand letter and court | Your exposure is roughly the latest draw |
| Your leverage mid-job | Low: much of the money is already paid | High: the next payment depends on progress |
| Hard money lender fit | You front the deposit and wait for the lender's draws | Payments line up with how lenders release rehab funds |
| Capital across several rehabs | Deposits stack up before any work is done | Money goes out as each job progresses |
A draw schedule can be milestone-based (paid when a phase is done) or weekly (paid as work progresses). Weekly draws vs. a traditional draw schedule compares the two.
What a deposit does to a flip: a worked example
This is a hypothetical deal, not a market figure.
- Purchase: $200,000
- After-repair value: $310,000
- Rehab budget: $55,000
- All-in: $255,000, leaving about $55,000 before closing costs
The contractor asks for 30%: $16,500 at signing. Then the job drags six weeks past schedule. Assume your hard money loan costs about $2,000 a month in interest; six extra weeks is roughly $3,000. Add an assumed $1,500 in taxes, insurance, and utilities for the extra time.
That's $4,500 of margin gone to delay, and $16,500 sitting with a contractor who isn't performing. If he does demo and then stops showing up, you have a gutted house, a deposit worth far less than you paid, and a replacement crew pricing in someone else's mess. More on that in holding costs from slow contractors, and if it's already happened, what to do when a contractor ghosts after the deposit.
Ways to rehab without fronting a big deposit
1. Weekly labor draws
Pay for labor in weekly draws instead of a lump up front. The full price is quoted before work starts, and each weekly payment is credited toward that total. See how weekly labor draws work.
On the $55,000 example, with materials bought separately and weekly draws with a $4,000 weekly minimum, the first payment is a $4,000 draw (the minimum; your draw is sized to your project) to reserve your start date instead of $16,500. After that, money goes out week by week as work happens. For a side-by-side of how far ahead of the work each schedule puts you, see weekly draws vs. a traditional draw schedule.
2. Hard money rehab escrow
Many hard money lenders fund part or all of the rehab budget and release it as work is documented. The key is matching your contractor's payment terms to the lender's draw process. A weekly schedule lines up with that. A big deposit means you front the money yourself and wait for the lender to catch up. How lender draws and contractor draws fit together.
3. Buy your own materials
Separate materials from labor. You buy materials directly from suppliers at cost, as each phase needs them, and the contractor bills labor only. Much of a typical deposit is justified as material money, so taking materials off the contractor's plate removes much of the reason for one. You also see every material price and avoid a markup.
4. A short-term credit line
A business line of credit or a HELOC on another property can bridge the gap between paying a weekly draw and getting reimbursed by your lender's draw. Build the interest into your deal analysis. For a short float between draws, it's usually far cheaper than tying up a large deposit for months.
What doesn't work
- Putting the deposit on a credit card. The interest is high, and it's a sign the deal is undercapitalized.
- Borrowing it from friends or family. It adds relationship risk to a problem that has a structural fix.
- Only negotiating the deposit down. A smaller deposit helps, but if it still pays for labor that hasn't happened, the structure hasn't changed. Tie any upfront payment to materials, permits, or mobilization.
Why it matters more as you scale
One deposit is a risk. Several at once is a capital problem. Every dollar sitting in a contractor's account before work starts is a dollar not available for earnest money, the next acquisition, or reserves. A weekly structure keeps most of your capital with you until work is actually happening.
When a contractor won't work weekly
Some contractors won't. Ask why. A contractor with a healthy business can carry a week of labor and has supplier accounts for materials. If the answer is "that's not how we do it," or it's clear they need your deposit to make payroll, that tells you how the rest of the job is likely to go.
Before you sign a contract with a large deposit, ask for weekly draws, ask to buy materials yourself, and ask how the payment schedule lines up with your lender's draws.
How we work
Seller's Little Helpers is a licensed and insured general contractor for real estate investors in Chicagoland, and our crews handle every trade. We quote the full project price up front. Your first weekly labor draw reserves your start date, and weekly draws follow while work is in progress, each credited toward the total. You buy materials at cost from our lists, and Mason sends a weekly update with photos, progress, and draw and budget status. Book a scope visit.