Understanding contracts and liens before you begin a remodeling, home improvement or fix and flip project can help you avoid a major headache with a contractor and possible loss in your real estate investment.
It’s imperative you understand your obligations in any contract before you sign. For example, a contract may state that your contractor can legally place a lien on your property and take claim if you would fail to pay for the completed work.
Also, a lien could be placed on your property if a subcontractor or supplier is not paid by the contractor, and you did not sign a lien waiver. For example, if a home improvement contractor fails to pay his employees or fails to pay for the building materials used in the remodeling project, you can be held liable for the unpaid expenses.
Why Require a Lien Waiver When Working With a Contractor
With a lien waiver, when the project is complete, both you and the contractor sign off that you have met the contract obligations. This means the contractor is agreeing to all payments that may still be owed to suppliers, subcontractors or vendors.
If your general contractor doesn't agree to sign off on the lien waiver, withhold your payment to your contractor until he or she shows proof that all suppliers and subcontractors are paid.
Under Texas law, you can be held responsible for subcontractors and suppliers, even if you were not the one to establish the contract. This is why it is essential to trust the general contractor you are working with and to understand all contracts you are asked to sign.
Tips for choosing a contractor
With real estate investment projects, choose a contractor with an investment mentality. He or she will understand the importance of tight timelines and also the importance of key value areas.
Get bids in writing, and look for detail about exactly what will be done. Beware of the "low-ball" bidder whose price is much lower than everyone else's. Question the quality of the materials that will be used and the work that will be done.
Seek references. Talk with recent customers or inspect recent work. If they must be licensed by the state, such as for electrical work, contact the state licensing agency to verify credentials and inquire about complaints.
The Texas Department of Licensing and Regulation (TDLR) is a state regulatory agency that currently oversees more than 20 types of businesses, industries, trades, and occupations. The agency is responsible for issuing licenses, conducting inspections, investigating complaints, assessing penalties, setting rules and standards and holding hearings.
Signing a contract with your contractor
Insist on a written contract that specifically states what the contractor will do, when the work will start, and when it will be completed. Insist on signing a release of lien when you have fulfilled your obligations with the contract.
Remember these final tips when it comes to contracts with your contractor:
- Make sure the contract includes everything the contractor promised and spells out the cost of special orders and materials.
- Do not allow anyone to rush you into signing a contract.
- Do not sign a contract with blanks in it.
- Do not sign a contract until you have read it and understand it, or until your trusted advisor or attorney approves.
Catalyst Funding is a hard money lender who can help build your real estate investment opportunities. With a background in fix and flip projects and other property investments, we can provide resources and guidance to help you through the entire process. We strive to be more than a lender! For more information, contact Catalyst Funding online or call us at (832) 648-3626.