O
ne of the biggest pitfalls you can make is
to hire a contractor without a checkoff 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 nine-month time overrun. This
contractor underbid 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:
1. Independent Contractor Agreement (Make sure
it is reviewed by an attorney.)
2. Final Scope of Work (Lineitem by lineitem,
with part numbers)
3. Payment Schedule with 25% holdback for last
payment
4. W9 IRS Form
5. Insurance Indemnification Form, with you as a
loss payee, and Workers’ Compensation Insurance
6. Final and Unconditional Lien Waiver
LET'S AVOID PITFALLS:
1. All changes must be in writing and signed by
both parties.
2. Before any payments are made require copies of
receipts.
3. Make sure you have a ReleaseofLien signed
before making the final payment.
4. DO NOT get involved running errands for the
contractor.
5. If the contractor runs into problems and asks for
more money, make them turn in change orders
listing materials and labor.
6. If the contractor takes on another job, and your
project starts slowing down, make sure you put in
a penalty on a per diem basis.
7. 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
97