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Hey Moguls, Steve Cook back again with my follow-up lesson about contractors.
In Part 1, I covered loads of valuable info about contractors, some of which, you may not have even thought about before. We talked about why building a list of reliable contractors is essential, how to make your contractor your BFF, where to find a ‘good’ one and more. So make sure you check out that first part before diving into Part 2.
Today, we’ll cover contractor payment schedules, contracts, insurance and the Release of Liens. Let’s get to it…
Payment Schedule - In Advance or In Arrears?
This is a touchy area. I never like paying contractors anything up front simply because I have been burned EVERY time a contractor has owed me because I was ahead. I’ve done it three times and I have been burned three times.
As a result, my policy is to pay after the work is completed. I may pay in draws as certain things are finished, but I don’t pay in advance under any circumstances. As long as I owe a contractor money, I’m sure they are going to be around.
As soon as they owe me money, they usually end up working for someone else who owes them. Though you won’t usually have this problem with big companies, they also charge a lot more to cover their overhead… more than I’m normally willing to pay.
Contracts in Writing – Always
I recommend that you put your agreements with a contractor into contract form.
I didn’t do this when I first started, and when a home was near completion the contractors would say things like the light fixtures were not in their quote. My response would be, “Yes, they were. We were standing right here when we talked about it. Don’t you remember I told you that I wanted this type of light here and that type there?!” The contractor always came back with, “I don’t remember,” or “We never discussed that.” Then I would have to work something out with them to get my light fixtures installed.
So, my advice to you is... GET IT IN WRITING and save yourself some heartache, even after you’ve established a relationship with someone.
Insurance Is a Must
Make sure that the contractors you hire are insured for liability and workmen’s compensation.
The work that they do is dangerous and the possibility of someone getting injured while working on one of your homes always exists. If a contractor or one of his workers hurts themselves and they do not have insurance, the person they are going to sue will be you.
Even if it’s a frivolous lawsuit, the expense may put you and your family in the poor house. So obtain a copy of the contractor’s insurance certificate. Though anyone can sue you for anything, with this in hand, you will be in much better shape.
Release of Liens
For those of you who don’t know, a Release of Liens is essentially an agreement signed by a contractor and given to a property owner at the completion of a job. Basically, it states that the contractor has been paid in full for the work done and relinquishes their right to place a mechanic’s lien on the property.
The release of liens serves as protection for the property owner from an unscrupulous contractor who, though paid in full, might try to claim that they are still owed some money and place a lien on the property for any amounts that they claim are due but not paid.
Personally, I have never had one of my contractors sign a release of liens. After talking with most contractors that I have used, I’ve discovered that most wouldn’t even know how to put a lien on your property. The one time I did have to threaten a contractor with a lawsuit via a letter from my attorney, I never heard from him again. Therefore, I have never considered obtaining a Release of Liens from any of my contractors.
I am not going to advise against having your contractors sign a Release of Liens upon receiving final payment. Personally, I don’t do it, but I’m not aware of the laws in other states. You should look into this where you live or consult an attorney because I know that some people strongly advocate it.
And there you have it. Follow the solid advice I’ve provided in Part 1 and here in Part 2 and you should be good to go with the contactor on your power team.
Happy Investing,
Steve Cook
Need More Advice?
Got any other questions about contractors? Ask in the comments section below.
Pay your contractor only after the work is completed.
Always put your agreements with contractors into a written contract.
Make sure your contractor has a valid certificate of liability and workmen’s compensation insurance.
Consider asking the contractor to sign a Release of Liens after the work is completed.
Steve Cook
was a nationally recognized real estate investing educator, author and real estate investor, prior to teaching Lifeonaire life coaching system. Today he is regarded as "The Coaches' Coach." Many of the people who have been coached by Steve have become coaches themselves, eager to share what they have learned with others.