About the author: G. Brian Davis is a real estate investor who has owned dozens of investment properties over the last 15 years. He’s also the co-founder of SparkRental.com, an online resource which provides free landlord education and video series for anyone looking to build passive income from rentals.
As a real estate investor, you will inevitably work with contractors. Whether you flip houses, buy and hold rental properties, or any other strategy to invest in real estate, your properties will need repairs or renovations sooner or later.
But working with contractors is notoriously difficult for many property owners. I’ve discovered a few things new real estate investors (and homeowners, for that matter!) need to know about working with contractors before they hire out their first job.
7 Ways to deal with a bad contractor
One of the most common questions I hear from flippers and landlords alike is “What recourse do I have against a contractor?”
Before we walk through specific challenges that real estate investors face, here’s an overview of 7 top options available to property investors.
First, compile all paperwork
The first step, before moving forward with any of the options below, is to always make sure you have documentation of the contractor’s errors and transgressions. Take photos before work begins and at each stage of the renovation project.
In addition to the executed contract itself, also keep copies of all written communications with contractors. That includes emails, texts, and any photos sent back and forth. For verbal communication, keep a log of each conversation and be sure to get any important agreements in writing.
Also, compile all cancelled checks or other evidence of payment. If you can’t prove that you paid a contractor, how can you hope to recover the money?
1. Fire them
If a contractor does not do quality work, or is not working on your property consistently, there’s no reason to dig yourself into a deeper hole with them. Shoddy work will need to be redone by a competent contractor and it may cost extra to undo the poorly-completed work.
Stop the bleeding. You’ll need all of that documentation you compiled as evidence for why you have just cause to terminate the contract. Expect pushback from the contractor, so be prepared to defend your ground when they demand payment.
Review the contract carefully for termination clauses and to determine how much money you still owe them, if any.
2. File a claim if contractor is bonded
Contractors can buy a surety bond policy from their insurance agent, effectively insuring against client disputes. These bonds protect the client (you) from shoddy or incomplete work.
This opens another option for you: contacting their insurance agent to file a bond claim. Make sure you get a copy of a contractor’s surety bond (if they have one) before signing a contract, as the contractor may stop returning your calls once you start arguing over the work.
If you file a claim, the bond policy pays you to compensate for your losses. They then turn around and pursue the contractor to reimburse them, so contractors obviously don’t want to see any claims filed against them.
Of course, in order to be eligible to buy a surety bond policy, the contractor must first be licensed, which opens another avenue to property owners as well.
3. File a complaint with the state licensing board if contractor is licensed
One reason to use licensed contractors is that you can report problems and disputes to the state licensing board. To keep their license in good standing, contractors will often correct the problem rather than risk their license.
This is one way to force the contractor into mediation to resolve the dispute.
You can find your state’s licensing board with a quick online search for your state’s department of licensing and regulation. For example, in Maryland it’s called the Maryland Department of Labor, Licensing and Regulation, but the bureaucracy name will vary state to state. The process to file a claim also varies by state, so call the department up and ask them about their procedure.
4. Request mediation or arbitration
If the contractor is unlicensed, or if your state’s licensing board declines to take up your complaint with the contractor, you can request mediation or arbitration. They are similar, but not identical. In mediation, the parties can choose to ignore the mediator’s recommended solution. In arbitration, the solution isn’t a recommendation, it’s a binding decision.
Before signing a contractor’s legal contract, check it over for dispute clauses. If it doesn’t contain one, property investors can insist that one be added, and even name a specific third party mediator or arbitrator that both parties agree to use in the event of dispute.
This way, the contractor is forced to accept arbitration or mediation.
5. File a suit in small claims court
The advantage of small claims court is that parties do not need an attorney to represent them. The limitation? There’s a ceiling on the amount that the plaintiff can sue for.
Whether your contractor is taking too long to finish a job, or your contractor went over budget, or any other infraction, small claims court is an alternative to mediation. Double check what the limit is in your jurisdiction as it varies by state.
Filing these claims is intentionally made easy, as it’s designed for laypeople to do without an attorney. Call your jurisdiction’s courthouse to ask about which forms you need to file for small claims court.
6. Hire an attorney
If mediation is not an option, and the damages you want to sue for are higher than the limit in your state, you can hire an attorney for a full-fledged lawsuit.
