Involved In Real Estate · Los Angeles, CA · Member since 2013 · 110 posts · 4 votes
Hello BP community,
I have an amazing contractor (with a crew) who completely remodeled my home. He's professional, fast, reasonably priced and most importantly, trustworthy. However, he is unlicensed.
I want to use him and him only for my potential rehabs in the near future. I will probably need to use a hard money type of situation when I'm ready, and wondering if most hard money lenders require licensed contractors, or if it's just a matter of finding the right lender? I am able to show the work I've already done with this contractor.
If the answer is "yes" - Does anyone know of any creative ways to get around this?
Let's say you do some light landscaping, replace pedestal sinks, paint, polsih, and have new carpet installed, a newbie might swing that.
Next project,gut the cabinets and sheetrock in the kitchen, replace the shower/tub, match a toilet and sink, change interior doors and hardware, open the back kitchen wall for a patio door and build a deck. Absolutely not, not without experience!
Think of it this way, I give you money and my collateral is that house. You go in and TRY to do what you THINK you can, but never did before. Now, how do I know the cabinets will be level, that the doors will close, that the patio door will be plum and square, that the trim fits?????? Not with my collateral you're not! So, besides the permits getting pulled, insurance, time frame to get'r done, I'm not going to allow Ivan the Investor to be swining any hammer in my collateral.
That goes for running the job too and hiring Wine'o Willie from the day labor camp and your supervising.... :) '
That will depend entirely on the hard money lender.
It might also depend on whether this is for a flip or a buy and hold rental. Buyers of renovated properties often ask to see permits which usually means using licensed contractors.
As Ned and Carl said, the biggest question will be whether they need to be licensed by the state in order to legally complete the work you'd be hiring them to complete. Obviously, permits are the best example -- if you need to permit you're work, you'll need licensed contractors anywhere the jurisdiction requires in order to pull permits.
I imagine most HMLs will want to verify that you're pulling permits when required, as not pulling permits will put your project (and their money) at risk.
Let's say you do some light landscaping, replace pedestal sinks, paint, polsih, and have new carpet installed, a newbie might swing that.
Next project,gut the cabinets and sheetrock in the kitchen, replace the shower/tub, match a toilet and sink, change interior doors and hardware, open the back kitchen wall for a patio door and build a deck. Absolutely not, not without experience!
Think of it this way, I give you money and my collateral is that house. You go in and TRY to do what you THINK you can, but never did before. Now, how do I know the cabinets will be level, that the doors will close, that the patio door will be plum and square, that the trim fits?????? Not with my collateral you're not! So, besides the permits getting pulled, insurance, time frame to get'r done, I'm not going to allow Ivan the Investor to be swining any hammer in my collateral.
That goes for running the job too and hiring Wine'o Willie from the day labor camp and your supervising.... :) '
I use two different hard money lenders, both are independent locals, no BrookViews or the like, neither one has required licensed contractors.
The state of Ohio doesn't require general contractors or remodelers to be licensed, you will want to check your state. In order to pull permits , if its not your personal residence, you do need to be insured and bonded. Certain jurisdictions, cities and counties have more stringent criteria that supersede state requirements.
HVAC, Electric and Plumbing do require licensed contractors. For our work we hire licensed guys for that, the rest we do with our own guys and pull our own permits (we are insured and bonded) on an as needed basis, or use experienced crews, and pull the permits as needed.
Creative option, if your guy is competent and if you have or can create the relationships, get a licensed guy to sign off on your guy's work, with a hml may also need to do the billing, that could get a little complicated.
Example, I had a guy with many years experience in electric and plumbing, was very good, my HVAC Co, was licensed in electric and plumbing. We would review scope of work with the licensed guy, come up with specific plan, my guy would do it for 15.00 per hour and the licensed guy would sign off and pull permits for 250. per project.
I know quite a few rehabbers who use a similar strategy, there has to be a high level of trust with the parties in order for this to work, but I have found most of the good unlicensed guys already have a relationship with someone who will pull permits for them.
You asked for a creative option some version of the above may be a possibility.
Ben Kahle In California if someone does work over $500 they are required to have a contractors license. A hard money lender, and any other lenders are going to want the work being done that secures their loan done legally. It would be foolish of a lender not to require a license, because once they release funds, and the City/County or ? comes back and says to rip out all the work, and have it redone by a licensed contractor, who will pay for it?
There is no classification for a handyman, they are unlicensed contractors that lack bonds, insurance, and any recourse by homeowners when something goes wrong.
Yes, there are acceptable ways to work it out, my little skit above points to a borrower, with no experience wanting to do his own rehab. I've suggested elsewhere that you get a guy with experience and then work under him, doing what you can do, but he is responsible. :)
Is there any reason your guy cant or wont get licensed up? I can certainly understand wanting to keep a guy that getser done for ya, but if he isnt legal, you both will be limited in what you can do and get away with and youll both regret the day an inspector has a job hes looking at down the street, and sees the trucks or a dumpster and decides to stop in for a surprise visit when he doesnt see permits posted!
If you want to use him and not getting licensed is about the money, why not write up a promissory note for the license fee, amount of the required bond and initial insurance payment, and let him work it off.
I agree with Randy. If he knows what he's doing and has experience, it shouldn't be difficult to get a license. At least in my state, if he couldn't put together the money to get licensed, I'd be a little concerned. To be fully licensed, you must pass a test and pay about $350. If he can't do those simple tasks, I don't know if I want therm near my house.
