Has anyone used construction bonds on single family flip?

10 Replies

I ran into a situation on a flip where the GC was not insured or bonded. He hired a bunch of sub contractors who he didn’t pay even though I paid him. This was in Texas so the sub contractor put a lien on the property. The contractor also walked off the project having been paid 2/3 of the rehab cost with 20% of work being done. My question is has anyone used construction bonds on single family flip? From my understanding the cost is 2-3%. There are 3 types of bonds that I thought might have been useful in my situation

1) Bid bond

2) performance bond

3) payment bond

Has anyone used any of these? Have they been useful? Appreciation any insight.

As @Richard Betz asked...was he licensed? Doubtful because you can't be licensed in Cali without a bond. A performance bond will work but a lot of GCs won't be interested...not because they're dishonest but because it's a big PITA to work a project with a PB. Better for you to really check out your Contractor (which you did not do in this case)

Texas apparently does not license General Contractors.  That seems a bit crazy to me.  Not that I'm in favor of more government in my business, but consumers obviously need protection.

Who needs a contractor license in Texas?

Not all contractors in Texas need to hold a license. Whether or not you need a license depends on your trade and the area in which you’re working. So then, who needs a contractor license in Texas?

No license required

If you’re a handyman, general contractor, or builder, you’re good to go. The State of Texas does not require folks in these lines of work to carry a license issued by the State.

https://www.levelset.com/blog/...

State Board:

https://www.tdlr.texas.gov/

@Benedict A Hubbert All the types of bonds you mentioned are only used on large private and government contracts.  You won’t get this kind of bonding from any GC’s doing rehabs.

You have to know how to manage your contractor/subs...each state has specific laws on how mechanics liens work....notices required, timelines, forms, etc.  You need to know these laws and procedures, an hour with a construction lien attorney will be money Very well spent.

Originally posted by @Wayne Brooks :

@Benedict A Hubbert All the types of bonds you mentioned are only used on large private and government contracts.  You won’t get this kind of bonding from any GC’s doing rehabs.

You have to know how to manage your contractor/subs...each state has specific laws on how mechanics liens work....notices required, timelines, forms, etc.  You need to know these laws and procedures, an hour with a construction lien attorney will be money Very well spent.

 I second this! Great advice. Performing your due diligence on the contractor AND having proper and fully executed contracts outlining the scope of work and the draw schedule will help prevent these occurrences in the future.

@Will Barnard Since these projects are out of state, I have since hired project manager to check quality and progress on weekly basis and pay only for work that is completed. I guess my question is there any protection to make sure GC pays subs? Lien release forms for GC and subs at each payment? Checking out contractor completely is definitely what I’m been doing since BBB, license, bankruptcies, business details, and reviews.

Yes, in your contract, you can institute a direct payment clause. Basically, a direct payment clause states that if you have paid the general contractor for work done by subcontractors & your GC does not pay the subs, then you can pay the subcontractors directly & deduct that payment amount from any other money due to the main contractor.

Lien releases: You can also have the GC sign lien releases for each progress payment. There are conditional and unconditional waivers in lien releases. I suggest you speak to your RE attorney to ensure you have the proper protections in your contract for this issue.

Originally posted by @Benedict A Hubbert :

 I guess my question is there any protection to make sure GC pays subs?

And there is your problem. You did not hire a GC. You did not hire a Contractor at all..... You hired an unlicensed scab..... probably for $$. You have no recourse and it's your fault. Do it differently next time.

But in Texas they don't license General Contractors.  

One of the issues is you are not there to check on things.  Getting a local inspector to make sure things are done right is definitely

a good idea.   Lien releases for sure.