Contractors are legal landmines. They can sue you, they can blow up your budgets and deadlines, they can put liens on your houses, and they can run away with your money. What’s an investor to do?! In this week’s episode, you’ll learn the 5 steps you can proactively take to avoid contractor problems.
In this week’s episode you’ll learn:
1️⃣ How defensive asset protection tools like LLCs and insurance cover you in contractor disputes
2️⃣ What to look for when vetting a contractor
3️⃣ What type of documentation you should have for your contractor relationship
Bonnie Galam 0:11
Hey there, it’s Bonnie, and welcome to the House of Horrors episode if you are listening to this when it flops then Happy Fourth of July. I’m recording this a little bit in advance. But I plan to spend the day outside at our new pool with our family and friends and probably whip up a really big Israeli barbecue. I am not really a burger and hot dog barbecue type of girl I want to like all of the kabobs and pita and hummus and all that. And so we’ll be celebrating America’s birthday, it will be done Israeli style. And I was thinking about last week’s episode where I talked about the second time I got sued. And if you haven’t listened to that episode, go back and give it a listen, it’s all about the situation with someone else’s property. It’s a wild ride. But it got me thinking about the first time that we got sued because that has to do with a contractor. And I’m not going into all of that today, if you want to hear about that particular horror story go and sign up for my free workshop. But the cliff notes version is that it just involved one of our contractors, and contractors are just such serious legal landmines. And that’s why I really want to dive into it today because lawsuits with your contractor can sometimes but are usually not covered by your LLC. They’re almost never an insurance coverage issue. And it’s not just lawsuits you have to worry about with contractors, but they can just generally be a money pit by causing delays and increasing your holding costs tech can put liens on your freaking property. And so we want to make sure that when we’re dealing with contractors we’re doing so properly because I found out this lesson the hard way with a lawsuit probably close to a decade ago at this point. And this is a problem that runs rampant in the investing community and may have already happened to you. But I mean, I’ve had students wait like over a year for a project that was supposed to take something like 60 or 90 days and I’ve had investors who put up all the money upfront for the contractor to disappear as we talked about in a previous episode, or for the contractor to just kind of mosey along and it did not really move things in a timely manner. I’ve had investors who had contractors get hurt on their property, landlords have had contractors steal from their tenants, and contractors who just straight up damage more than they fixed. And so I thought it was absolutely necessary to kind of break down five different ways to avoid problem contractors how we can avoid these situations, to begin with, and eliminate this as much as humanly possible as an asset protection risk.
Workshop Ad 3:04
Hey, there, it’s Bonnie, if you’re looking to protect yourself, minimize wasted time and money and confidently scale your real estate portfolio on a solid legal foundation I want to invite you to my free on-demand legal workshop, the three legal myths real estate investors cannot afford to follow and of course, what to do instead, it’s free. So get registered now at bonniegalam.com/workshop.
Bonnie Galam 3:27
So let’s talk a little bit about the first piece of this and which is that lawsuits from your contractor or with your contractor will sometimes be covered by your LLC and sometimes not. Let me talk about this because if you are suing your contractor that has nothing to do with your LLC – LLC is meant to like protect you in the event you get sued, but not necessarily protect, you actually definitely do not protect yourself in the event that you need to sue somebody else. However, if your contractor does decide to sue you, which is definitely something that can and does happen, that is a situation where your LLC would be able to cover you so long as you contracted with it properly. And so long. As you know, this is a situation where you’re liquidating everything you haven’t thought about LLC yet, the LLC will kind of put a cap on that loss. And so it’s not a real common situation where your LLC is actually going to come in and protect you from having some sort of massive, massive loss. But as we’ll talk about in a little bit, there’s definitely you know, the possibility of a contractor getting you to know, catastrophic ly injured on your property is not properly insured themselves. And then, therefore, you are on the hook for some major losses. So for that reason, the LLC is definitely nice for some peace of mind in those really unlikely remote situations but not impossible to happen. Now, when you think about other defensive strategies, obviously insurance is the big one that pops up. And most of the time insurance isn’t really going to matter to a contractor. Lawsuits liability is wherever the case may happen. So let’s break that down for a second. If you are suing your contractor for saying something like three breaches of contract like they’re not living up to what they promised they were going to do, or perhaps even the damage the property a bed or they stole or whatever the case may be is, that’s not so much an insurance coverage issue, in that the insurance is going to hire an attorney to pursue that legal action for you, you may separately have an insurance claim for, you know, actual damage or something like that.
