What’s easier to find, a unicorn or a rock star contractor?

If you asked most value-add real estate investors, the answer would be obvious: “Unicorns, of course.”

We all know the inherent value contractors bring to any real estate investment. A great contractor can help you reduce costs on renovations, save money on holding costs with quick turnarounds, and manage the project with limited guidance. The end result, of course, is a beautifully renovated property that gets finished on time and brings in a big payday.

Reality often paints a very different picture. Headaches, delays, and disappearing acts are commonplace. Investors are always looking for contractors because they either assume that all contractors are created equal or simply don’t know what to look for.

In either case, the quality of your contractor can make or break the deal. 

Whether you fix and flip or buy and hold, properly vetting and hiring reputable contractors is a muscle you want to (pardon the pun) build. Here’s what you need to know about bad contractors and how to find good ones.

How to Spot a Bad Contractor

Sleepless nights. Endless delays. Excuses. Theft. The list goes on and on. 

This more or less summarizes my experience with the first contractor I hired as an out-of-state investor. Everything that could go wrong went wrong. 

Here’s the gist of the story: The contractor promised a one-month turnaround time on a gut job at a bargain price, so I decided to give him a shot. Week after week, he would mention all the progress that was being made—yet all he sent pictures of was the framing, plumbing, and electrical. 

All were done incorrectly and without permitting, so the town shut down the project. We had to start from scratch and redo everything. 

The kicker? He stole $15,000 and stopped responding to calls and texts.

After applying for permits and getting a new contractor, we ended up behind on the project by two months. If I had paid attention to the red flags from the beginning, this project would have finished two months earlier, with less stress. 

Pay close attention to these five warning signs.

1. Lack of licensing

Some contractors subcontract work to unlicensed professionals to save on costs or pocket more for themselves. While it may be tempting to hire an unlicensed contractor for a lower price, the risk is usually not worth the savings. 

Depending on the jurisdiction, there are many components of a renovation that may require permitting. You’ll need to have a specialist in that field willing to put their name on the line and stand behind the work completed. If done incorrectly or if permits weren’t pulled, the jurisdiction can tell you to start over—there goes all that time and money out the window if you don’t follow the right steps.

Make sure that the contractor and team members used on the project (such as electricians and plumbers) are licensed.

2. Unrealistically low bids

Another red flag to look for in a contractor is an abnormally low bid. We all want to save money, but that’s how they reel you in.

Don’t let cheap prices fool you. They usually come at a hidden cost. Unethical contractors know property owners are looking to cut costs, so they’ll provide cheap labor and cut corners to land the job.

Be sure to review bids against your required scope of work to make sure you’re being charged for everything you need. 

As mentioned, a contractor I worked with bid significantly less than the next. Naturally, I gave him a shot. All the work was done incorrectly, and I had to hire a more expensive contractor to fix their mess. In the end, it cost me significantly more to complete the project because I thought I was saving money.

3. Poor communication 

No investor wants to deal with a contractor who randomly disappears throughout their renovation. Contractors who go MIA put your project at risk and delay return on investment. 

You can usually tell whether a contractor is a good communicator in your first interaction. If they don’t follow up after your initial call, respond slowly, or lack attention to detail, expect them to treat your renovation the same way.

It’s also important to pay attention to a contractor’s written communication, or lack thereof. If a contractor is hesitant to put terms in writing, either through a contract or email, be careful. This may indicate they don’t want to leave behind a paper trail, which could be useful in future disputes.

4. High upfront deposits

Contractors usually ask for a certain amount of cash upfront before getting started on renovations. That’s normal.

However, you should not have to come out of pocket for more than a week or two of material and labor at one time. This gives them enough to get started but holds the contractor accountable for the work. And in a worst-case scenario, you won’t lose everything if they run away with it.

When distributing funds, make sure that it aligns with the scope of work, and check that the contractor can provide receipts for their purchases. You can also try negotiating a lower price by providing materials and making it easier for your contractor to get started. That way, you don’t get up charged for materials, and you can guarantee that the correct materials are being used on your project.

