I Had to Fire the Contractor
Our first flip of 2020 was purchased in the middle of December 2019. Here we are nearing the end of January and the property looks more or less the same. I naively trusted a contractor I had built a relationship with over the past several months. The day after I purchased the flip, I sent him a hefty deposit of $10,220.00 so work could get started straight away. The project was only supposed to take 4-6 weeks, so I figured it'd actually be more like 8-10 weeks. Yes, this was during the holidays of Christmas and New Year's so I wasn't expecting a miracle but after so many weeks and excuses, other things transpired and I decided it was time to cut my losses and move on.
Y'all, please save the, "I told you so's..." "Was he even licensed?" "You went with him because he was cheap/"investor-friendly" until after you read the post. If you want to post nasty and unhelpful comments anyway, go ahead. You'll just be ignored or deleted.
Red Flags I Ignored:
1. I should have known when he kept referring to me as a "friend" but also called me "boss" within the same breath.
2. I found him on Facebook. My first mistake? Maybe, but I've met some truly incredible people in our local real estate investment FB groups.
3. New bank account with checks that didn't have his name or business name on them. I made him send me pictures of his debit card that did have the business name and account number on them that matched the account number on the check.
Green Lights I Used to Ignore the Red Flags:
1. I had been to two of the properties he had worked on and was actively working on. Subcontractors were busy at work and pleasant with the contractor. The properties looked good too.
2. He is/was a flipper himself, so he appeared to have more of a vested interest in the process than someone who only does construction. (That was a naive assumption of mine).
3. I had known him for several months and he posted in our FB groups of over 12K people often. I figured if anyone had issues with him, that would have shown up well before now. (Another naive assumption).
4. The numbers he quoted me on properties were very similar to those other contractors quoted me. He wasn't coming off as a "discount" contractor.
5. He was licensed and insured.
What I Could Have Done Differently:
1. I could have called the Maryland Home Improvement Commission (MHIC) to check his record for any unresolved complaints prior to sending the deposit. (They only post unresolved complaints though. I did call several times after firing the contractor but only ever reached voicemail and no one has called me back. So I will need to take time to physically go to the MHIC office.)
2. I could have asked for references and thoroughly vetted those references. (Anyone can provide a reference. Who knows if they are legitimate or not? That takes extra research and possibly even meeting them in person and asking to see the work that was done. All that can still be forged unless I decided to go "private investigator" on them and demand to see photo IDs, LLC documents, and paperwork/contracts for the work I was being shown.)
3. I could have demanded to pay for the materials and provided a smaller deposit upfront and then paid as work was completed. (This is a bit difficult to find contractors willing to do be paid after work is completed because they are often screwed out of jobs by investors as well).
4. I could have pulled the plug on the whole project earlier (but I felt I had to wait given the holidays and "reasonable" excuses he had initially).
Also, open to further suggestions regarding this:
So what was the final straw? 3-4 weeks after purchase/sending the deposit:
1. The property still had not been fully demoed. Mind you, the place was essentially a shell when I bought it, no stairs even. So all that needed to be done was removing the layers of thin wallboard and plaster in a house that had no internal walls and was less than 800 sq ft with no basement.
2. The construction debris that had been in the property when I bought it, was still there. In fact, the contractor had placed a lot of it in the backyard setting me up for possible code violations if someone had cared to report it.
3. All necessary permits still not being pulled despite the work being started.
4. Framing not done up to code and put over the top of the subfloor that needed to be repaired.
5. 1-2 weeks after I sent the deposit, people in our FB group started to complain about this contractor. Turns out he was ok over the summer but in very recent months he has been doing a terrible job and taking people's money.
6. When I walked into the property after not having visited for several days, not only had no additional work been done but all of the electrical work that had been started was destroyed. I met the electrical subcontractor who the GC had hired so I had his number. When I called him, he had no qualms telling me he destroyed the work he did because he hadn't been paid, and given the posts on FB about him, he decided he likely wasn't going to be paid. (Turns out that work he had done wasn't up to code anyway but I'm so very thankful he didn't destroy anything else.)
So, here I am now, it will be about another 2 weeks of sunk costs and time, properly vetting highly recommended contractors with long work histories to obtain updated numbers and a timeline for the work. Last week was tough because I bought the property under the numbers and assumptions the prior contractor had quoted me and were approved by my lender. I had no idea if they were completely off and if they were, how was I going to recover?
The first numbers came in last night, and they are only about 5-10K more than the original quote, so that's tolerable. However, the prior contractor has cost me approximately 13-15K thus far with the deposit I gave him, holding costs where minimal to no work had been completed, and having to demo and haul away the work that was done incorrectly.
We have since had him banned/blocked from that FB group so that he no longer preys on people within that group at least. I am in the process of pursuing legal action against this contractor and plan to ban together with as many of the other subcontractors and investors who he has harmed in this way as well.
The most important thing you can do when buying a house to flip is to make sure you have the numbers right and pad/cushion that timeline for work, timeline to sell, and rehab costs. At this point, it looks like we'll still be able to turn a decent profit and hopefully recoup those lost funds to the contractor through other means over the next several months.
This will hit me heavy on the front end because now I will essentially be out another 10K, which is certainly more than I was anticipating, and we're trying to figure out how to make that all work and keep our own roof over our head. Fortunately, I have a little equity in my personal residence and am in the middle of applying for a cash-out refinance and a couple of wholesale deals that should be closing within the next couple of weeks. So we should be ok, but we're still very much in the "unknown" phase right now but it's certainly a little better than last week when I cried just about every single day because of all the unknowns that were still at play.
Here's a little "before" picture. This is what the property looked like when I bought it. I'll update with what it looked like after I fired the contractor and as we get rocking and rolling with a legit contractor. I'm very much looking forward to seeing the end result on this one!
First Floor of Our First Flip Gone Wrong