Why You Should NEVER Hire an Unlicensed Contractor for Your Real Estate Projects

by | BiggerPockets.com

There are a LOT of unlicensed contractors out there. Anyone who can (or can’t!) swing a hammer can claim to be a contractor, but few are licensed to do so. A license is obtained by a contractor after they have filled out the proper forms with the state where they are doing business, paid the appropriate fees, taken the appropriate tests, and obtained the correct insurance and surety bond required by the state. (A surety bond is similar to insurance, where the contractor pays a fee to a bond company, and if they don’t complete the work that was agreed upon, the bond

can come in to pay for the work to be finished, and the bond company will go after the contractor.) We will refer to licensed, bonded, and insured contractors as simply “licensed.”

That said, because of the costs a licensed contractor must pay to maintain their standing, licensed contractors tend to have higher overhead costs than their unlicensed counterparts. Translation: Licensed contractors are more expensive. Now, if you are anything like us, you are probably a penny-pincher who loves to find a good deal. So, if two guys can both do the work, and one is $25/hr (unlicensed) and the other is $45/hr (licensed), is it a terrible idea to go with the cheaper guy? In other words, as a landlord, does it really matter if they are licensed, as long as the work gets done?

YES. IT MATTERS.

stop-flipping

Related: Interview: A Contractor’s Perspective on Working With Real Estate Investors

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Why Hiring a Licensed Contractor Matters

Here are four major reasons why:

  1. First, when a contractor is licensed, it means they are legitimate about wanting to be in the game for the long-haul; they are not simply taking your money and running. After all, a license likely cost them hundreds or even thousands of dollars and requires mounds of ongoing paperwork. The licensed contractor at least wants to be legit, which means a lot. If nothing else, it demonstrates that the individual doesn’t cut corners when it comes to their legitimacy, and it increases the likelihood that they won’t cut corners on your project either.
  2. Secondly, their legitimacy also gives you a “big stick” to use if the contractor doesn’t live up to their end of the bargain, as you can report the contractor and even go after their surety bond. If accused of wrongdoing, the contractor could lose his or her license and subsequently, his or her livelihood.
  3. Third, a contractor who is licensed by law must have workman’s compensation insurance on themselves and their employees. This insurance helps to protect you, the owner, in the relatively frequent occurrence that someone gets hurt on the job. Without that insurance, it’s likely the hurt individual will go after YOU to pay their medical bills. How would you like a $40,000 lawsuit on top of that $400 paint job?
  4. Fourth, hiring an unlicensed contractor may void any warranties on the products they installed.

If you still aren’t convinced that it’s worth it to hire a licensed contractor, consider the following real-life example from our landlording career of what can happen if you hire someone who is not licensed.

He seemed great, at first. Walked the walk, talked the talk, drove a nice truck, looked us in the eye, and assured us he could complete our project within our five-week timeframe. He was also “licensed.” This guy was legit, or so we thought. After signing a contract and giving him a $5,000 down payment for materials, we let him at it. A week into the project, we started feeling like something wasn’t right. Nothing was getting done, and the clock was ticking. After repeated calls, he again assured us all was well —he was just waiting on the materials he ordered to arrive and finishing up a couple loose ends on another project before starting ours; not to worry, it would get done. A few days later, after no progress on our project, we knew something was wrong.

We drove to the building supply store that he supposedly ordered our supplies from, only to discover that they had no record of his order. “Are you sure?” we questioned. They were sure. Our materials were never ordered, and this stranger we gave $5,000 of our hard-earned money to just two weeks prior was suspiciously MIA. We went online to do a little research and learned not only was this particular contractor NOT licensed, but he had been accused of stealing $3,000 from another unsuspecting homeowner just 10 months earlier. Ugh. When we finally got ahold of him over the phone and confronted him about his lies, he admitted that, indeed, our money was gone. He had spent it.

Learning From Hiring Mistakes

We are the first to admit we made many mistakes when it came to hiring this “contractor,” but our biggest mistake was that we should have verified that he was licensed and not simply taken his word for it. By doing a simple search online, you can discover all kinds of information about your contractor, including if they are licensed, bonded, and insured; if they are active (and not suspended); if they have any infractions; and if they have any lawsuits against their bond. You can also verify that your tradesperson (such as your electrician or plumber) is certified.

Related: 4 Reasons You’ll Never Find a Good Contractor (Insight From an Investor/Contractor)

In our situation, had our “contractor” actually been licensed, bonded, and insured, his bond would have (hopefully) covered his dishonesty, and we would (hopefully) not have been out $5,000 dollars. Furthermore, if he was licensed, it would have been harder for him to swallow stealing that much money, knowing he would lose his license, and hence his livelihood, when we complained. Finally, we should never have paid such a large down payment to a contractor with whom we had never done business. Looking back, it would have been much smarter to order the materials ourselves and simply pay him for his labor at certain benchmarks. But alas, our money (and a piece of our faith in humanity!) was gone like the wind.

