It may seem like a no-brainer, but using interior paint on an outside wall can result in peeling. So can painting an exterior in subzero temperatures, or applying paint to an unclean surface. Whatever the nature of your project, make sure to identify all trouble spots before priming and painting. No peeling paint or surface defect can remain if your work is to be successful.
With that said, here's the reality of that particular scenario. Painters do put water in the paint, but not for reasons you would think. Some materials need to have their viscosity manipulated in order to slow drying time, allowing gravity to 'smooth' out the product for a better finish. It also prevents 'drags' and 'sausages'. I personally try not to do it too often, but from time to time I have to. I want my client to have a proper finish.
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A good contractor doesn’t just do quality work, of course. Workers should be courteous, pleasant, and capable of clear communication. Ideally, the people altering your home’s look will be enthusiastic about the task rather than jaded and burnt out. Find out from your references what kind of attitude the company’s workers displayed, and whether they behaved professionally. Also ask whether the crew stayed on schedule, and whether they arrived early each day, did their work, and got out of there.