Protect Your Investment: How to Spot and Avoid Bad Contractors as a Real Estate Investor

Jun 01, 2023
bad contractor job on renovations and re hab of an investment property

Bad contractors can derail an investors profits on their real estate investment.  Find out how to spot and avoid bad contractors as a real estate investor.

Getting your first, second, or even third real estate deal and beyond can be an exhilarating experience. Whether you're a seasoned investor or just starting, closing a real estate deal can be a satisfying and rewarding achievement. It's an opportunity to grow your portfolio, increase your passive income, and build long-term wealth.

However, a bad contractor can quickly take away the exhilaration of buying a real estate property. After investing time, money, and effort in finding the right property, a bad contractor can derail your plans by providing poor workmanship, causing delays, or exceeding the budget.

The excitement of closing a deal can turn into frustration, disappointment, and even financial loss. A bad contractor can create a stressful and unpleasant experience that can tarnish your enthusiasm for real estate investing. The time and resources spent fixing the contractor's mistakes can also take away from your other investment opportunities. It is crucial to hire a reputable contractor who can deliver quality work and meet your expectations to maintain the exhilaration of buying a real estate property.

But how can you tell the difference between a good contractor and a bad one?

It's a critical question that every real estate investor should ask themselves before hiring a contractor. One way to differentiate between a good and bad contractor is by doing your due diligence.

Research the contractor's work history, experience, and qualifications. Look for references, reviews, and testimonials from previous clients. A good contractor will have a proven track record of delivering quality work on time and within budget. They will also have the necessary licenses, insurance, and permits required by your state and local authorities.

A good contractor will communicate effectively, provide detailed project plans, and offer reasonable warranties for their work.

Conversely, a bad contractor may lack the proper credentials, have a history of poor workmanship or delays, or communicate poorly.

So, what are the red flags of a bad contractor?

A bad contractor may ask for 50% payment upfront before the work even starts. Don't let your money get ahead of the work being done. Ensure that the payment is made according to the work progress.

  • A contractor who asks for money up front is not necessarily a bad contractor, as there are legitimate reasons for requesting an initial payment.
  • One common reason is to cover the initial cost of materials and supplies needed for the project. For example, if the contractor needs to purchase expensive materials, they may require a deposit to ensure they have the necessary funds to buy them.
  • The contractor may ask for money up front as a means of securing their schedule and ensuring that they can commit to the project. This can be particularly true if the contractor has several projects on the go and needs to balance their workload effectively.

However, it's important to note that asking for too much money up front or requiring payment before any work has been completed can be a red flag. A reputable contractor will have a clear payment schedule and won't require payment until certain milestones or deliverables have been met.  This article outlines some tips:          You Need to Keep Your Contractors on Budget! Here's How

Request their liability insurance and ensure that the name insured matches the name on the contract you signed. If the names don't match, it could be a sign that the contractor is not insured.

  • If your contractor does not have the right liability insurance, it can have a significant impact on a real estate investor.
  • In the event of an accident or damage to the property during the renovation or construction process, the investor may be held liable for the costs of the damages. Without adequate liability insurance, the investor would have to pay for these costs out of pocket, which could result in significant financial losses.
  • If the contractor causes damage to a neighboring property, the investor may be held liable for that damage as well. Therefore, it's critical to ensure that your contractor has the appropriate liability insurance to protect yourself and your investment.

Here is an article about What Type of Insurance Should a Contractor Have?

If the contractor shows up late or doesn't show up on the first day of the job, it's a red flag. This indicates that they may not be reliable.

  • When a contractor does not show up or is late to start a project, it can have several negative impacts on a real estate investor.
  • First, it can cause delays in the project timeline, which can lead to increased holding costs, lost rental income, or missed opportunities for other investment projects.
  • The contractor who is consistently late or does not show up at all may be an indication of poor work ethic, lack of professionalism, or a lack of commitment to the project. This can lead to subpar work quality, missed deadlines, and ultimately a negative impact on the investor's reputation.
  • Investors need to set clear expectations and deadlines with the contractor at the outset of the project and to monitor their progress closely to ensure they meet their obligations, and DO NOT give them any more money!

Drinking alcohol while working is unprofessional and unsafe. If the contractor brings beer or other alcoholic beverages at the beginning of the day, it's a bad sign.

  • When a contractor drinks on the job, it can have significant negative consequences for a real estate investor. Drinking alcohol on the job can impair the contractor's judgment, coordination, and overall ability to perform the work safely and effectively.
  • Contractors who drink on the job can cause mistakes, accidents, and injuries on the job site, which can result in liability issues for the investor. Contractors who drink on the job may not take the project as seriously or may be more likely to cut corners, resulting in subpar work quality or incomplete work.
  • This can ultimately lead to delays, increased costs, and a negative impact on the investor's reputation.

A good contractor cleans up the job site at the end of each day. If the contractor doesn't clean up and leaves debris in your yard, it could be an indication of poor workmanship.

  • When a contractor does not clean up the job site at the end of the day, it can have several negative impacts on the renovation of a property.
  • Not cleaning the job site on a daily basis can create safety hazards, such as tripping hazards or debris that can cause damage to the property or injury to workers or other individuals.
  • A cluttered job site can make it difficult for workers to perform their tasks efficiently and effectively, leading to delays in the project timeline and increased holding costs.
  • Lack of cleanliness can be an indication of poor work quality or a lack of attention to detail, which can lead to subpar workmanship and ultimately a negative impact on the property's value.

Inquire about the owner of the company. In some states, a bad contractor can start a new company under a different name. If the owner of the company has been sued multiple times, it's a sign to be cautious.

  • Anyone who is using a contractor should check out the owner of a contractor company and not rely solely on online reviews because online reviews can be manipulated or fake. Savvy and deceitful contractors can have family members or friends write them positive reviews to make their business appear more trustworthy than it actually is.
  • On the other hand, negative reviews may be from clients who had unreasonable expectations or unrelated issues.
  • It's important to do more thorough research on the contractor, including checking their license and insurance information, asking for references, and verifying their work history.
  • Checking the owner's history can provide valuable insights into their professional background and any potential red flags, such as lawsuits or bankruptcy filings.

Even as a seasoned real estate investor, I have been taken in by more than one bad contractor. Over the years, I have come to realize that all contractors have a shelf life.

This means that they may have been good contractors at one point, but due to poor money management skills or a lack of ability to hire qualified subcontractors, they start to live paycheck to paycheck. Unfortunately, this cycle can lead to a decline in the quality of their work and overall professionalism.

In my experience, I have had contractors who started out with an excellent work relationship, but then turned sour.

My experiences with bad contractors include:

  • they hired poorly skilled sub-contractors
  • left the job site in such a mess that it was hard to tell what was done and what wasn't
  • or even failed to pay suppliers

My experience in real estate investing has taught me valuable lessons about the importance of vetting contractors before hiring them for a project. While bad contractors can take away the excitement of buying a property, there are steps that investors can take to mitigate the risks.

It's crucial to do your due diligence on contracts, avoid giving too much money upfront, and keep an eye out for warning signs such as a messy job site, late or non-existent arrivals, or unprofessional behavior.

And if something does go wrong, don't be intimidated to step in and try to work it out with the contractor or fire them if necessary.

By being proactive and vigilant, investors can minimize the chances of a bad contractor ruining their real estate investments Being aware of these warning signs can save you a lot of money, time, and frustration.

Make sure to do your research before hiring a contractor to ensure you have a positive renovation or house flipping experience.