Randy F. - I don't think his reasons for not having a license are financial, as he's always busy and as Carl Schmitt mentioned, it's rather inexpensive to get one. My guess is it's regarding a citizenship issue, but I could be way off. Either way I will have a chat with him about it and see what can be done. Thank you very much!
Btw, regarding permits - What would one generally need a permit pulled for? Sorry for such a newbie question. When I remodeled my house, the contractor and I agreed on a price, the work began and 8 weeks later we were done. Granted, we didn't knock down any walls or do any additions. But we re-did all our floors, windows, paint, kitchen, electrical and plumbing all the way out to the street.
Btw, regarding permits - What would one generally need a permit pulled for? Sorry for such a newbie question. When I remodeled my house, the contractor and I agreed on a price, the work began and 8 weeks later we were done. Granted, we didn't knock down any walls or do any additions. But we re-did all our floors, windows, paint, kitchen, electrical and plumbing all the way out to the street.
It depends on the requirements of your municipality.
Most will require permits for rough electrical, rough plumbing, HVAC and structural/foundation. Many others will require permits if you do work over $X (where X can be anywhere from 250 to 3000, in my experience). Many will require permits for roofing and decks.
Here in southern California there's a HUGE problem with unlicensed contractors that are illegally in the country. As a licensed general contractor myself, it irks me that people choose to knowingly hire illegal immigrants to do the work that American contractors need. As far as I'm concerned, people that do that deserve the problems it causes.
Dell Schlabach - Great option. I don't think my guy does HVAC anyway. Will check it out.
Karen Margrave - Totally understand what you're saying and the irritation it may cause. In my situation... for my house remodel my contractor came highly recommended from a family member (who is a very experienced real estate agent). I also asked many friends for recommendations, all of which gave me horror stories about (licensed) contractors not showing up, adding extra costs, not paying subcontractors and taking way longer than promised. So - I went with the guy who had the best reputation.
I actually wasn't aware that he wasn't licensed until after the job was almost over. As a first timer I didn't think to ask. My family member may have mentioned it but it probably went over my head. Hopefully I can work on getting him a license, as I do trust him with all the above.
This is unrelated to your original question, but the bigger question is if he's insured. Not using licensed contractors can cause hassle and some lost money, but not using insured contractors can cost you everything.
Ben Kahle You can do what you choose. However; the fact that a few people had horror stories about licensed contractors not showing up doesn't excuse using unlicensed contractors that are illegal immigrants on jobs. They didn't not show up because they are licensed, they didn't show up because they had terrible work ethics, and obviously references weren't checked. Going with the cheapest work isn't necessarily the best choice in business. It's great if everything works out, but if there's a problem down the road, and the people buying the house come back, it's you that will be held liable and be spending money defending a lawsuit. If you're willing to do that for your handyman, that's your decision and very nice of you. However; any lender with anything on the ball is going to require a licensed contractor.
I named my construction company 1st American Construction, because I believe in supporting America however possible, using American products where possible (though they're harder to find) I am a first generation American on my fathers side. His family LEGALLY immigrated to America from Portugal, so don't get me wrong, I understand totally why people come here,(even those that come illegally), wanting a better life for their families. But to your question, it can make a difference as far as liability. Don't want this turning into a political post :)
I agree with Karen 100%! Ok... 99%! I dont see it as a political issue. It's a "rule of law" issue. It becomes political when politicians use it to pander to a particular voter block. It is very simple. We have laws in this country. If you break them you are a criminal. If someone enters and works in this country without having followed the laws, they are criminals. Those who knowingly hire illegals are also criminals as there are laws that prohibit doing so. And as far as I know, ignorance is still no defense. It is not a moral issue. I am all for people coming to our country legally to provide a better life for their families. But I am not sympathetic to those who do not respect our laws and come in illegally, while many thousands are on waiting lists and willing to jump the hoops required to obtain legal status.
There are many jurisdictions that rarely if ever convict those who hire illegals, but I wont talk about the local governments that thumb their noses at the laws cuz thats political! :c)
But as others have mentioned, there are many other ways that hiring illegals can and likely will come around to bite you... even ruin you.
In CA an owner builder doesn't have to be licensed to pull permit and work on his property. You will need workman's comp insurance if you hire workers on the job. A none lic. constr. worker can work on your project, but he is considered an employee. Make sure you pay taxes on him and get insurance for him.
If you convince your lender that your crew is good, then there should be no problems to get a hard money loan. The lender should rely on you, mostly, and your rehabbing experience.
I have lent on several similar situations in the past myself.
No, the IRS does not use licensing as a test. If they are only doing a job or two for you overall, I doubt they would be an employee. If their work is ongoing that is another story.
In CA an owner builder doesn't have to be licensed to pull permit and work on his property.
This is true in every state so far that I know of, however municipalities have nipped the flipper "owner builder" permits by saying that it must be OO for a minimum of 1 year or something similar. So you might get away with doing one that way but I bet someone will catch on and you'll end up in some hot water for pulling permits on a resale.
A none lic. constr. worker can work on your project, but he is considered an employee.
What makes you say that? As far as I know, the IRS doesn't use licensing status as a test for employee or independent contractor status.
This is how I understand it ... from a tax standpoint both licensed and unlicensed contractors are considered independent contractors, unless you make them an employee, in which case they are an employee. If an unlicensed contractor gets hurt he will be considered an employee from a liability standpoint, so it's best to make him an employee and get insurance for your employee. Not so with a licensed contractor, if a licensed contractor gets hurt it's on him, and his insurance, so there is no need to make him an employee.