You have the property, you have the hard money loan, now you need to lock in the contractors. What now?
This is a construction project, right? Things can go wrong, it is easy to go over budget, the scope of work can be confused. Get everything on paper, just in case there is a disagreement. Here are some important points to have:
- Basic info: 2 parties of the agreement with names addresses, job site address, start date, substantial completion date
- Scope of work: the more detailed the better so that everyone understands what is expected from the contractor
- Material specifications: exactly which materials would be used if agreed to. For example, do not just include cabinets, but specify which company, brand, style, etc.
- Cost: unit prices, materials, labor, management, anything that applies
- Insurance: require that the contractor be insured and keep copies of their proof of insurance
- Not to exceed: if a contractor would agree to a not to exceed contract (and not all will), overages not suggested by you would be the contractors’ responsibility
- Payment schedule: so that everyone is clear when the contractor would be paid, it is necessary to have this on paper. if you pay by % completion or monthly, this should be a part of the agreement
- Drawings and plans
- Change orders: if anything needs to change, specify the process for doing so
- Compliance: contractor will do all work in accordance with zoning, permits, inspections, local ordinances, and codes
- Clean up: contractor needs to keep site clean
- Mechanics’ liens: require that the contractor provide you with evidence that subcontractors have been paid for work completed. A lien release might be required by your lender in addition
- Warranties: if any work is warrantied, specify what is and for what time frame
- Dispute resolution: how unresolved issues will be solved (arbitration, mediation, etc.)
- Termination: right to terminate for a breach of contract for reasons such as poor workmanship, failure to meet the contract requirements or bankruptcy or insolvency
As always, make sure you find the right contractor for the job. Vet them thoroughly! For further real estate investment help as well as hard money loans, contact the TABS, LLC. team.
This info was adapted from FLIP by Rick Villani and Clay Davis.