\n<\/p>\n
A bad contractor<\/strong><\/a> could not only ruin your home renovation but cost you tens if not hundreds of thousands of dollars. Don\u2019t believe us? Just ask Rico to the Rescue<\/em><\/strong><\/a>\u2019s Rico Le\u00f3n<\/strong>. Rico has spent years cleaning up contractor mistakes<\/strong>, making homeowners feel whole again after getting ripped off, lied to, and scammed by who they thought were reputable contractors. As a contractor himself, Rico knows the red flags to spot right away<\/strong> to tell if a contractor will take your money and run, and he\u2019s sharing them with us today!<\/p>\n This episode is crucial for ANYONE who owns a home<\/strong>, is looking to renovate one, or is just getting started in real estate investing<\/a>. Home renovations can make or break your career as a <\/strong>real estate investor<\/strong><\/a>, so knowing who can get the job done is a skill that can\u2019t be overlooked. Rico breaks down the common problems inexperienced contractors run into<\/strong>, the Ponzi scheme of payments to look out for, how to create a contractor contract<\/strong> so you protect yourself, and the mistakes you can prevent BEFORE you hire a contractor.<\/p>\n Plus, we\u2019ll get into the not-so-obvious red flags that only an experienced contractor will notice<\/strong>, what you need to check before you hire a contractor, the milestones to set up so you don\u2019t get ripped off, and the conversation you must have with ANY contractor before work begins. Finally, Rico leaves us with four tips to help even the most inexperienced homeowner <\/strong>hire the right contractor.<\/p>\n Henry Washington: James Dainard: Henry Washington: James Dainard: Henry Washington: James Dainard: Henry Washington: Speaker 3: Henry Washington: Speaker 3: James Dainard: Speaker 3: Henry Washington: Speaker 3: Speaker 3: James Dainard: Henry Washington: James Dainard: Rico Le\u00f3n: Rico Le\u00f3n: James Dainard: James Dainard: Rico Le\u00f3n: Rico Le\u00f3n: James Dainard: Rico Le\u00f3n: James Dainard: Rico Le\u00f3n: James Dainard: Rico Le\u00f3n: Rico Le\u00f3n: Rico Le\u00f3n: Henry Washington: Rico Le\u00f3n: Henry Washington: Rico Le\u00f3n: Henry Washington: Rico Le\u00f3n: Henry Washington: James Dainard: Henry Washington: Rico Le\u00f3n: James Dainard: James Dainard: James Dainard: Rico Le\u00f3n: Rico Le\u00f3n: Henry Washington: Rico Le\u00f3n: Rico Le\u00f3n: James Dainard: James Dainard: Rico Le\u00f3n: Rico Le\u00f3n: James Dainard: Rico Le\u00f3n: Rico Le\u00f3n: Henry Washington: Rico Le\u00f3n: Henry Washington: Henry Washington: Rico Le\u00f3n: Henry Washington: Rico Le\u00f3n: Henry Washington: Rico Le\u00f3n: Henry Washington: Rico Le\u00f3n: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
What\u2019s going on everybody? Welcome to the BiggerPockets Real Estate Podcast. I am your host, Henry Washington, and I am joined today by my good friend, Mr. James Danner, for a show about one of the most relatable universal problems that investors face and that is contractors. James, have you ever had a nightmare contractor?<\/p>\n
Never once. Every job site has gone a hundred percent smooth.<\/p>\n
Always bating a thousand,<\/p>\n
Bating a thousand. I feel like me and you were talking about construction a lot the last couple of weeks. Definitely one of my favorite topics because I\u2019m a value added investor, so the construction is so important to implement correctly and have the right people on your team. We\u2019re going to cover a lot of things that will help spare our listeners some pain to where they don\u2019t make same mistakes. They can vet their contractors and avoid costly problems. And<\/p>\n
To do that, we have brought in Mr. Rico. Leon Rico is a contractor who specializes in cleaning up other contractors\u2019 messes. In fact, he\u2019s so good at it. They gave him a show on HGTV called Rico to the Rescue where he does just that. So today he\u2019s going to talk to us about what red flags to look out for when hiring contractors, how to protect yourself with a strong contractor agreement and what property owners can do, even if a contractor project goes way, way out of bounds.<\/p>\n
And I do want to say that not all contractors are bad. We reference that a lot throughout our show. There\u2019s thousands of great ones out there. We\u2019re here to help you protect yourself and make smart decisions. That\u2019s the whole thing that we get. Talk about Ricoh about making smart decisions and protecting your job site.<\/p>\n
Alright, that sounds great. So let\u2019s bring in Rico. Rico, Leon, welcome to the show.<\/p>\n
Thanks for having me.<\/p>\n
So you\u2019ve seen a ton of contractor work gone wrong. What\u2019s the impact of that for these families? What\u2019s at stake for them?<\/p>\n
So a lot of people that want to do renovation, they always have a budget. They get started, they hire a contractor and then things move forward. In my show, they tried to do that and then unfortunately that contractor would just take the money and run or cause lots of damage that is very expensive to fix and then the contractor runs away and puts it back onto the homeowners. So this is what I\u2019m seeing now more than ever because, and honestly, the pandemic is what threw wrench into things because not only the material costs go up, but then subcontractors were getting smarter with their bidding, but the GCs weren\u2019t. So all of a sudden a GC will say, Hey, I\u2019m going to do this project for 150,000. I have all these subs. We\u2019re going to move forward. During the pandemic, halfway through a project he found out or she found out that they\u2019re making no money, absolutely none. The subs are costing more and material costs more, and then they\u2019re realizing they\u2019re doing a job for free. And the problem is they don\u2019t have that conversation with the homeowner. They just say, I want more money or I\u2019m going to put a lien on your house. So there are better solutions to solve these problems than just screwing over homeowners. That believed what you said to begin with.<\/p>\n
