Contractors are a reason that a lot of people are afraid to get into real estate investing. They hear horror stories from other investors or homeowners who got screwed by contractors and are shell shocked into believing that the only thing that is safe to do is to Wholesale or Lease Option.
To those who are afraid of the big bad contractor, beware of the investor who cries “wolf” because no matter what form of real estate investing you do, sooner or later you will need to hire a contractor.
Whether your doing full blown rehabs, subject to, agreement for deeds, buying apartment buildings, lease option or even wholesaling, you are going to need to use a contractor and you want to know a secret? They’re not that hard to work with.
Actually if you follow some very simple rules you will substantially decree the risk of getting screwed by any contractor.
Those you have been mistreated and had a contractor walk off the job with thier money and not return or had a contractor who would rarely show up, never trained themselves properly to work with these tradesmen.
Now don’t get me wrong. I say tradesmen because those are the only type of contractors that I have work for me. There are many people out there who claim to be tradesmen but are nothing more than thieves in the night.
The first rule or working with contractors is to ask for and check his/her references. Too many people skip this step because they are in hurry to get someone, anyone on the job so that they can get finished. This is their number one priority.
They soon find out that this is not the contractors number one priority, especially since they already got a good chunk of money up front.
Even if you check thier references and your “gut” tells you that this may not be the person for your job, listen to your gut. Your going to have to be married to this person until the job is finished. Make sure it’s a marriage made in heaven.
You must then have the contractor sign a Contractor Agreement. You must have a binding contract that spells out the rules that both you and the contractor will follow as the job progesses towards completion.
If you do not have a Contractors Agreement signed, you have just set yourself up for failure.
Here are the key clauses and addendums that you need in your contract:
1) Scope Of Work – make sure all of your contractors bid on the same job. A lot of contractors omit items from thier bid so that they can charge you “overages” later.
Be as specific as possible when describing the scope of work. For example, if it is a roof that is being replaced, make sure the contract specifies the type of shingle, the style, the manufacturer of the shingle you want to use, how it will be fastened down… the more specific you get, the more protection you will have.
2) Draw Schedule – Never give a contractor 50% up front! You drastically increase your chances of never seeing him again. I give enough to cover the supplies and to pay his guys for one week, then I split the rest up into thirds.
3) Change Order – Be clear with your contractor that if any additional work is done on the property, if he doesn’t fill out your Change Order and have you both sign it, (I will only sign it after I have inspected the proposed additional work) you will not pay for the work.
This is a common tactic with less scrupulous contractors.
4) Penalty Clause – I have a penalty clause in my contracts that charges a contractor a certain amount per day for each day he is over the date that he said he would be done. The amount is usually $100 but it depends on the job size. This clause is a must!
5) Damage Clause – This states that the contractor will pay for any damage that he or his workers do to any other part of the property when they are on site. Contractors are always damaging other contractors work. Why should you have to pay? You save money with this clause over and over again.
6) Contractors Home Address And Phone Number – If he knows that you know where he lives, the chances of him disappearing go down drastically.
7) Clean Up Clause – You want your job site broom swept clean at the end of every day. You never know when a potential buyer will be coming through and if you don’t keep the place clean it will quickly look like a dump. Nothing attract trash like trash!
If you treat your business like the business it is, you will be treated like a businessman from your contractors.
Contractors are not hard to deal with if dealt with properly. Consider yourself informed.
There is a lot, A LOT of money to be made in real estate investing. Go out and get your share!
David Lindahl has renovated over 475 houses in 6 1/2 years and is the author of “How To Estimate And Renovate Houses For Huge Profits“.
Tags: contractors, david lindahl, fixers, real estate investing, rehabbing