5. Lack of reviews and references

Contractors with one- or two-star reviews—or no reviews at all—are difficult to trust. Sometimes, contractors who have had their licenses revoked or been sued by previous customers will dissolve their previous companies and reestablish them under a new name. No reviews could also simply be a sign that they aren’t as experienced in their field and have had difficulty obtaining customers in the past. 

Whether a contractor has online reviews or not, they should definitely have at least a few references. If they’re unable to provide even one, they’re probably not someone you want to work with. Contractors who are confident in their services are more than happy to share references who can speak to the quality of their work.

 

What to Do If You’re Already Stuck with a Bad Contractor?

If you come across these strategies once you’ve already started working with a bad contractor, you’re probably asking yourself, “Now what?” 

It can be difficult to let a contractor go once you’ve already signed a labor agreement and made payments. You’re not stuck, though. Here are some options to explore.

Align on expectations

You can try having a conversation to align on expectations and see how they respond.

The first thing you want to do is eliminate or at least minimize opportunities for tension. If there’s no way you can get out of the work contract, let them finish the job. However, remain observant and verify their work processes. 

You can do this by creating project checkpoints, where you can manually verify that the work is being done correctly before going further. If they fail to complete work on time or in compliance with local regulations, you may be able to end the contract early.

In some cases, letting the contractor complete the job would put your property and investment at risk. If you find yourself in this position, contact your state’s licensing board and file a formal complaint. The mere mention of a complaint may be enough to get the contractor to get their act together. 

Move on and start fresh

Another option is to try to get out of this as quickly as possible rather than hoping things will get better—they probably won’t. 

Start exploring additional contractor options. Get bids with timelines to see how early they can get started.  After vetting and verifying your new contractor, it’s time to have a hard conversation with the contractor you plan on replacing. 

No matter how difficult it can be to stay composed, you want to come off as professional. Tell them the reasons for the change, and make sure to agree to payout terms as needed. You’ll also want to put this in an email recap after the conversation to have a paper trail.

How to Find a Trustworthy and Reliable Contractor

Every real estate investor should know how to identify red flags in a contractor. However, even the most experienced investor is capable of missing a few. Here are five strategies you can use to prevent contractor red flags from slipping through the cracks. 

Only hire a licensed contractor

Working with an unlicensed contractor is always risky. Even when an unlicensed contractor can do a good job, they may not have the right insurance in place to protect you or your property if something were to go wrong. Minimize the chance of project delays and noncompliance fees by making licensing a priority. 

Ask previous customers

While it is an extra step in the hiring process, reaching out to previous customers is necessary when bringing on a new contractor. Following up with references and checking online resources, such as the BBB and Angie’s List, will help you gauge customer satisfaction. You should also call or email references directly to get a more personal account of the contractor’s work ethic and expertise.

Get referrals

This is similar to the previous point—the only difference is that you’re going to people you already know. Asking friends, family, your real estate agent, and others you trust is the best way to find contractors.

Real estate investing is highly relationship-based. Those around you want to maintain a positive relationship so that you can continue working together in the future. As such, these people are the most likely to give you honest reviews.

Check litigation history

Knowing if a contractor has ever been taken to court by a customer can save you a major headache in the future. Many municipalities make it easy to search a company’s court history by publishing courthouse documents online. When searching for lawsuits, check your contractor’s full name, the name of their company, and any DBAs associated with their business. 

Vet thoroughly and take your time

Outsourcing work is a major part of the real estate investment journey. As you begin to scale, you’ll need to hire professionals for tasks you may not have the time or expertise to complete. It’s better to hire slowly than hire the wrong person from the start.

Final Thoughts

As soon as you see one of these red flags in a contractor, run as fast as you can in the opposite direction. 

Hiring the wrong person for the job can easily double your renovation expenses and push out your renovation timeline by weeks if not months. They say someone else’s mistakes are the best teacher. Don’t make the same mistakes I made.

 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.