Yeah, the pandemic, it was like this breaking point in construction because I\u2019ve been in construction for a long time 2005 to now. And in 2008 I remember there was contractors everywhere you could get. It didn\u2019t matter what kind of project you had, you had to line out the door. And then as the market improved, resources start tightening up, right? The economy gets better, there\u2019s more work out there. And then when, like you said, it threw a wrench in it and the wrench cost three times more than the trades. And during the pandemic it was we had this massive crunch of bodies and the demand and the boom and so much money got poured in the economy. It really pulled the resources out and the subcontractor prices exploded. And we\u2019ve seen the same thing across the board with these general contractors. They\u2019re bidding things, they come too high, and then there\u2019s a million reasons of why. And there\u2019s something that breaks down with the communication of they just don\u2019t want to sit down and talk about it where it should be like, Hey, I bid this, I have a problem, we got to review this again. And there\u2019s a lack of business etiquette there, and then that\u2019s where it just spins out of control.<\/p>\n
Well, it\u2019s funny because over here I think too many people are underbidding it, not overbidding it because if a contractor\u2019s not making money, then the priority of your house is going to be last on this person\u2019s list. And then of course problems arise.<\/p>\n
Ricoh. In my market, what I tend to see is some of the contractors that I work with, especially the smaller mom and pop contractors, are great contractors in terms of quality of work and maybe not so great in terms of operating a business because they got into the business because they enjoy being a contractor, not necessarily because they like running a business. So you lose some of the customer service aspects or some of the communication aspects, like you said, how contractor really just need to sit down with the homeowner and say, Hey, this is what we bid, this is why we bid it, but this is where we are now. Do you find a lot of that sometimes being the cause of contention that maybe they just aren\u2019t great business operators, but they\u2019re better contractors?<\/p>\n
That happens a lot. That happens so much. I mean, there\u2019s people that just do flooring that homeowners love so much. They\u2019re like, can you please do the rest of the house? And then that person says, well, I got a friend that does tile and I got a friend that does plumbing and I got a friend that does whatever, and that person will bring those guys in but doesn\u2019t know how to manage or market up or communicate or even manage all of it. So there\u2019s so many situations that I\u2019m seeing right now. I know the mom and pops are really good. They could build you the most gorgeous kitchen, not great with communication, not great with their SOP system, operating procedures, not great with their finances because again, pre pandemic robbing Peter to pay. Paul worked out. It worked out back then because people were paying, you could shift money, get things going, and it was kind of a smoother flow.<\/p>\n
Pre pandemic. During the pandemic robbing Peter Pay, Paul did not work. Homeowners stopped paying because they didn\u2019t trust contractors. So now you have contractors that owe 2, 3, 4, 5 people like subcontractors and you have GCs that owe money. You have GCs that haven\u2019t finished work and then it\u2019s a standstill and then everyone\u2019s like, where\u2019s my money? And everyone\u2019s cool until money\u2019s involved. So that lack of communication is the reason why things blow up because they don\u2019t have those systems in place. Something that a lot of people don\u2019t know, there\u2019s a new Colorado statute, a construction statute that they just passed in Colorado. So now if a contractor in Colorado spends $1 of a homeowner\u2019s money on another project, that person could ask for discovery, get the accounting and sue right away. So they\u2019re trying to prevent contractors from doing that whole robbing Peter to pay Paul thing. So now if you want to stay in construction, spend the $15,000 on a lawyer to make sure your contracts are in place, your systems are in place, you\u2019re protected legally, have the language in place, and then make sure you have someone that manages finances beautifully to make sure everything is in line with milestones on the contract<\/p>\n
That robbing Peter to pay Paul. That\u2019s a big deal. That\u2019s something that we\u2019re always looking for as renovators and we\u2019re hiring contractors and there\u2019s always this little queue that starts happening that what\u2019s going on. Typically they\u2019re start asking for draws a little bit earlier, earlier and earlier. That\u2019s usually my number one red flag, like going, okay, if you\u2019re requesting money too soon, you need the money and you can kind of see it happen through as you hire these contractors out. And to touch on a couple points that you and Henry discussed is during this boom, the subcontractors saw general contractors getting a lot of work and they thought they were making a ton of money and they just jumped right into the space. They went from electrician to general contractor, and it\u2019s kind of unfortunate because you lost a SubT trade, but then B, they just didn\u2019t know how they were getting into it and they didn\u2019t understand all the cost of running a general contracting license like the licensing fees, the insurance, the payroll tax, and it snowballs on \u2019em. And the snowball can become detrimental to a renovation project whether you\u2019re doing it for yourself or especially for a flipper, because if that construction project goes awry, your deal is dead.<\/p>\n