Granted, suing a contractor should remain a last resort. It’s expensive, time-consuming, and leaves you open to countersuits. But when a contractor doesn’t finish the job, or when you’re at a loss for what to do when a contractor does poor work, hiring an attorney to pursue them is an option.
7. File complaints and post public reviews
When all else fails, real estate investors can at the very least leave negative reviews and complaints on public review websites.
A classic example is the Better Business Bureau, with which many businesses keep a profile and rating. But additional options include Angie’s List, Google, and any other public verification and review websites you can find.
It may not help you get your money back, but at least you can prevent other property investors and owners suffering from dealing with a bad contractor.
Specific problems and recourse against a contractor
Learning how to prevent and address problems with contractors is crucial to learning how to get started in real estate investing.
Not all bad contractors operate the same way. In the event that your renovation project takes a turn for the worse, here are several common scenarios and how to handle them.
What to do when a contractor does poor work
It’s another common question: “Do I have to pay a contractor for poor work?”
Sometimes. It depends on how you go about resolving the conflict with them, and whether they sue you for non-payment.
If a contractor does shoddy work, the burden is on you to prove it. Start with detail-oriented documentation, showcasing exactly why and how the work is shoddy. Take photos, get expert opinions in writing from other licensed contractors or homebuilding experts. Put together a persuasive case, both to deter the contractor from pursuing the matter further and to present to an insurance bond agent, mediator, arbitrator, or judge, depending on how the dispute proceeds.
The first course of action is to approach the contractor directly and politely ask them to correct the problem, if you believe them capable of doing so. If they don’t have the skill to complete the job properly, terminate the contract immediately. Keep the bigger picture in mind: if a contractor messed up your property in one area, you don’t want them wreaking even more havoc elsewhere and having to pay double for the work.
Most important of all, inspect all work carefully before paying contractors for it. As the adage goes, possession is nine-tenths of the law, so if you don’t pay them for bad work, the onus is on them to pursue the matter in arbitration or small claims court to try and get money from you, rather than vice-versa.
What to do when a contractor goes over budget
The larger a project is, the higher the risk that it goes over budget.
Even contractors who do high-quality work and who show up every day on time can still hit you with surprise costs. Before collecting quotes, tell each contractor that you have a zero-tolerance policy for projects going over-budget. Ask them to be extremely precise when bidding the project, because you will not use them for future projects, nor recommend them to fellow property investors if they hit you with surprise costs midway through the renovation.
If the contractor insists that it’s impossible to know what surprises they’ll find behind a wall or under a floor, get a second, third, and fourth opinion. It may be true, in which case other contractors should confirm that stance. Or the other contractors may have better insights about what lies beneath the surface.
It’s hard to prove that a contractor intentionally underbid a project, knowing about an additional scope of work that would need to be completed, with the intention of hitting the owner with it after signing the contract. If you suspect that happened, you can take it to the state licensing board, or mediator, or small claims court. Just be prepared to prove it.
More likely, you’ll need to choose between firing them or paying them and simply not using them again.
What to do when a contractor is taking too long to finish the job
As seasoned house flippers know, forecasting how long it takes to renovate a house is both tricky and prone to going past-schedule.
It’s your job as a real estate investor to learn how to get a contractor to finish a job—and on-schedule. Start by negotiating hard before signing the contract to pay less up front and more upon completion of the project. The more financial incentive a contractor has to finish the job quickly, the more likely it is to happen on-schedule.
You should also be persistent in following up with the contractor. Call them several times a day if you must; as the adage goes, the squeaky wheel gets the oil, so squeak loud and often to add another incentive for them to finish your project.
What to do when a contractor doesn’t finish the job
You can’t earn a profit as a house flipper if you don’t complete and fix houses that you flip!
It happens more often than new investors think. When the contractor fails to complete the work, or when contractors don’t call back, contact their insurance agent to file a bond claim. If that fails, go through the steps above in order and see where you find traction.
If the contractor took the money and ran, there’s a good chance they weren’t bonded or licensed. In that case, skip straight to number 5 and 6 and try small claims court or hire an attorney.
It’s an expensive mistake that beginners often make when flipping houses—hiring untrustworthy contractors!
6 Prevention tips to avoid problems with contractors
Contractors can be your greatest resource or your worst nightmare. The trick is to only work with excellent contractors at each price point, and to weed out the bad seeds before they can cost you tens of thousands of dollars.
