How do you protect yourself from unethical contractors?

Question

I haven't personally encountered any issues yet but I was reading some stories of people that have gotten ripped off by contractors and began to wonder how some of you protect yourself from unethical contractors? This is especially important when you are an out of state investor like me and so many of you. While I was reading the stories of people putting the initial payment down and contractors essentially asking for more right away after doing nothing and/or just walking away with a large chunk of capital.

I have pretty much only signed the estimate and then come to some kind of agreement on the draw structure. Should I be doing more? I've only used 2 contractors and I have had good experiences with both even though 1 was far too expensive.

I have pretty much only signed the estimate and then come to some kind of agreement on the draw structure.  Should I be doing more?  I've only used 2 contractors and I have had good experiences with both even though 1 was far too expensive.

Kevin Sobilo · Answer

@Nick Macklin, I have tried a couple things with regard to managing contracts especially if they are new to me or have shown to be at all unreliable.

First, in my experience most contractors write up contracts with VERY little detail. So, I write up an additional detailed scope of work, usually in some kind out outline format. This way, there are no disputes later on about the details of the work to be done.

At the end of the contract they prepare I have them reference the scope of work. It might be a simple statement such as "See attached scope of work" and I have the contractor sign the scope of work document as well.

If the work is to be done over a period of time, I will try to break it into phases that are spelled out in the scope of work. This will allow me to pay them smaller amounts at the beginning and end of each phase. This allows them to be paid timely, but not paid too far in advance.

If completion time is a factor, I MAY add in a bonus for early completion and a penalty for late completion. It might be $10/day bonus for every day early and $20/day penalty for every day late. This provides accountability if time is a critical element and the contractor is new to you or has been flaky in the past.

Frank Geiger · Answer

As an investor that manages projects out-of-state, I would say the best way to protect yourself is to keep as much money in your wallet as you can (until the rehab is complete) and word the contract so you can break it if certain milestones are met. The scope of work is so important. Understanding the different contract types can help you understand who holds more of the risk.

Everyone makes it sound easy. But it's super difficult and I've been burned a few times.

Mary M. · Answer

I had a very smart friend loose a lot of $$ by giving a GC a large deposit and allowing the GC to store all purchased job materials at the GCs warehouse.

So when things went bad this person wound up losing apprx 100k.

Moral of story - pay a small deposit, never let them store expensive items you paid for offsite (or store them yourself or only have stuff delivered as needed)

i have been in this game a while, have rehabbed a couple places and working on another and i would never try to do this long distance!

Kevin Sobilo · Answer

@Hari Mann, unfortunately no. I should work on creating one though.

In the past I kept things simple, broke the work into phases and then down into smaller pieces. I did it all in an outline form so that it was brief and usable.

Hari Mann · Answer

@Kevin Sobilo

That contract sounds great. Do you have a template you can share?

Fred Cannon · Answer

@Nick Macklin. Referrals are a good start.  If you can start with a small job to see how that goes.  Say maybe paint a room or tile a bath.  If that goes well give them another or ask them to bid on another job.  Hopefully you find a good resource that you like doing business with and can trust  if you are doing a major rehab find someone who is bonded and has been in business for awhile.

Mike Dymski · Answer

Self-managing rehab and repairs out of state without scale is possibly the hardest/riskiest aspect in REI.  It can be challenging even when you are local.

How do you protect yourself from unethical contractors?

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