So now that we understand what\u2019s underneath some of these contractor issues and why we\u2019re seeing so many lately, what can homeowners do to prevent these problems in the first place? We\u2019ll get Rico\u2019s answer right after the break. Welcome back investors. We\u2019re here with Ricoh Leon of HGTVs, Ricoh to the rescue and he is rescuing all of us we hope from future contractor nightmares. So let\u2019s jump back in.<\/p>\n
So it\u2019s all about prevention as we\u2019re going through things I\u2019ve learned over the years is the more you vet your contractor, the more organized you are as an investor by putting things on construction contracts, having a template, a written down guide, the investor, the homeowner, and the contractor of how that job site\u2019s going to run and the processes that are going to be implemented and how change orders work. It really ties the whole job site together to where everyone\u2019s on the same page. How do you prevent mistakes on your job sites? Because a lot of times we get so excited, we just want to hire the contractor, get going and people skip all these vital steps.<\/p>\n
You don\u2019t get paid if you don\u2019t follow the system. You have to force people. You hear about CRMs, right? CRMs organize what you do, but if there\u2019s not a person that\u2019s organizing and constantly touching the crm, then the CRM means nothing. So your processes and systems also mean nothing. If there\u2019s not a person that enforces, Hey, by the way, before you do this, sign a conditional lie waiver. You don\u2019t get a check until then. Make sure that you\u2019re going to do this. Prove to us that you have funds in the bank so we know that the project\u2019s going to get done. These are things that a lot, I\u2019m a systems guy, I\u2019m an SOP guy. I\u2019ve created language that\u2019s used to help homeowners and contractors against insurance companies. I feel like I was an internal lawyer my entire life, right? Because I know a lot of contractors like to complain versus find the solution.<\/p>\n
And the solution is creating a system that protects you and the homeowner just get things done. This is the problem. Another pandemic thing, the jobs now when it took three months before it takes six, if it takes six, it takes a year. Now permitting takes longer. All this kind of stuff takes longer. So you have to strategize paying your rent, your mortgage, your car payment, your kids whatever for three months longer. So you have to factor in inflation pricing and then also a level of priority. If you do this proficiently, then you\u2019re fine. If you don\u2019t, you\u2019re going to end up on my show. You know what I mean? You\u2019re just going to end up screwing a homeowner whether you\u2019re a good guy or bad guy, and then I\u2019m going to have to come in and go track everything that you did or wrong, like insurances and everything else. And it always comes down to the process a hundred percent. Or they sell a job just so they could get a check today and then never necessarily prioritize them at all.<\/p>\n
Yeah, get that funds coming into their account and not saying, one thing I do want to clarify is you guys, there is so many great contractors on this planet that run a professional business. I have contractors I worked with for years. It\u2019s just when it gets out of control, it can become very damaging. And so we have a standardized checklist before we hire a contractor. It\u2019s check references, check their license and bond status every time we hire them because sometimes it lapses in the middle of your job as well. Review the bid, make sure it\u2019s itemized out by line item. Every benchmark needs to have a dollar amount associated with it. Every line item needs to have a dollar associated with it, A construction contract signed to where they know what their payment schedule is, how it works, what they\u2019re responsible for, what we\u2019re responsible for, and just keeping that clarity.<\/p>\n
And the reason we do that not only is to prevent mistakes, but to mistakes early. Because once these jobs snowball and you don\u2019t get on the contractor and it gets out of control, that\u2019s where the fire starts and it is like you can\u2019t control it at that point. Right? What red flags are you looking for from a contractor on a job site? What is that? I know I see a couple cues where I\u2019m like, okay, something\u2019s going on here. What are those red flags that you\u2019re looking for or tell people to watch out for to know your job site and he\u2019s getting a little out of control.<\/p>\n
Yeah, unfortunately, everyone tells me what I want to hear. Contractors tell the homeowners what they want to hear also, and I feel like some of them believe it where it\u2019s like, Hey, I\u2019ve been doing this 30 years. My dad\u2019s dad, dad did it, and I have a great reputation. I\u2019m old school. I\u2019m old school. I don\u2019t have the internet, I don\u2019t have websites. I\u2019m just really good. Whatever the thing is, good contractors say the exact same thing as a bad contractor, you have to, when I say references, it\u2019s references in the last year, year and a half. I don\u2019t care if you did Mrs. Jones edition in 2010. I literally don\u2019t give a, because that was a billion years ago. Prices were different. What have you done successfully now in the last year? Because if you could do successful things in the last year, then I know you understand the processes, systems, the pricing, and then I\u2019ll feel a lot better.<\/p>\n