Here are 6 prevention tips to make every house flipping deal a success.
1. Screen contractors carefully
Regardless of the price point or specialization of your contractor, screen them meticulously to maximize the odds of hiring a good contractor.
Call all references that they provide and ask probing questions, such as:
- What went right about the project?
- What didn’t go according to plan?
- What were some challenges working with them?
- Did they complete the project on-schedule and on-budget?
- What was their working style? Did they need to be micromanaged in order to complete the project or were they self driven?
- May I take a look at the finished projects? (via before/after photos or in person)
- Would you hire them again?
Also, ask to call a contractor’s most recent client, who may not be cherry picked as an ideal reference by the contractor. Even better, ask the property owner if you can swing by and take a look at the work firsthand, if available.
Research the contractor on Angie’s List, the Better Business Bureau, and any other review websites you can find in order to dig up any potential challenges. In Google, you may search for the contractor (company) name with keywords such as “rip off”, “scam”, “fake”, and even add in the city you are in. Examples of things you can search for are:
- [Example Construction Company] scam
- [Example Construction Company] City Name
- [Example Construction Company] bad
- [Example Construction Company] rip off
Because vetting contractors is so crucial, make sure you read up on how to find contractors to flip houses before making a hiring a decision.
2. Get several quotes
At a bare minimum, collect three quotes from contractors. Better yet, collect four or five quotes.
With each contractor, ask as many questions as you can about what work they feel is needed and how certain they are of their budget. Ask about whether they see any risks of complications or unforeseen expenses, and why.
The more quotes you get, the more confident you will be that you found the right contractor for the job.
3. Be clear on the scope of work
If you aren’t clear on what you want, then how can a contractor be clear on it?
Without a clear scope of work, your property may not turn out how you’ve envisioned. Take the time with each contractor, when collecting quotes, to specify in exacting detail what your vision is for the property.
Then have the contractor put it in writing. Review the written scope of work and if there is anything missing, no matter how small, make sure the contractor adds it in writing before you sign the contract.
4. Try contractors on smaller projects first
You don’t want the first project you give a new contractor to be a $75,000 renovation project.
Start them with smaller work projects first. It could be a roof repair at one of your properties, or repairing drywall and painting a unit, or redoing a kitchen or bathroom. But you want to establish trust and rapport with a contractor before entrusting them with tens or hundreds of thousands of dollars.
5. Use licensed, bonded contractors on major projects
There is a time and place for inexpensive, unlicensed handymen. They can paint and do drywall work, fix leaks, unclog drains and toilets, and other basic work.
They should not handle major renovation projects.
When you flip a house, your goal is to hire a contractor appropriate to the scope of the project and the quality of the property. For significant renovations, hire licensed, bonded contractors, and call to verify their work license and bond insurance policy. That will leave open more of the options outlined above for how to deal with a bad contractor.
6. Take photos before, during, and after the work
As mentioned above, in a dispute you’ll need to put together a compelling case for why and how the contractor failed to live up to the contract. One of the easiest and most persuasive ways to do that is through, again, thorough photo documentation.
Turn on the timestamp on your camera before taking the photos, to prove the time and date each photo was taken. At the very least, take photos every week, and make sure you have plenty of “before” photos to establish the baseline condition of the property.
Taking photos is a critical step on your house flipping checklist! Without photos, you’ll have few options for what to do when a contractor does poor work.
One of the most important skills real estate investors can learn is how to hire and manage contractors, as well as building relationships with them. Unless you’re an expert contractor yourself, you’ll need to screen and manage contractors.
If you hire the right contractors, who do quality work on-schedule and on-budget, you may not have to come out of pocket for any of the work. When you borrow a hard money loan, the lender typically covers most or all of the repair costs due to the contractor. In the case of LendingHome’s bridge loans, we cover 100% of all contractor renovation costs.
When you have confidence that your contractor will complete the job on-schedule and on-budget, you can spend more time finding good deals to flip, and less time screening, hiring, and overseeing contractors.
Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. Please consult your tax advisor. All calculations and information shown here are for illustrative purposes only. All third parties listed above are for demonstration purposes only and are not affiliated with LendingHome. All views and opinions expressed in this post are the author’s own. NMLS ID: 1125207 Terms, Privacy & Disclosures. Copyright LendingHome Corporation 2019.