Thanks for tuning into the vlog! We’re back talking about the 14 mistakes new real estate investors make and we’re in the bonus section today. To catch up on this series, visit my Youtube channel.
Bonus #4: Paying Contractors Before They Have Finished With the Rehab
This is true with any property, whether it’s your primary house or an investment property. But let’s talk specifically in regards to an investment property.
One of the things I always like to do, if it’s a very big project, is make sure that the contractor has worker’s comp. I want to make sure that the contractor has worker’s comp and so do all of his contractors or subcontractors or people that work with him! I already know this can get kind of expensive. Sometimes if you have smaller rehabs, it’s better just to use a handyman. I’m referring to larger contracts where you may have a number of different tradesmen that actually come on your property.
If that’s the case, there are two things you really want. One, you want proof of worker’s compensation. If someone falls or slips on your property and the contractor has not covered their workers, you’re the one that can be responsible to pay. That’s important to know especially in the construction business. I also know, for all you seasoned real estate investors out there, that this can increase the price of the contract. It’s a balancing act between using handymen to do your work. If you’ve got one guy that’s going to do all of the work, then having worker’s comp may not be necessary depending on your circumstance.
Secondly, I like proof from my contractor that all of their workers have been paid. Some of you may have heard me tell this story! One time I was doing a commercial project. I remember this guy coming in and begging me for a job. He was telling me how his kids hadn’t eaten and so I hired him. He was a brick layer.
Of course, he came to me at the end of the project and wanted to be paid. So I paid him what was owed on our contract. He was finished, I had it inspected and everything was in good shape. What I didn’t realize was that he didn’t pay any of his employees who helped him on that job. So guess who they came back to? Me!
I not only paid that contractor the full price for the contract that I had with him, I also had to pay all of the wages for his employees. At that time I was a novice in the area of real estate and didn’t understand that you need to have proof that they paid their contractors! Of course if you’re dealing with people you know really well and they have a proven history, you don’t have to worry about that kind of stuff. But if you’re new, I can tell you right now that you can be out twice the money just because you haven’t done the due diligence and your homework.
Another tip for working with contractors is that the final payment, the last 10 or 20% that you owe on the contract, should not be released until all the proper government inspections have happened.
For most of you that’s going to be tied to the city, county or district that you’re in. It just depends on what municipality is regulating the building codes and the building inspectors. I’ve seen it happen many times where a project has not been finished properly, the investor pays ahead of time, but the inspector comes back and wants a lot more work done. So anytime you write a contract, you should always tie it to approval from whatever municipality matters for the area you’re in.
Thanks for joining me. I’ll cover another mistake next week. Make sure you share, like and comment and I’ll see you next Thursday!
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