So when anyone comes up to me, I look at the most recent projects that they have, and then I definitely do due diligence by calling those homeowners, making sure I was like, Hey, can I stop by? Is that cool? Hey, I want to invade your privacy, but I just want to make sure I\u2019m making a good decision. It\u2019s just that vetting process has to be more, you have to spend more time on that vetting process and definitely follow up with real humans. People could build a gorgeous website now with AI in an hour and a half, and it looks like they\u2019ve done a hundred million dollars worth of work. So you have to do your due diligence a lot more detailed now than before.<\/p>\n
Yeah, part of that due diligence, what we do is we check their license number. When was that established? When was that granted, there\u2019s a date on there. If your general contractor has a year and a half old date, that can be an issue because the next question needs to be like, where were you working prior or did you own another construction business prior? Because in Washington state, it\u2019s a little bit easy to get your contractor\u2019s license. You fill out a form, you send it in, you get a bond, and poof, you are a general contractor, you can go build a house.<\/p>\n
Wow,<\/p>\n
It is a joke.<\/p>\n
Colorado\u2019s not like that at all.<\/p>\n
I mean, there\u2019s so many things that come awry with that. And so for us, we want to go into l and i website, check their name, see if they\u2019ve had old companies, but it\u2019s such a joke. You have to watch out for it and you have to check those references because one time I hired a fake contractor, he literally had a fake id, fake bank accounts. He had a builder\u2019s license that was real, but it was all fake identity up to it. And I had one reference from someone that referred it over, but if I would\u2019ve gone through and gone back a year or two on his references, I would\u2019ve known it wasn\u2019t a real thing. And so taking that time and checking is so important. And then when you do make your mistake and sometimes you hire the wrong person, I\u2019ve done that countless amount of times having that brick and mortar, so important to keep things going forward. Do you use construction contracts before you hire or when you\u2019re going through the paperwork, the paperwork protects you on your deal? Do you use a construction contract and what do you feel are the most important things there to be included in that agreement?<\/p>\n
Yeah, so I have a pretty intense work authorization, very intense, and it definitely protects me from multiple things just because I\u2019ve been screwed over by the homeowners too. It\u2019s not just contractors or all the bad guys or anything like that. There\u2019s homeowners out there kind of doing the same thing. So in my workout, there\u2019s multiple things. I have a pyramid and the pyramid\u2019s a hierarchy. So the hierarchy I send to the homeowner saying, Hey, I\u2019m the owner, but only talk to me when it comes to this is the project manager, this is the plumber, this is the mechanical, mechanical this. These are the people that are in charge of this project. The main point of contact is your gc. If you\u2019re having issues with money that you call grace, you call Jordan, you call whomever. There\u2019s things in my contract that are systematic where it\u2019s like, Hey, you stay in your lane.<\/p>\n
I stay in my lane because at the beginning it\u2019s honeymoon period. Homeowners are excited, contractors are pumped, whatever, and then a couple months in, the homeowner can turn and be, I want this, this. And then a contractor can be like, oh, I\u2019m not making money this. So what I do is I have my systems in place where the homeowner knows what to do if this person\u2019s happy, not happy, whatever the homeowner\u2019s responsibilities are on one sheet. So it\u2019s like this is your job to pick this. It\u2019s his job to do this at this timeline. It\u2019s just getting things into systems and then enforcing it. And that\u2019s how I do pretty much any job moving forward. I do my due diligence on the other end where I make sure the homeowner understands how it\u2019s going to go. This is a problem with contractors right now, and the investors do this a lot.<\/p>\n
When contractors start working on a job, the homeowner\u2019s like, well, how much are you making off of this? What\u2019s your percentage? What\u2019s your cut? How much are you taking? Half of it, are you doing this? And then when that happens, it\u2019s just a standstill contractor, stop talking. They\u2019re like, I don\u2019t want to work with this person. They want to know the money because the second that homeowner knows how much you\u2019re making, they\u2019re going to start cutting that down. So there has to be ways where it\u2019s just like we\u2019re doing this system. This involves all of our profit in there. If we agree to do something different, we\u2019re going to have an agreed upon change order that we will both read and sign and then we could issue another check for that and then move forward. You got to go slow the first three months to make sure everyone knows what\u2019s up. Then go gungho.<\/p>\n
Ricoh as a homeowner is writing a contract. What are some of the things they need to do due diligence on?<\/p>\n
