More often than we like, we hear about nightmare stories about contractors. In the aftermath, investors are confused, left wondering what went wrong, AND they still have to get the work they originally hired the contractor to do done.
While we often hear horror stories about things that go terribly wrong, it’s important to note that there is a far higher percentage of stories where contract work went well. Millions of contractors out there really enjoy their work. They take their job seriously and they care about their reputation. In many situations of contracting-gone-wrong, the bad situation could have been prevented with a little due diligence and attention to detail.
Recent trends in economic growth indicate that 2013 will have been a strong year for home improvement spending with 43% of U.S. homeowners and investors indicating they will renovate their properties this year. Among those, 74% are expected to hire contractors for some or all of the work. Investors are among the biggest employers of contractors, especially for wholesale flips and rehab investors who have a good idea of the amount of work that’s necessary to get a property ready for resale. As an example, San Francisco ranks high in the real estate investor market for 2014 with a burgeoning economy that is projected to add jobs at a rate of 2% over the next two years.
3 Types of Contractors Hired by Investors
There are 3 types of contractors typically hired by investors:
General repair contractor – these are the ‘handyman’ types of contractors who can do a great number of smaller repairs such as fixing broken tiles, repairing leaking faucets, etc. An investor will call this contractor when they have general work to be done, including minor demolition work.
Speciality contractor – these contractors have specialized in a particular type of contracting, such as electrical, heating and air conditioning, plumbing, etc. An investor will call this contractor if the repair is isolated to their speciality; otherwise, they’d probably rely on the third type of contractor.
General contractor – this contractor is an investor’s primary resource because they act as project managers and handle large-scale renovations that require a multitude of contractors, including specialty contractors. A general contractor will determine the scope of work, find the appropriate contractors and often pay them as well as supervising the work.
A successful investor is likely to have a team of contractors comprised of all three types, but how do you build such a team?
1. Start by Protecting Yourself
In order to protect yourself, you have to know that the contractor you are working with is licensed and insured. This means asking for a copy of their:
Workman’s compensation insurance
Any experienced contractor will have copies of these on hand.
Once you have a copy of their license, make a quick phone call to verify their license is not suspended. The contractor’s bond protects the investor in different ways from state to state, but essentially guarantees the job completion and payments of all labor and materials – so you don’t have an unexpected surprise later.
Another quick call to find out if any complaints have been filed against the contractor with the Better Business Bureau is quick insurance. Take what you find out there with a grain of salt – especially if there are few complaints and they are spaced out over a period of time. We’ve all seen situations with clients that were simply unworkable. A lot of complaints and you should walk away.
2. Look for Experience
An inexperienced contractor will often underestimate to get the business and then renegotiate after work has reached a certain point. An experienced contractor is one who has been in business for at least a few years, has a number of references to share with you, and knows how to accurately estimate a project and give you a solid estimate.
3. Call the Contractor’s References
Always ask the contractor you are thinking of hiring for at least three references. Once you have those references, call them and chat quickly about the quality of the workmanship, whether the project was done in a timely manner, that sort of thing.
It takes only a few minutes, but many people skip this step because they think: “If the contractor gave me the references, they must be good and there’s no need to call.” This is a mistake that many come to regret it later – often when they find out the references would have told them horror stories had they taken the time to call.
4. Have the Contractor Pull Permits
The investor should not pull the permits required by their local building department. The contractor should do this. They should also be responsible for the work passing necessary inspections so that a certificate of occupancy can be obtained when the work is completed.
5. Contractors Purchase Materials, Not the Investor
An investor should never waste their time buying materials. While it may seem like a good idea – perhaps you think you are a better price comparison shopper – the contractors often get special rates working with local businesses. Plus, buying the materials yourself can compromise tax guidelines enforced by the IRS. Specifically, the workers doing the job may be viewed as employees and therefore entitled to benefits. Many an investor has lost their shirts with this mistake.
6. Pay at the End
Of course, the final tip is one that you probably already know: pay your contractor when the work is complete. An experienced contractor is often a busy contractor and so they can handle the job before getting paid. If you choose to pay a portion up front, make sure the contract outlines what is to be completed and by when. The final payment should be contingent upon the work passing necessary local city government inspections.
When you need to hire a contractor, a smart investor has a contractor’s agreement that outlines the details of the work, dates of completion, financial details, and more. Get the right contractor’s agreement by working with an experienced attorney.