Real Estate: Before Contracting a Contractor Read This

LOCAL RECORDS OFFICE – I flip about 15-20 houses per year, and on each flip, I use an average of ten contractors. That adds up to about 150-200 contracts per year that I need to write! I could probably save several hours of time by not writing contracts, but one major dispute with a contractor that ends up in court could easily eat up twice as much time (and quite a bit of money as well). So, in my opinion, writing contracts are worth every minute that I spend doing it.


Hiring the Right Contractor is Crucial


By using contracts consistently throughout all my projects and with all my contractors, I sleep better at night knowing that I’m pretty well protected, both legally and financially. Of course, no contract is bullet-proof, and anyone can sue me for any reason, but having a contract in place makes it all the more unlikely that that will happen; and if it ever does, I’m happy to take my chances in court.


And, not only do the contracts I use protect me and my business, they protect my contractors as well. They know what I expect and they never have to worry about me trying to take advantage of them by adding work or “forgetting” payments. Contracts are a two-way street that – when used properly in this business – can provide a peace-of-mind to both the investor and to the contractor.


But, I’m not going to spend any more time trying to convince you to use contracts for your contractors…instead I’m going to talk a bit about what a good contract looks like…


Contract Myths


Before we jump into the details of what a contractor contract should contain, first let’s dispel a couple common myths about contracts:


Myth #1: Contracts need to have a lot of legalese and/or be written by a lawyer to be worthwhile.


A lot of up-and-coming investors will decide that, because they can’t afford to hire an attorney to write their contracts, it’s not worth even having one. While getting a contract written by (or even just reviewed by) an attorney will go a long way towards ensuring that your interests are protected, it’s much better to have a self-written contract than no contact at all. While judges are trained to interpret contracts very literally, they also are reasonable enough to take common sense and intent into account when resolving a contract dispute. So, don’t forego a contract just because you don’t have a law degree or can’t afford to hire an attorney.


Myth #2: It’s better to have long/complicated contracts than to have short/simple contracts.


We all know that stereotypical contract that’s dozens of pages of small print that covers every possible contingency in gory detail. But, while one purpose of a contract is to protect your (and the other party’s) interests, the other purpose of a contract is to ensure that both parties are on the same page with respect to the transaction at hand. Plenty of contract disputes arise not because one party is looking to “take the money and run,” but instead because the parties never really understood what the other party was agreeing to. Sometimes, all it takes is a couple sentences to reasonably describe each party’s rights and responsibilities, and is enough for both sides to really understand what they’re agreeing to before it’s too late.


Myth #3: You don’t need a contract for a small/inexpensive job.


Just because a transaction only involves a small amount of time and/or money doesn’t mean that a contract isn’t important. Hiring a handyman to screw in a light bulb for $2 may seem pretty straightforward, but if that handyman electrocutes himself in the process, having a contract may mean the difference between you visiting your handyman in the hospital and you meeting your handyman in court while he’s suing you for everything you’ve got.


Elements Of A Contractor Contract


With those things in mind, let’s talk about the key components of a contract you might use with a contractor who is working on one of your properties. Remember, these are things that many investors feel are important to have in a contract, but this is by any means a complete list of contract issues that might be included in your contract.


Ultimately, you’ll need to decide what things are important for you to have in your contract, and while most of these things below will probably make the cut, that’s for you (and perhaps your attorney) to decide.


Independent Contractor Status


One of the most important things most attorneys will recommend you include in your contract is a very clear declaration that the contractor is an “independent contractor,” and is not your employee. This is important for several reasons:


  • From a liability standpoint, you may be required to carry certain forms of insurance for your employees. If your contractor gets hurt on the job, and can make a case that he is an employee of yours (it’s not as far-fetched as you might think!), you may be on the hook to cover his medical expenses and other claims.



  • From a tax standpoint, you are required to withhold taxes from paychecks and also to pay certain employer-related taxes. If the IRS deems your contractor an employee (again, it’s more likely than you might think), you may be on the hook for taxes and penalties.



  • From a benefits standpoint, if after a job is complete, your contractor claims to have been an employee of yours – and if the unemployment office agrees – you could be on the hook to pay his unemployment benefits.



  • From both a liability and from a financial standpoint, it’s extremely important that you clearly define your contractor’s role in your business – and that role is as an independent contractor, not an employee.



Also, keep in mind that the IRS has a number of tests to determine if someone is an employee or an independent contractor.


For example, if you provide the tools to the worker, the IRS will be inclined to consider that worker an employee. Likewise, if you direct the worker as to how the job will be completed, when he must show up and go home, etc, the IRS is more likely to determine that worker is an employee.


For this reason, these sorts of things should be called out specifically in the contract. For example, your contract probably should state that the contractor will provide his own tools.


Scope of Work: Perhaps it goes without saying, but just in case… Your contract should call out – as specifically as possible – the tasks that your contractor is being hired to perform. Don’t be afraid to go into gory detail if you think there is any possibility of confusion or miscommunication.


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