It\u2019s like you as a contractor have to have, if it\u2019s not like W nine employees, they\u2019ll two employees. Then if it\u2019s a 10 99 world, then you may have to make sure that they are bonded insured, like he was saying earlier, like James was saying earlier. But then on top of that, making sure their insurances are up to date. Because I\u2019ve seen insurances that they say they\u2019re insured and they stopped paying like a year and a half ago. So there are these things that you have to do certain levels of due diligence. Also, as a GC to protect yourself, you have to have a subcontractor agreement with every single sub that you have. Also, because if they mess up their insurances get hit first, their insurance will pay for it. You as the GC don\u2019t lose 10, $20,000. You could get that money back, hire a different contractor for that specific trade and then move forward. But if you don\u2019t know this stuff, when I started, I didn\u2019t know this, right? So when I started and these guys mess up, I wrote a check for my account to just move forward and get it over with. But I know a lot of people can\u2019t do that. So having the subcontractor agreement, understanding the processes and all that kind of stuff, really streamline things and then you start getting the profits that you want.<\/p>\n
Rico, when I do contracts, the way I typically organize things is we\u2019ll give some sort of an upfront payment, typically no more than 25%, and then we will tier out a schedule in terms of in tier one, these are the things we expect to be completed. And then we\u2019ll do a review and if they meet those things, then we\u2019ll pay them and then they move on to tier two. And then we do that maybe for three or four tiers or depending on how large the project is. Do you recommend everyone have some sort of tiered payment system in their contract?<\/p>\n
Absolutely. I love the tier. I love that as well. And then also just put in the contract stating like, Hey, we know things arise and material costs go up. Or maybe you want to hire a subcontractor that\u2019s better, that\u2019s more available and that person\u2019s more expensive. Have that conversation with the homeowner, proof to that homeowner that this is an actual situation. Then you can move forward. I tell people to not get emotionally involved because homeowners and contractors, they just fight internally. So I always say, put it into a bank, have it in escrow. Give the bank all this information of the tier system. That way you could put it on the bank and the bank\u2019s like, Hey, we\u2019re not going to release another 50 K unless we get proof and boom, boom, boom. So now a homeowner can take it off of their chest. They don\u2019t have to be the Karen that\u2019s like always blah, blah, blah, blah, blah, blah, blah. They could be like, Hey, you know what? You want more money, it\u2019s going to cost more. So why don\u2019t we do this? Show me the proof of why and who you\u2019re going to do this, who you\u2019re going to hire. Just do the simple thing for me. I\u2019ll give it to the bank. Someone can do an inspection and then they can release the money. So now when you put things into an escrow into a bank, now your hands are free and the bank\u2019s got to go off of the written contract.<\/p>\n
Man, first of all, that was worth the value of the episode alone. That\u2019s a great tip to put it in escrow and blame the bank. Last night I was doing a class with James and he was given some contractor tips and he said, and he told me something similar that I should just blame him for every time something goes wrong. Oh, that\u2019s funny. But yeah, no, that\u2019s a great idea to put it in escrow with the bank and then that bank can help you release those funds and obviously they\u2019re going to protect that the best way that they know how.<\/p>\n
First of all, they want the money in the bank. They make money off the interest of holding onto the money. Cool, whatever. We\u2019re not going to talk about how banks make money, but they\u2019re going to do 10 times more due diligence. Let\u2019s just say maybe intentionally a little bit slower, maybe intentionally a little bit slower, but guess what? They\u2019re going to do more due diligence. Then the contractor could be mad with the bank versus you the homeowner, and it makes things go a little bit slower, but you\u2019re safer. You don\u2019t get screwed.<\/p>\n
Man, there is so much gold here already. But what I want to get into is how to write smart project milestones and if things do go wrong, what options do property owners have? Rico has some genius tips for that after One more quick break.<\/p>\n
Hey everyone. Welcome back to our conversation with contractor Rico. Leon, let\u2019s pick up where we left off.<\/p>\n
One thing that I have done before to RICO is working with contractors that allow me to pay with a credit card because in some of these situations, what I found is if they go off and they say they want more money or they say that they did something that they didn\u2019t do, I can then file a dispute with a credit card company. Oh, interesting. And get my money back. Have you seen contractors that a won\u2019t work with people with credit cards, or are you open to working with people who are going to pay with the credit cards?<\/p>\n
You know what, that\u2019s literally never come across. I\u2019ve never really had a situation with the whole credit card thing. I think if that\u2019s true, then that\u2019s amazing. I think homeowners should do that to protect themselves, but I\u2019ve never gone through a situation where they\u2019ve done that. I think one time a homeowner bought the materials, so then they didn\u2019t have to pay the cost plus and they bought the materials with their credit card, the materials were on site, and then I think half the materials disappeared and it was like this weird shady thing that happened, and I\u2019m not necessarily sure that they filed a claim saying that the person stole it. I don\u2019t know what the process is after, right? It\u2019s like does a credit card file an insurance claim against the contractor\u2019s insured or do they just do a little investigation and then pay out? So I\u2019ve never been in that scenario because I could also see how people would abuse that scenario also. So for me, it\u2019s never been a situation I\u2019ve ever been in.<\/p>\n
