What Real Estate Investors and Home Owners Need To Know About Hiring Contractors

Copyright © 2008 by Ralph Marcus Maupin, Jr. (Mark)

Unless you are purchasing brand new property with no need for any sort of repair or maintenance you will definitely have to hire a contractor. With most investments the key to making money is buying low cost property and selling it for a profit. It is likely that inexpensive property will need some sort of renovation in order to increase its selling value. This is why having a proficient and affordable contractor is vital. There is important information you need to know about hiring a contractor, such as the following:

Where do you find contractors? Ask for referrals from other investors. You can also go to Home Depot early in the morning where the contractors check out. Talk to the clerks about who are the regulars and talk to the contractors in line. Check out their work start to finish and their references. Home Depot is a great place to find a reasonable crew that works for builders.

Does the contractor need insurance? You need to make sure you or your contractor has three types of insurance which are:

Type 1 - Workman’s Compensation Insurance: If you are doing a lot of rehabs, you will want to get a minimum workman’s compensation insurance policy. If your contractor has workman’s compensation insurance, you will want him to give you a copy of his insurance with you shown as an additional named insured. You then have proof of coverage. Even if you have a minimum policy covering you, you will still need the proof of coverage for your insurance carrier or you will be charged for their cost on your own policy. If you hire a contractor working by himself he can choose to exempt himself from workers compensation, but he needs to sign a form that you get from your insurance company.

Type 2 - Liability Insurance: Make sure again that you’re named as additional insured on your contractor’s policy or have your own policy. You should talk to insurance experts to determine the amount of coverage you need.

Type 3 - Builder’s Risk Insurance: You may want to check on getting builders risk insurance for other coverage on your equipment, tools, and etc.

How do you pay your contractor? If you are dealing with new contractors that you don’t have a track record on, I recommend that you buy a small amount of materials and see that they get the materials to the job. Only pay for the work that gets done. The question you need to ask yourself is if the contractor walks from the job is there enough money to hire someone to finish the job. Even experienced investors, as well as new investors make the mistake of paying out too much on the job all the time. I have had Home Depot call me and tell me that my contractor is bringing materials back for cash refund. I have had great contractors, who I have had a long relationship with, walk off the job. It is a must to hold back enough dollars to hire someone to finish the job. I don’t care how long you have worked with contractors you have to inspect the job before paying. If you don’t inspect the work, don’t get in the business. Consider placing a provision in your contract that final payment is contingent on passing a city certification inspection.

Should you have a contract with your rehab crew? I say yes. At the end of this article is a sample contract. See your attorney for what you need in your contract.

Should you pull permits? Yes, Yes, Yes!!! The people I see who try to bypass the system and city inspectors just end up in trouble and end up doubling their cost. The short cut to getting the job done is to pay for the permits required.

Note: The above comments are derived from personal experiences. They are not intended to be legal or accounting advice nor solutions. You should always consult with the appropriate professional when making decisions.

Here is a sample of contract I have used:

INDEPENDENT REHAB CONTRACTOR AGREEMENT

This agreement is entered into this day of _________________________, 20   , in the city of ___________________, State of Michigan between ____________________, (owner) of ________________________________________________________ and:

Contractor: ________________________________________________________

Contractor is a Corp. (  ), LLC (  ) Partnership (  ) Sole Proprietorship (  )

Street Address: _______________________________________________________

City, State, and Zip: ___________________________MI______________________

Phone: (          ) ___________________ Fax: (         ) _________________________

Pager: (        ) ____________________ Cell Phone: (        ) ____________________

Federal Tax ID No (EIN):___________________ Soc. Sec. No._________________

Contactor License No (s):_____________________ Type of License: ____________

Person authorized to sign and bind Contractor: ________________________________

1. Schedule: The Contractor agrees to commence work on: __________________, 20    . The Contractor agrees to complete all work by: ______________________, 20    , subject to excusable delays such as strikes, unavailability of building supplies or acts of nature. Owner reserves the right to cancel this agreement and Contractor agrees to forfeit the balance of money due under contract if work is not completed by this date. The contract herein shall be void at the option of Owner, if contractor does not commence work within ___________________________ (____________) days from the date of the signing of this contract.

