There is a major pitfall when it comes to flipping properties that most people don’t talk about enough. The problem of properly qualifying and staying on top of contractors. This is a common problem that all who wish to venture into the flipping jungle need to be aware of and not be lazy about.
I had a student who was very eager to get going in real estate. He and his wife had some cash to work with. They thought that having enough cash would be just what they needed to get a deal done and paid little attention to much of the training. They soon found a deal they liked and were able to get it under contract. I strongly cautioned then that they needed to qualify their contractor and do their due diligence.
You see when you work with contractors, there are three keys to keep both control of the contractor and reduce any potential for problems.
FIRST, you always have a contract and scope of work spelling out the terms of the relationship and exactly what the contractor is supposed to do. Also, you cannot forget to include a deadline in the contract with a stiff penalty, if not achieved.
SECOND, you must ask for and receive three good referrals from happy customers that the contractor you decide to use has worked for before, and call those people. If those happy customers are still happy with this contractor then you have a good chance you will be happy with him too.
THIRD, you never give the contractor all the money up front.
Sadly, my clients did not listen. They simply relied on someone who was very convincing and that seemingly “knew his stuff.” By doing that they ended up with a guy who not only didn’t show up very much to do the work he promised to do, but also took off with their money.
It started out ok. He went and bought some supplies and made the effort like he was starting work after they gave him $50,000 up front. Then he came by less and less. Finally, he called them and said that if they didn’t give him another $20,000 that he wouldn’t finish the job. They were so angry they fired him and proceeded to take him to court.
This didn’t work out as planned because as they were looking into the guy he was doing this all over the city to many unsuspecting homeowners. He gets the money up front, and if they sue, he just bankrupts that company and starts a new one. He tells the court some song-and-dance about how he was mistreated. That he is the victim and that he should get damages from them. In the end, they prevailed. It only took sixteen months to conclude their court case. They won a judgement of $100,000. Fifty thousand for damages and fifty thousand that for punitive damages and attorney’s fees.
After all that, the contractor bankrupted the company and is merrily ripping people off to this day I’m sure. They got no money back, had to pay thousands in attorney’s fees, spent hours of time, and lost sleep all because they didn’t want to expend a little effort to follow the rules of dealing with contractors.