Yeah. One thing you have to watch out for on that credit card is you got to look at, like Rico said earlier in the show, is you have to check your local laws. Every state has different lien rights. They have different contractor laws. I know like in Oregon, from what I understand, a subcontractor can actually get in front of the bank by filing paperwork. They have all the rights in that state from what I\u2019ve heard. And so you just want to make sure that it\u2019s also not fail safe because if you dispute it and let\u2019s say the credit card turns it over, they can still lien your property. And that\u2019s what the construction contracts are there to do, is to kind of guide when they can lien for what services, and then also in these benchmark schedules, clarify when they\u2019re going to get paid because nothing\u2019s worse than a homeowner, than the contractor going, Hey, I need a check.<\/p>\n
I need a check, I need a check. And you\u2019re going, okay, do I just give \u2019em the money? And those benchmarks are very important to have in there when I\u2019m given a draw out, typically, we actually like to do 10% down just through demo, then give \u2019em another 15% to get going because the most dangerous part of your renovation is that first 10% because you are diminishing the value of that property the day you get in and you rip all those cabinets out, you rip all that flooring out, your house is not financeable anymore, and that\u2019s where the value is going to come down. So when you\u2019re doing these contracts, how much clarity do you have in your draw schedule? We have benchmarks going, Hey, you get through demo. Then we go through our construction bid, tie it in with the contract, and we highlight sections like this must be completed before the next payment.<\/p>\n
And we usually break it up in four to five payments across the board and we have \u2019em sign it because when they start asking us for money, we can meet with them in person, go, Hey, look, we all agreed to this schedule. I want to pay you, but you just got to get this done and I will give you a check tomorrow. Or that\u2019s usually that red flag in that sign where I\u2019m going. You\u2019re asking a little bit earlier, and that\u2019s where as an investor, a homeowner, I can kind of step in and go, okay, is there an issue here? What can we do to resolve this? Do you want me to go buy the materials for you and then you can install it and then I\u2019ll get you a check. There\u2019s so many solutions because what happens is they get in this conflict, they go to the contract and people start fighting, whereas they need to get together and have go, how do we fix this situation? What are common things that you\u2019ve done to mediate those? It\u2019s so important to get everyone on the same page.<\/p>\n
So this is the thing, even marriages, right? We are all in love. We start this some years in, maybe it\u2019s a little rocky. It\u2019s the same with almost everyone, right? They have a perception of what it was going to be like. It\u2019s not exactly to what they wanted. Now everyone\u2019s not feeling good. So in the middle of projects, let\u2019s just say a homeowner\u2019s getting iffy, but I know as a fact I need a certain amount of money to get to the next milestone. Even if I prove it, what I do say, Hey, I\u2019m willing to sign a conditional lien waiver, not just myself, but my subcontractors as well. So this is showing good faith on my end that I can never lien your house. I can\u2019t lien it because when you send a conditional lien waiver, it says you\u2019re going to hand me a check for 20 5K, and I\u2019m going to hand you a thing that says, I will not put a lien on your house.<\/p>\n
I\u2019m never going to put a lien on your house under the condition that I take this money and work on your project. So if there\u2019s ever a weird people don\u2019t have a problem with me, but let\u2019s just say a contractor that they may not know, I always say in the middle of a project, Hey, you know what? I\u2019m going to show good faith on my end. I\u2019m not that type of guy that\u2019s going to be like lean, lean, lean, money, money, money, but my subs need this, this, this to do whatever. I proved it. Let\u2019s do a conditional lien waiver. That means they won\u2019t, won\u2019t put liens, and I won\u2019t put liens either. Okay, we meet in the middle, yes or no. So then in middle of projects, when things go a little array, which happens naturally, sometimes it doesn\u2019t. Those are those things that I do to put the homeowner at peace so that we can move forward. Because my thing is this, we could argue about this for two, three months, and then those two, three months, I\u2019m paying rent, mortgage, my car, whatever, and I\u2019m losing money. So I try to solve things as quickly as possible and then put \u2019em at ease.<\/p>\n
Even in the most perfect world, Rico, when you have a contract, everything\u2019s lined out, you\u2019re all in the grants and you\u2019re ready to rock and roll, there\u2019s still going to be those moments where there\u2019s miscommunications. Can you give us maybe two to three of the most common miscommunications or misunderstandings between contractors and homeowners and then how we can potentially help people avoid those situations,<\/p>\n