Bonnie Galam 5:08
But in terms of the insurance coverage you have to conduct that lawsuit, it’s probably unlikely. It’s also more likely that it’s like a small claims type of matter, in which case, you may choose to go pro se meaning represent yourself or we may, you know, decide to have an attorney, I would say most of the time though, when you are suing a contractor, you should anticipate that your legal will almost be always out of pocket. Now, on the flip side, if a contractor is suing you, then insurance may possibly peek in; if it’s a money issue, type of dispute a contract dispute again, it’s unlikely your insurance is going to cover you for that, especially if you’re just talking about you know a homeowner’s type of policy. However, if it’s a situation where there’s some sort of catastrophic injury on the property, then perhaps this is a situation where your homeowners or some other general liability policy that you have would pop up and protect you. Now, contractors, though, don’t just come with lawsuits, as we talked about, they come with, you know, delays, and they could also put liens on your property. And that’s we’re going to talk a little bit as we go through these five ways to avoid problem contractors, I want you to keep that in mind that we’re not just trying to prevent you suing, you know, the contractor for failing to live up to their job or them, you know, suing you for whatever reason, but we don’t want liens put on the property, whether rightfully or not. And we also don’t want to, you know, have delays, we don’t want of holding costs. And so at the end of the day, the way I always look at asset protection is saving money, how can we save money, and sometimes that also means saving time. And like I said, I found this all out the hard way, when one of our contractor relationships when South way before I was even a real estate attorney probably close to like a decade ago like I had mentioned. And so let’s dive into these five ways to avoid problem contractors, the first being, you know, you want to check with their licensing. And insurance, I realize a lot of people will have licensed and insured on their trucks, or it may be on some of their paperwork, see it, see it, and maybe if you can, if it’s public record in your state, look it up, see that you can see that their licensing is still active, not that they at one point in their life had a license, that is not good enough friends, and then also their insurance. Do you want to see that policy, you want to see what it covers, you want to see what the limits are, I don’t want like a $5,000 policy or whatever, like the absolute minimum amount of coverage, some of these people need to have to be in business, I want to see, you know, a really hefty policy. And if it’s not it, especially if it’s not just them, but even if it is just them, you want to see that there’s a worker’s compensation as covered in their policy or by a separate policy. So that way, if someone does get injured on the property, you know that their insurance is going to be covering that loss, and you will not be. This brings me to number two, while you’re digging through and, you know, seeing what the deal is with this contractor, I want you to do a background check. And I don’t literally mean like a criminal background check. Although some people will do that. There’s nothing wrong with that. And some people only feel comfortable doing that, especially when you’re talking about multiple six-figure types of jobs. But just because someone’s at, you know, Home Depot at 7 am just not a good contract make, I realized that that’s like the common, you know, the suggestion to find contractors at Rheas and whatnot. It’s like going to you know, go to Home Depot at Lowe’s and see who there’s really early, those are the go-getters. But that really doesn’t mean a whole lot. References, ask you to, you know, in your RIAs, or maybe even in neighborhood groups, but you may even want to take it a step further. I mean, to do a Google Check, check Better Business Bureau, do they have reviews do they have on you know, Google or Yelp or Angie’s list these are all places where someone who has been established and is at least treating their business like a business that they want to grow beyond you know, just organic word of mouth. They may have you know, reviews from up past or current clients, or customers who may have good or not so good things to say and you’re gonna want to find them and also ask for references. If this person is not coming to you for a reference ask for some of them and that ties right in with number three another tip that I have for kind of vetting out who is you know, for real in this business.
