We are about to flip 2 houses at the same time. Doing a house flip is difficult enough. Doing 2 flips at the same time is quite difficult. So many things can go wrong. Before you start flipping, you need to know How To Protect Yourself Hiring A Contractor!
If you are a hungry or new investor, you probably must be wondering how we managed to get 2 amazing deals to flip, probably with drool leaking out of your mouth. Well, recently a lot of time was devoted to step up our SEO efforts. Other investors in our market are gunning for us and they have stepped up their SEO game. This prompted us to do the same. We have noticed that many investors have no idea how to do SEO the right way. This is dangerous both for them and for us. Doing blackhat SEO WILL cause them to climb the ranks fast. Yes, they are at risk being penalized by google… at some point if that point will ever come, but in the meantime, they are ranking higher and higher and this can take leads away from us. So as I stepped up my SEO, our site became insanely popular and we have gotten a ton of leads.
This caused us to buy the other property. Well almost. Contracts are signed and we are now just waiting to close. Closing depends on a good inspection. If you recall in a previous post that we bought a house in Putnam CT (also because we ramped up our SEO), we have not actually started yet. As our previous contractor totally screwed us over this time we are extra careful. We are still vetting our next contractor and making sure we are completely covered in case poop hits the fan again.
In a much previous post, we talked about how to choose the right contractor. Well, obviously we overlooked a few things. No there is no foolproof way to hire the perfect honest contractor but there is a lot you can do to prevent a nightmare to happen.
I think it would be really useful, to go over the precautions we took and go over How To Protect Yourself Hiring A Contractor to incase something happens. Keep in mind, hiring a shady contractor is not the only way to screw yourself overdoing a flip. Sometimes honest contractors in a bad situation can cause issues.
We have decided to pay our contractor in 6 draws. This is not a new mind you, but I was too trusting and “felt bad”, being firm. When our previous contractor was running behind and asked me to front some money for material costs for the next phase, while the previous phase was not completed yet, I allowed it. You probably must be thinking: “Yeah you moron, that was stupid, I would never have done that”. Don’t be so hasty though.
Imagine you are in my position. House is running late, spring is passing you buy, this contractor you have started sheetrocking started the demo, some, flooring is in, things are done halfway. It is really not that easy to just say “OK get lost” and fire him with ll the work half done. Finding someone to take over and take ownership of his work, is not only unlikely if you do find someone it will be really expensive as no one wants to take ownership of someone else’s work!
It is just a really hard decision. So what we are doing this time to prevent this is to rule with an iron fist. We don’t really see the entire work as one job with 6 draws. We see this as several independent jobs. Roof, Demo, Electrical, flooring, windows, and doors. All with a separate draw and deadline.
This is obviously the most crucial part of doing this business with the least amount of headaches. From our lessons learned we realized there is significant room in our contracts to cover ourselves. By eliminating any possible ways someone can take advantage of you, you take preemptive measures to protect yourself. A contract should be written specifically in such a way to target malicious contractors and stop them in their tracks trying to steal money from you. Just imagine you have a contractor of which you know with 100% certainty that they are planning to rip you off one way or another. If you can write a contract that anticipates every one of their moves and stop them in their tracks, that contract is bound to protect you dealing with a contractor without malicious intent. That is the idea here. So all that is left to do is try to figure out how someone can take advantage of you, find the loopholes and make sure that can’t happen. With this in mind here is a list of key items your contract should address.
For our specific case, (Putnam house), we need to replace the roof, pressure washes the siding and fix siding at some locations, turn the addition back into a garage. Internally, well, the house is an empty shell. Literally. No rooms no framing, just an empty shell. Basically, it is safe to say it needs everything done. The finishes need to be in accordance with a house that will be sold for about $250,000.00. This should be helpful How To Protect Yourself Hiring A Contractor
To avoid confusion and misunderstandings, how and when payment is released is crucial. The last thing you want is to be dealing with a lawsuit because in your opinion your contractor did a crappy job, but to the contractor, a fantastic job. What then? The solution is dealing with 3rd parties. They will decide what a good job is and what isn’t. All work should be done by code, ad the quality of the work with professional craftsmanship. The way we have set up payment this time is as follows:
We will front the payment for materials only for the first phase, which is roof replacement in our case for our Putnam house. We will not pay for labor till after that phase (the roof) is 100% completed, inspected by the city inspector, and by a 3rd party inspector of our choosing. Why a 3rd party inspector? A job can be done legally correctly, but that doesn’t mean the job is done with quality workmanship. The second inspector is there to make sure the job is done beautifully. This is stated in the contract that is signed by all parties and thus can’t be written off as an “I didn’t know“.
For the second phase, we again will front funds for materials only for that phase (in our case windows and doors), in addition, we now pay for the labor that was performed for the first phase. There are some cases where this model needs to be adapted. If roof work needs to be done but it is snowing heavily, we rather not sit and wait till weather clears up. The contractor can just start doing windows, or other work that can be done inside. This will be worked out as these issues present themselves. But for the sake of this argument, the next draw consists of his labor payment for the previous completed inspected and approved phase.
You are responsible permits are pulled. Not the contractor. Therefore it is always a good idea to check with the city that permits are pulled. This is directly related to the contractor having the intention to do inspections with the city officials to make sure everything is to code.
A lien waiver release form is a document from a contractor, subcontractor, materials supplier, equipment lessor or another party to the construction project (the claimant) stating they have received payment and waive any future lien rights to the property (of the owner) for the amount paid. (source Wikipedia).
The idea here is that your contractor should not be able to put a lien on your property for reasons that are dishonest. I will not go over what such reasons could be, but absolutely assume the contractor WILL try to get money from you at one point. It is, therefore, a good idea to protect yourself. After work is completed satisfactory and it is time for payment, the contractor should submit a signed lien waiver form, from him and all of his subcontractors and people he has worked with, BEFORE payment, is released.
We did not do it during our first flip, and after he tried to take money from us, and we had our credit card company take it back, he placed a lien on the property. Once the lien is filed, it can take a long time before you can remove it IF the law is on your side and it takes longer. Flipping houses, time is not on your side and often investors are forced to pay off the contractor to have the lien removed.
Paying by credit card, in addition to having a signed contract with all the expectations and contingencies of payment, is the one best ways to protect yourself. If anything happens, the credit card company can retract payment if you can show proof that he was not in his right to keep that money. That proof is easily provided with a sold contract. The contractor should have no issues with this especially if he is legit. This because the credit card payment also protects him. If we decided not to pay him for whatever shady reason, he also can use that contract to demand payment from us. This is something that protects both parties.
Guess who could be responsible for medical bills and other work-related compensation when accidents happen? YOU! Make sure your contractor has all the required paperwork to ensure you are not liable!
In the next few posts, I will be documenting our flips from beginning to end. I will elaborate on how we applied this post to our flips. This can be used as an example of how you would do your flips as well. Hope this is of value to you.