Real estate has a multitude of contracts that you negotiate on, from purchase and sales to options to assignable contracts. One of the contracts that you may have overlooked in this vast sea of contracts is the contract with your contractor. It is important not to drop the ball on this contract, because this is where the rehab work actually gets done. A good contract will protect you in case you are dealing with a fraudulent contractor, which unfortunately is difficult to realize until after you’ve paid them and they have left the state. It will also incentivize the contractor to finish the job more quickly, and will spell out a set of consequences in case the quality and timeline of the project is not up to your standards.
The most important aspect of this contract is to refuse to pay upfront. Don’t even pay half upfront, because a dishonest contractor is fine with stealing half of the agreed upon amount. In fact, if the contractor requires any money upfront to complete the job, you may want to rethink about who you are hiring. They should have enough funds and credit to get started, and if they don’t it may mean that they mismanage their funds. One such way to deal with this scenario is to give them a very small up-front fee, like $500, and pay them every week. Make sure to keep the largest pay off at the end, until the project is fully completed and satisfactory. Also, force them to guarantee their workmanship for 90 days. If they are unwilling to do so, then it means that they expect something to go wrong in this time period! Time to hire a new contractor.
In addition to incentivizing them to complete the job, you also want to ensure that they complete the job in a timely manner. Sometimes contractors start one job and take on another one before they finish because they get a large down payment from the second job. Then, what should only take thirty days takes three months. In your contract, specify the time period and end date. It is reasonable to have a consequence for every day that the project is not done, such as a $100 back charge. Also, specify that you will hold a large percentage of the pay until after the last inspection is completed.
With all this in mind, you don’t want to cut them short. If materials get stalled, which is out of their control, you should give them a few extra days to finish. However, if the reason of the delay is just that they weren’t working, hold them to the consequence.
It is difficult imagining all the worst-case scenarios to cover in your contract, so get a list of previous clients and find out their experience with your contractor. Hopefully they’ll all have good things to say, but if not, it will give you an idea of what you should specify in your contract. Working with contractors can be a difficult experience, but if handled correctly, it doesn’t have to be.
Tell us what you think by leaving a comment. If you would like to be notified when new posts are made to this site, be sure to subscribe to the RSS feed.
Based out of Indiana, Jay Redding is a real estate entrepreneur, with experience in single family and multi-family investing.