What Does a Real Estate Investor Need to Know About Hiring Contractors?

Real Estate Agent with RE/MAX Ideal Brokers
What Does a Real Estate Investor Need to Know about Hiring Contractors?

If you're a real estate investor some of your best Oregon real estate investment opportunities are going to be "diamonds in the rough" that will need some work to realize their full investment potentials.

But where do you find good contractors?
You can ask for referrals from other investors or from real estate professionals or from local professional business organizations. Or you could go to Lowe's or Home Depot early in the morning when contractors are picking up their building materials. Talk to the clerks about who are the regulars and talk to the contractors themselves. Check out their work start to finish and their references. These are great places to find competent crews who work for builders.

Another important question to ask is what insurance a contractor needs.
You should verify that you or your contractor has the following types of insurance:

1) Liability Insurance: Be careful that you’re named as an additional insured party on your contractor’s policy or instead have your own policy. Evaluate the amount of coverage you need with insurance experts.

2) Builder’s Risk Insurance: Another consideration is getting builders risk insurance for coverage on equipment, tools, and other necessities.

3) Workman’s Compensation Insurance: If you are doing rehabs, you should obtain workman’s compensation insurance. If your contractor has workman’s compensation insurance, ask for a copy of his insurance showing you as an additional named insured party. This will give you proof of coverage.

The next question is how you should pay your contractor.
If you are dealing with new contractors that you haven't worked with before, you might want to dole out the job materials and make sure those materials get to the job. This will make it easier for you to pay only for the work that's performed. To protect yourself, you need to make sure that if the contractor steps away from the job, there will be enough money to replace him and finish the job. It's too easy to pay out too much for the job too soon. It can be too easy and too tempting for a contractor to return materials to the place they were purchased for a cash refund. So it's only good business to hold back enough money to be able to hire someone to finish the job if your original contractor does not perform. And it doesn't matter how long you have worked with contractors, you must inspect their work before you pay for it. If you can't do that, you don't belong in this business. And while you're at it you might include a provision in your contract specifying that final payment is contingent on passing any city or county required planning inspections.

What about permits and contracts with your rehab crew?
If you don't get required permits you open yourself up to unnecessary risks. This is a business and should be treated as such. If you try to bypass the system you might save a buck, but you also might double your costs and end up having difficulty closing a transaction when you try to sell the investment property. The extra time required to resolve permit discrepancies is as good as money.

As far as writing contracts for your rehab crew, that's a judgement call. I believe it's more professional to work to contracts and if your crew has a hard time with that, then maybe they're not who you want to work with.

Note: These recommendations are my personal opinions. They are not intended to be legal or accounting advice nor solutions. You should always consult with the appropriate professional when making decisions.

Image credit: "Paradise Restored Landscaping" by Media Director/Flickr

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