Hopefully by this point we’ve convinced you of the importance of hiring a contractor who is licensed. As you can tell from the story we just shared, it’s also not enough to simply take them at their word. Just last week we talked with a contractor about doing some work for us on a rental property, and he swore up and down he was licensed, bonded, and insured. He even went so far as to bash all those “under the table” guys who take work away from him, “the legit guy.” However, when we went online and checked, he was not licensed at all. A complete fraud. We won’t be working with him—ever. (He seemed like such a nice guy, too. His loss!)

BRRRR

Verify, Verify, Verify

Please, verify that your contractor is, indeed, licensed. Luckily, like we previously mentioned, this can be done fairly easily online by searching your state’s website. Find it by Googling “[your state]contractor license search,” and it should pop up first. You should also ask to see a copy of their insurance and bond, just to make sure they have not lapsed. Don’t feel bad for asking—it’s just business. Any good contractor will respect you for asking.

Keep in mind, a license does NOT mean the contractor is going to be good. Not all states require a general contractor to know anything about construction to get a license, so being licensed does not guarantee expertise. (Of course, with certain trades like electrical or plumbing, a license shows that they have had training and at least can pass a test demonstrating they know what they doing.) A license doesn’t show you the level of quality the contractor can do nor the speed at which they will do it. For that, you are going to have to do some research.

[This article is an excerpt from Brandon and Heather Turner’s The Book on Managing Rental Property.]

What has been your experience with licensed vs. non-licensed contractors?

Leave your comments below!

About Author

Brandon Turner

Brandon Turner (G+ | Twitter) spends a lot of time on BiggerPockets.com. Like... seriously... a lot. Oh, and he is also an active real estate investor, entrepreneur, traveler, third-person speaker, husband, and author of "The Book on Investing in Real Estate with No (and Low) Money Down", and "The Book on Rental Property Investing" which you should probably read if you want to do more deals.

8 Comments

  1. Tim Sabo

    Having a license is one qualification you need to check, but making sure the licensed contractor follows the rules laid out by the state is equally important. In PA where we live, contractors are required to provide written quotes for jobs over $500.00. The quotes must specify the work to be done, the time the job will be accomplished, and other important factors about the work. The contractor, by law in our state, also may not ask for more than one-third of the money up front; this is designed to protect buyers. Finally, every quote must include the contractor’s full name and state license number. Know what the law says in your state regarding contractor requirements, and be sure to use contractors that follow it.
    A second thing to consider is doing a search of the state Attorney General website for complaints about the contractor:L be sure they aren’t repeatedly in ‘hot water’ with customers. You can also check sites like Angie’s List or HomeAdvisor to see reviews other customers may have completed of the contractor.
    For PA law on contractors, see the link here:
    https://www.attorneygeneral.gov/uploadedFiles/MainSite/Content/Registrations/HIC_Contractors/Act_132_Home_Improvement.pdf

  2. Jeffrey Hare

    Bingo. In California, check http://www.cslb.ca.gov to confirm license AND Workers’ Compensation coverage. Some claim they are Exempt, which means they do their own work, or subcontract to only licensed subs. Check that the subs are licensed for their classification. Working “out of class” is the same as unlicensed. Also review restrictions on flipping if you signed an Owner-Builder Affidavit to pull permits.

  3. Christopher Smith

    If we employ a property manager should we be concerned about its policy of using licensed and unlicensed contractors?

    I get the sense that for very routine and unsophisticated work they sometimes use “handy men” but for all work beyond basic maintenance and repair they use licensed contractors.

    Whatever the case maybe is this primarily their concern? Both my prop mgrs have been in business for decades with no major incidents or law suits that I am aware of.

  4. Mary B.

    when I saw the title I thought ‘well duh, that’s a given’. yet I realize some people try to go the ”handyman” route for rentals that only require small repairs nothing major. still its a great contradiction to the DIY bunch. most DIYs are not licensed, doesn’t matter if they have relatives in the business that can show them a thing or few and now they want to try it out….although they may be quite handy, they aren’t licensed. additionally, sweat equity doesn’t always require a license….even HUD has sweat equity financing programs and often they demand 40 hrs a week contribution of sweat equity from the applicant. there are pros and cons to the DIY as well as hiring the unlicensed handyman along with quite a few variables – insurance liability being the grandest boulder of all. when in doubt hire a licensed contractor. my coin.

    Kudos,
    Mary

  5. Tyler Chartrand

    penny wise and pound foolish. I see plenty of people here cutting corners (phoenix) as labor can be very cheap and the homes usually do not have weather related maintenace. Just remember the contractor that promises you everything does the exact same thing to everyone else. it’s better to be disciplined and find a few good ones that you can use consistently. this will also lead to you gaining a network of reliable sub contractors and service people. thanks for the post!

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