Bonnie Galam 9:41
Obviously, not as strong as an indicator as you know, checking someone’s licensing and insurance, but I always ask on the spot to see work pictures if they’re walking the property. I want to see examples of their past work. I want to see you know, examples of things similar to what I’m asking for and if they are legit, they should Have these on the spot any contractor I know who is proud of the type of work that they do will have images on their phone of the work. Now I realize not everybody you know, thinks that taking photos of electric panels or HVAC panels is the most Instagram-worthy, you know content. But it is something that may even just show you the types of brands that they’re working with that have done this type of work before. Because the reality is people put these things on their websites. And they’re also just generally proud of the work that they do. I mean, I remember I had, especially when you talk about the more cosmetic type of areas, like when you’re getting glass made or tile installed, those types of people should have so many pictures, you wouldn’t know what to do with yourself. Same with things like sanding floors, anything cosmetic painters, if this person cannot pull up a picture run. Also, you want to think about their entity type This is tip number four, depending on their entity type, meaning, are they operating as an LLC? Are they just operating as you know, Joe Schmo electric, and that’s totally fine if they’re licensed and insured, but depending on their entity type, you may want to make sure and clarify their employment relationship to you. The reality of the matter is just because someone is a quote-unquote “contractor” does not make them legally a contractor for employment purposes to you. And that’s something you’re definitely going to want to have specified. And inside of my program, landlord law school I teach all about and kind of give you a checklist of you know, is someone employee or a contractor based off of different characterizations? Because the reality is, is you can’t just say, someone’s a contractor, you can, it doesn’t matter, based off of their title, it really matters on their relationship to you. And depending on their entity type that can be one of those factors that determine Hey, is this person actually an employee and entitled to, you know, certain benefits? Or are they a contractor? Next, and finally, and most importantly, because you know, it’s me, and you know, this is coming. The fifth way to avoid a problem contractor is to get it in writing, get it all in writing. And yes, that means more than just, you know, that handwritten carbon copy piece of paper with the scope of work and the price circled at the bottom and he rips it in half, and you get half and he gets the other half. That is not enough, you need a full contract, period, full stop. And perhaps, just as importantly, you need to be documenting everything else that’s going on from start to finish. That means if you give payments you want a receipt for those payments is especially if you’re giving payments in cash, don’t pretend that you’ve never done it. We all know that investors love paying contractors in cash and contractors love receiving dollars in cash as well. Also, you want to do that. And perhaps even better do that alongside a lien release. That way, as you’re making payments, it is decreasing the possible lien amount that a contractor could put onto your property. Also, when we’re talking about changes, because changes often do happen, you open up walls, you realize that the original plan is no longer the plan you want to go with whether it’s for budget reasons, or for structural reasons, or whatever the case may be best-laid plans go two ways… those changes also need to be documented in a written and signed Change Order that outlines what exactly is being changed. If that includes the timeline, if that includes the budget, if that includes the material that includes the subs, all of that stuff you need to document in order to adequately protect yourself and memorialize that relationship. I realized and I was guilty of this for many years until our first lawsuit happened kind of just doing things on a handshake and like scope of work, glorified invoice, but that is not enough to protect you. And it’s not really enough to protect them. And so it’s not a one-way street. When it comes to asset protection. A lot of the stuff that we talk about really does protect both you and the other party and the contractor has got a lot on the line as well. And so being able to go into this working relationship with respect, not just based on someone’s good name or good word or you know, a history of working together, you want to have that in writing.
Bonnie Galam 14:27
So, as a recap, these five steps that you should be taking to avoid problem contractors are the following. One, check their licensing and back and insurance to do a background check. Three, get past work photographs of their work. Number four, depending on their entity type, you’re going to need to clarify their employment relationship with you. And then finally, number five Keep Calm and get it in writing. And so that is it for this week’s episode of The House of Horrors podcast where we are teaching a little bit more about how to avoid houses of heart. Next week, stay tuned because we’re gonna be talking about leaky faucets and what exactly they have to do with your legal strategy. So make sure you’re subscribed, so you’re the first to know when that episode drops. And if you learn something new in this episode, I’d love it if you drop me a five-star review on Apple. It really does help other investors find this podcast. Thanks again for tuning in. I’ll see you here same time, in same place next week. Bye for now.
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