Have the conversation before signing the dotted line, say, Hey, by the way, I\u2019m a contractor. I\u2019m in charge of this and I control this. There\u2019s five things over here that I do not control how fast permits get done, the speed of materials getting to the house, the inflation rate of this. So I have a list of things that I do not control, and what I do is I show them that list and say, Hey, there\u2019s a scenario that it might be asbestos and not just drywall and installation. In that case, when we start doing demo or we test it and we find out there\u2019s asbestos, that demo is going to be abatement. It\u2019s going to be three times more. These are situations that may happen before we swing a hammer. So these are scenarios that I\u2019ve gone through he and back 20 times that I list upfront, and then I let them sign a paper saying that I had the conversation with them.<\/p>\n
So then when they say, well, you didn\u2019t tell me that this was going to happen, I was like, actually, yes. Now if it\u2019s the things I can\u2019t control, then I\u2019m free and clear and we\u2019ll figure out things together. If it\u2019s the things that I can\u2019t control. I tell homeowners all the time, throw a scenario my way to see how I handle it. So throw me a scenario where my plumber steals $10,000, and then I\u2019ll answer those things. So I tell homeowners, throw it at me, throw me the good, bad, ugly. And these are conversations that have to happen at the beginning, but then just let the homeowner know when this horrible thing happens, I\u2019m going to stay here. We\u2019re going to solve it together. Let\u2019s both be logical and then move forward.<\/p>\n
Yeah. It\u2019s all in the communication. And once that breaks down, the job site gets out of control, trust is gone. You get this pull, right? And that\u2019s where you want to meet people on site, walk it together, find out a common solution, because what you just said can really happen for investors, homeowners, the contractor starts leaning the property and sometimes they\u2019re leaning it because they\u2019re supposed to be paid and they should be leaning the property the other times. Sometimes they\u2019re trying to bully the person into getting the payment, right? They\u2019re clouding the title. So you can\u2019t sell it, you can\u2019t refinance it. I know there\u2019s some things you can do as an investor or homeowner that we\u2019ve had to do in the past too, where we have a dispute, we have a construction contract, we have a quality issue. We had to bring in other people to come fix the work, and we\u2019re not making that final payment.<\/p>\n
And a lien goes on and we\u2019re trying to sell that property or refinance that property. I know for a homeowner, there\u2019s things that you can do. You can work with your title company, you can get a bond for that lien. Typically you have to deposit one and a half times the lien amount and title will actually bond around that lien, and then it has to go through mediation. And then at that point, they\u2019ll actually release it. And so you can kind of keep moving with your day because I have had times where you\u2019re in 12% interest, the contractor\u2019s leaning your property. You don\u2019t get stuck in that debt for sure. And that doesn\u2019t mean you\u2019re going to get the money, but it does mean that you can keep going on just like that contractor because at the end you still got to get to that resolution. What other things do you suggest homeowners and investors should look for? And again, there\u2019s so many great contractors out there, it\u2019s that 10% that cause some issues and you can get bullied. Your job site can get messed up. What other recourses do homeowners have against a contractor?<\/p>\n
So I think, again, it\u2019s by state and the whole conditional lead waiver thing is going to protect you a lot. And unfortunately, a lot of contractors are really good at telling you what you want to hear and just to get that job going, just to get the check. And then they go, we were to figure it out later. And what\u2019s hard is honestly, you got to go old school. You got to talk to people that have had phenomenal situations with a contractor from beginning to end, and again, in the last year, two years. So I was just saying earlier, I was like, Hey, I know the guy that stole, he stole 600 K total, but he stole specifically from my jobs like two, 300,000, my gc, he stole that money from me. So whenever that happens, I\u2019m like, all right, cool. How do you prevent all these things from happening?<\/p>\n
There was a honeymoon period and that was pre pandemic. He was awesome 5, 6, 7, 8 years ago, and now he\u2019s obviously the opposite. So I think what you need to do is obviously talk to inspectors, realtors, people that do all those people that have just recently done a project, that word of mouth is be more powerful than a hundred reviews, which you could pay for now, right? A sick website that you could pay for a hundred dollars AI could build you a sick website. I think you\u2019ve got to go a little bit old school to see that type of reputation that the contractor has. And it\u2019s a risk, right? It\u2019s always going to be a risk, even if you have all your systems in place, contracts in place, you never know because human nature, you know what I mean? What happens if two the subcontractors die and then the sons take over as a priority on their business and all of a sudden sue you for whatever, not going to, it\u2019s like all this kind of crazy could happen. So it\u2019s the thing what James and I have said to prevent it. Those are it. There\u2019s nothing else except for the certain laws in your state that could protect you anymore. Like the Colorado construction statute that just appeared here. That\u2019s brand new to help the homeowners from going through and prevent contractors from playing games.<\/p>\n
Well, Rico, this has been amazing. To kind of wrap up, what are your top three tips that a homeowner investors should do before hiring that contractor to make sure that they can kind of protect their job site? We want to hear Rico\u2019s top three.<\/p>\n