2. Scope of Work: Contractor agrees to provide the following described labor, materials and construction in accordance with plans and specifications as may be referred to herein on the following described property:

(A) Address of work site: ___________________________________________________

(B) Description of work (Describe Labor, materials and Equipment to be furnished. Attach additional pages, estimates, and work sheets if necessary.

________________________________________________________________________

________________________________________________________________________

Other Special Provisions: __________________________________________________

The Contractor’s supervisor/project coordinator of this project shall be designated agent for the Contactor. The name of the person is: ___________________________________

3. The Contractor agrees to perform this work in a workmanlike manner and to comply with applicable building and construction codes for residential and commercial structures. The Contractor warrants that his work will conform to such codes and pass any governmental inspections. (If any plans or specifications are part of his job, they are to be attached and made part of this contract).

4. Price: Owner agrees to pay to the contractor for the satisfactory performance of the contractor’s work subject to the terms and conditions of this agreement:

Total Contract amount: _________________________

Initial Payment Amount: _________________Payable on _________________

Extra work, if any, will be priced as agreed.

Payments will be made only on satisfactorily completed work based on progress inspections done by Owner’s approved supervisors. Contractor has the responsibility of arranging time for inspections. All check requests must be submitted by Wednesday proceeding for Friday payments. Should work not be performed to Owner’s satisfaction and /or accordance with the codes and standards in paragraph #2, Owner will retain a sufficient amount to complete the work as a final payment until the contractor brings the job up to code and/or Owner’s satisfaction.

5. The following is prohibited unless agreed to in writing and signed by Owner and Contractor: extra services and work, deviation of the work as specified herein, or assignment or subcontracting of the work to be performed.

6. The Contractor agrees to indemnify and hold harmless the Owner of the property from any liability or claims arising directly or indirectly from the Contractor’s work under this contract whether due to Contractor, its employees, workers, and agents or any other person hired by the contractor. (This includes Construction (including mechanics and materials) liens). Contractor agrees to pay all fees and costs incurred in defense of Owner and or Owner. Contractor specifically agrees to assume and pay any liens that shall be filed by its sub-contractors.

7. The Contractor agrees to obtain and pay for: Workers Disability Compensation Insurance, Personal liability Insurance, Errors and Omissions and/or contractual Insurance, Public Liability Insurance, and any other Insurance or Bond coverage, or submit appropriate waivers which may be necessary or required by Owner, the municipality and/or State of Michigan. Copies of such documents, binders, declaration sheet, proofs, or waivers will be presented to Owner before commencing work.

8. The Contractor agrees to pay and withhold where required all federal, state and local taxes on the money earned from Owner for itself or its employees and to file all proper tax returns. Owner will not withhold any sums for any sums for any taxes due Contractor. Contractor’s relationship to the Corporation shall be that of an independent contractor and not of an officer, employee, or agent of Owner. No partnership, joint venture, or similar relationship is created by this Agreement. The Corporation shall have no liability to Contractor except to pay its compensation under this contract.

9. Building permits will be pulled by: _______________________. Costs will be paid by: __________________________. City certificates will be obtained by: ___________

_________________________________.

10. No modification of this contract will be effective unless it’s in writing and is signed by both parties hereto. This contract binds and benefits both parties, assigns, personal representatives and any successors. Time is of the essence of this Contract. This document, including any attachments, is the entire agreement between parties. The laws of the State of Michigan govern this Contract.

This is a legal contract. If there is anything you do not understand about this contract or the language, DO NOT sign it. It is recommended that you consult with a legal or tax advisor of your choice. It is assumed by you signing this contract that you have either consulted with your advisors or have decided not to do so.

The parties accept the terms and agree to abide by them.

Owner:

Dated____________________20___By:___________________________ Contractor:

Dated____________________20___By: ___________________________

Ralph Mark Maupin has purchased and sold in excess of 3,500 single-family homes and many multi family properties. Ralph Marcus Maupin, Jr. Nick Name ‘Mark’ is one of founders of National Real Estate Network LLC. He teaches real estate investing and Internet Marketing for a local Michigan College. You will find many free resources such as: Free Real Estate Forms, Terms, Articles and Real Estate Investor Clubs Locations at: http://MegaEveningEvent.com. For low cost Michigan Real Estate Investing CDs, DVDs, forms and E-books go to http://stores.ebay.com/Real-Estate-Investing-Guide