So you have your first property under contract, and you’re ready to get started and hire a contractor. What now? This was the question that confronted us on our very first project.
We had already done the business basics: formed an LLC for our company and got our EIN number, bank account, bookkeeper and CPA. Next, we needed documents that would protect us on our first flip.
Before we bought a HomeVestors of America franchise, we were members of FortuneBuilders. Its database gave us some of the information we needed, and we also found answers at our local Triad REIA in Greensboro, North Carolina. There is one point in the REIA meeting when the facilitator asks if anyone has specific needs or wants. After we asked how to deal with contractors, we were inundated with experiences from helpful folks. Everyone shared stories and resources. And we came away with six different documents we still use to this day.
The first document, the Independent Contractor Agreement, sets the tone. It lets the contractors know you’re a professional and that you want things done the right way, the first time. The agreement lists everything you will be faced with while dealing with your project. Things can get sideways in a hurry if you don’t have this in place. It lets the contractors know they are not your employees and that they must have liability insurance and workers’ compensation coverage for anyone they employ. It also covers inspections, building permits, job site cleanliness, warranties, penalties, change orders and payment schedules. This covers anything and everything that can happen on a job site.
The Payment Schedule goes hand in hand with the Independent Contractor Agreement, as it chronicles when the contractors will get paid. We set certain goals for payments, which typically coincide with passing building inspection milestones. For example, we usually pay after demolition, rough-in inspections and kitchen and bathroom installs. We hold the final payment until all inspections have passed, work has been signed off, and the final punch-list items are completed to our satisfaction.
The Scope of Work is the road map for your general contractor to follow during the project. It lists every aspect and detail of the rehab, including but not limited to landscaping, paint colors, electrical, plumbing, kitchen and baths. Although this is the most complicated document, it goes a long way in showing the contractor you are serious about this project and have thought out every detail. We find this gives us a tremendous pricing advantage because there is no guesswork on finishes and fixtures. (For more information on scope of work, see the May-June 2016 edition of Think Realty Magazine, pages 122-123.)
The Hold Harmless and Insurance Agreement ties in with the Independent Contractor Agreement. It’s an agreement between the contractor and our company that stipulates the contractor will have a $1 million liability policy in place and that the insurance company names us (by name) as additional insured party on the policy. It also states that workers compensation insurance must be put in place and we are not liable for anything the contractor does. Even though the contractor may have printed proof that he’s acquired the necessary coverage, we always call the insurance company to verify.
Another valuable tool, required by the IRS, is a W-9 form. Anyone to whom you pay more than $600 must sign one of these, or you can be responsible for paying his or her taxes! The form can easily be downloaded and printed, and it’s simple for the individual to fill out. At the end of the year, you must mail the recipient a 1099 form. That form lists the total paid to the recipient by your company. The W-9 form is never actually sent to the IRS, but is held by us in case verification is ever needed.
The Contractor Lien Waiver is the most critical part of your paperwork and the last thing signed off by every contractor or subcontractor who works on your project. It certifies that the contractor listed in the document releases any liens or claims against your property and signifies to having been paid in full for all materials and labor. To add another level of protection, we include a statement that all sales tax has been paid on materials, labor and installation. We find that sharing this document with the closing attorney and Realtors goes a long way, demonstrating that we are serious about our business, and there will be no repercussions after they buy the house.
We have gotten into the habit of always using these documents, and they have saved us on many occasions. This might seem like overkill, but in the end, using these documents will simplify your entire rehab and keep everyone on the same page.
Now go out there and buy a house!