By Gary Massari
One of the biggest pitfalls you can make is to hire a contractor without a check-off list. If you fail to interview, prescreen, and check the contractor’s references, or set up the proper working relationship through the six critical documents needed to protect you and your investors when rehabbing, you could be facing serious problems.
I will share with you one of my most trying experiences when doing a rehab out of state in Atlanta, Georgia. I hired a contractor on the recommendation of a new project manager without properly doing my research and homework. As a result, the job turned into a disaster with a 9 month time over-run. This contractor under-bid all the other contractors we were interviewing, and we awarded them the job. We put together a contract, scope of work, Insurance indemnification, and payment schedule. Sounds good so far. Well, here is what happened.
The contractor kept asking for more money than what was on the agreed payment schedule, and after 3 months I had paid the contractor 80% of the entire budget with only 25% of the work done. The contractor started falling behind with one excuse after another, claiming problem after problem. After each inspection, they would ask for more money to fix the new problems. After I asked for all the paid receipts, the contractor ignored me. They wouldn’t return my phone calls, or emails, I knew the contractor was going to skip out on the job with the money!
The contractor was gone with over $63,000 of rehab money with only 25% of the work done! I was screwed! So let’s go over the pitfalls so you don’t make these mistakes. All the signs were there. I should have known!
There are six critical documents you need to have the contractor sign immediately, before any payments are made:
- Independent Contractor Agreement (Make sure it is reviewed by an attorney.)
- Final Scope of Work (Line-item by line-item, with part numbers)
- Payment Schedule with 25% hold-back for last payment
- W-9 IRS Form
- Insurance Indemnification Form, with you as a loss payee, and Workers’ Compensation Insurance
- Final and Unconditional Lien Waiver
Let’s avoid pitfalls:
- All changes must be in writing and signed by both parties.
- Before any payments are made require copies of receipts.
- Make sure you have a Release-of-Lien signed before making the final payment.
- DO NOT get involved running errands for the contractor.
- If the contractor runs into problems and asks for more money, make them turn in change orders listing materials and labor.
- If the contractor takes on another job, and your project starts slowing down, make sure you put in a penalty on a per diem
- Make sure the contractor shows up daily to the job site.
Unfortunately, no matter how experienced you are, and how many rehabs you have done, even a contractor you have been using can turn on you and make you and your project miserable.
Use the 6 critical documents I have listed, and make sure you use written Change Orders. Sign off on everything.
Hope this article helps you to avoid the pitfalls that can be very costly.
Gary Massari CEO of REI Fortunes, https://reifortunes.com
Bruce Kellogg, Real Estate Consultant