Number one would definitely be the references, but the references have to be recent. So what have you done for me lately? That\u2019s number one. Because again, like I was saying earlier, someone that was awesome 10 years ago means nothing today. It means absolutely nothing today. So references that are recent and then proof. So you got to say, Hey, what\u2019s the address? Can I see before and afters? You got to dig deeper. You got to assume everyone\u2019s a liar and dig deeper. Number two, I would definitely say ask a contractor the good, bad, ugly. Ask the contractor what\u2019s going to happen if the worst things happen and how that person\u2019s going to delegate it. Just be like, Hey, I know things happen. Tell me how you would solve it. And then number three, get another third party contractor, just the GC to look over everything. I know a big mistake people make is they get architect first and they say, Hey, I want to build a house, an addition for 300 K. The architect builds it. It must be for Mark Anthony in Miami because when a GC looks at it, he\u2019s like, this is six 20,000.<\/p>\n
So it\u2019s like that happens all the time. It happens all the time. So if you\u2019re going to mess with an architect, have a GC look at things first, and then also talk with the architect, because this is a big issue out here. People go architect first. I get it. I get it. Then they show to four GCs and all four GCs say it\u2019s 500 K, and the architect was told 300 budget. So make sure you involve a GC that\u2019s third party that you say, Hey, this job isn\u2019t for you. I\u2019m going to give you a couple hundred dollars to just consult me. Look over this stuff and show me the red flags, the best couple hundred dollars you\u2019ll ever spend. Because now what do you think That lady that just spent $12,000 for the architect has to redo everything now because she didn\u2019t involve someone that knew. So my third tip would definitely be get a third party contractor or estimator, someone that knows how to put these things together and pay them for their time.<\/p>\n
Man, these are fantastic tips. I couldn\u2019t agree more. I\u2019ve had architects give me amazing drawings, and I already knew off Jump Street. I\u2019m like, this is 10 times the budget that I gave you. Yeah.<\/p>\n
Oh, we\u2019re building Mark Wahlberg\u2019s house, I guess.<\/p>\n
Cool. Yeah. So if I could sum everything up here, what it sounds like to me is you guys, we have to be human beings. We have to understand that contractors are in this business to make money, so let\u2019s not be surprised that they want to make money or else they wouldn\u2019t be here. But we have to have communication from all parties throughout all aspects of your project because without the communication, you\u2019re going to lose the trust. And if you lose the trust, then now we\u2019re talking about liens and lawyers and things that can get really expensive and cause families to lose sleep. So everybody must protect themselves. We\u2019ve got to get contracts in place. We have to have honest conversations about what can get done. And I loved your tip about saying ask people what happens if in a scenario where something goes wrong, because you\u2019re absolutely right.<\/p>\n
What I would be looking for in that same conversation is somebody who\u2019s giving me an honest answer to say, Hey, yeah, we\u2019ve screwed up before. Here\u2019s how we handled that situation. And I\u2019m always going to pick the contractor who seems like they\u2019re being honest with me. I don\u2019t want to pick the guy that\u2019s like, look, no, we don\u2019t screw up like that. We don\u2019t make those kinds of mistakes. Everybody makes mistakes. It\u2019s about how do we pick ourselves up and handle the mistakes going forward? How do we communicate with each other? A lot like a marriage man. You just have to have that communication upfront. Rico, thank you so much for coming on the show and sharing your wisdom with people. This is very helpful information that people can actually take away and hopefully save themselves a lot of trouble. We also want to say thank you for the work that you do for getting out there and helping families. I don\u2019t think people realize how stressful it can be on a relationship when you are trying to renovate your home and someone is taking advantage of you. And so you\u2019re really, really doing things that are helping people. And these tips are also going to help people make sure that they don\u2019t end up in that same situation. I do<\/p>\n
Have one more tip. I do have one more tip that\u2019s so good and I forgot to tell, but it\u2019s so good. The homeowner that I was saving season two, episode one, she put herself as named on the contractor\u2019s insurance. So when he messed up and did all this damage, the insurance companies were ready to ignore everything until we found that out. And since she\u2019s named on the insured, she\u2019s technically a client and because of that, she got $45,000 back. That was something I learned this last year. So that\u2019s another tip<\/p>\n
For sure. Additional insured. Yep. Before we get out of here, Rico, please let everybody know what night or day they can see your TV show on H GT<\/p>\n
V. Awesome. So yeah, my show Rico to the rescues on Wednesday nights. It\u2019s like nine Eastern, eighth Central, something like that. I\u2019m in Mountain Time, so it\u2019s like never lined up. But yeah, every Wednesday. And then I just finished doing Battle on the Mountain, just finished last week, which I was on as well. And then next month I\u2019m on the celebrity season of House Hunters, and then I got more shows that I can\u2019t even announce yet. So anyone that supports, I do appreciate it.<\/p>\n
Thank you so much, Rico. This was extremely helpful.<\/p>\n
Thank you guys.<\/p>\n
Hopefully we\u2019ll get to talk to you again soon.<\/p>\n
Yeah, that\u2019d be awesome.<\/p>\n