Unless you are a home repair ace, and you are prepared to put a ton of sweat equity into every property you flip, you are going to need contractors.
Even if you could do it all yourself, you’ve got plenty of other work to do. Specifically, you need to go find other 
properties you can flip, arrange for your financing, “stage” the property, and find willing buyers. On top of that, you’re a project manager for your own flip. That’s three full-time jobs, right there!
Contractors cost money. And above-board, legitimate, licensed contractors cost even more money. But it is vital for your protection, your long-term business viability, and your own financial security that you use legitimate, licensed contractors – exclusively. Why? To protect yourself!
Workers’ Compensation
Construction, remodeling and renovation sites are notoriously hazardous. It is routine for workers to get injured on the job. Legitimate contractors must carry a special type of insurance, called workers’ compensation insurance.
This coverage ensures that there’s enough cash on the table to help injured workers pay for any medical care and pay their bills while out of work from job-related injuries.
This insurance serves three purposes, actually: First and foremost, it protects the worker. Second, it protects the injured worker’s employer, the contractor. Otherwise, the contractor would have to assume the entire risk. And, with health care costs being what they are, and with the constant possibility of fraudulent malingering pushing up expenses, those costs can be crippling to the contractor – especially to small contractors.
But workers’ compensation coverage protects you, the property owner, as well.
Consider this: You decide to remodel a home’s kitchen as part of your flipping strategy. Cash is tight, and you know your margins on this property are narrow. But one guy offers to do the work very cheap, for cash under the table.
“This is a lifesaver,” you think, and let the guy do the work.
But one of his workers hurts his back on the job. He sues the contractor, but the contractor has no assets beyond the tools in the back of his truck. Well, the tools of a trade generally fall under bankruptcy exemption statutes in most jurisdictions. So the employer can’t make the worker whole.
Guess who’s next in line in the lawsuit?
You are.
In fact, if the plaintiff’s attorneys view you as the “deep pocket,” you may well get sued first.
As the property owner, you also bear potential liability for anyone who gets hurt on the job on your property. Now, workers compensation insurance largely shields you from having to pay compensatory damages to injured workers.
Now, it could be that the worker is lying about the injury. But can you afford to pay a private investigator to follow the guy around? Can you afford to get a secondary assessment from a different doctor? Can you afford to pay all the attorney’s fees it would take to defend yourself? Sure, if you won a countersuit, they may have to pay attorney’s fees and court costs. But we’re talking about a laborer here. What if he doesn’t have it? You can’t collect what he doesn’t have. What would that do to the profitability of your company?
Contracting Scams
Not convinced? Here’s another scam to watch out for:
You hire a contractor to do a job – but they leave the job unfinished, perhaps to take a higher-paying job elsewhere. Meanwhile, the house is unusable.
If you hired a legitimate contractor, you would have some recourse. You could complain to the state licensing board. Contractors don’t want to have their licenses revoked, and will work very hard to avoid getting a track record of problems and complaints.
Legitimate contractors also carry liability insurance, or they post a bond to ensure they can satisfy any likely claims arising from damages from shoddy work or accidental or negligent damage to the property. If something goes wrong, the contractor has something to lose – and has demonstrated to licensing authorities the ability to make good on any damage caused by his work.
Here’s one common scam: You see flyers in your neighborhood advertising for concrete or paving work. They may even put a contractor’s license number on the ad.
You call them up and you have them do the work. They ask for money up front “for materials” and then disappear. Or they apply a thin layer of low-grade concrete that crumbles in just a few months.
But when you call to complain, their number’s disconnected and their business address is fake. The “company” was a group of people living in a motel and they’re long gone. The business or contractors’ license number they gave you was fictitious.
Always check out new contractors’ licenses before you give them any money. Call your state’s contractor licensing board and verify the status of the license.
One additional red flag: Normally, the contractor obtains the necessary construction or digging permits. If they ask you to get them, it could be because the permit office is on to them. Further, if they don’t bother with the permits, the city could hold you liable for any damages.
There are other resources you can use to check out a contractors’ reputation, including websites like Angie’s List and the Better Business Bureau.
When you find a good contractor, take good care of them! Skilled and efficient contractors are an important part of any flippers’ team. Their willingness to work with you on pricing and to get you in their schedule quickly can make the difference between a profitable flip and an unprofitable flop.
Jason Van Steenwyk is a veteran financial industry journalist who has been fighting to make the world safe for the retail investor since 1999. He lives at Ground Zero of the real estate bubble in Fort Lauderdale, Florida.
