How to Vet a Commercial Real Estate Contractor

Nov 21, 2017

As a commercial real estate investor, whether you choose to buy and hold an income property or renovate and sell, finding a good contractor is essential.

Unfortunately, although the success of the deal can depend on it, it can be one of the most difficult parts of investing. Higher than expected renovation costs, extensive delays, or shoddy unfinished work can break an otherwise lucrative deal.

Renovation woes are par for the course under even the best of circumstances, however, there are steps you can take to minimize disruptions.

Plan Ahead

planning ahead

Your success as an investor hinges on the ability to predict problems and prepare for the unexpected. One of the best ways to avoid surprises is to make sure you have a great contractor lined up before you actually need them.

Compile a list of trusted contractors you stay in touch with regularly, adding to the list even if you don’t need them at that point in time.

How To Find Reliable Contractors

find reliable contractor

Start off by asking other investors which contractors they recommend – and which they would avoid. You can also try asking other subcontractors which contractors they like to work with, and why. While this may seem like an unusual tactic, it makes sense that the person who has to pick up where the last one left off has a good idea of who they prefer to work with.

You can also try asking employees of stores where building supplies are sold. Plumbing, lumber, electrical, and other stores know their regulars inside out. That means they’ll be more than aware of the contractors who buy high-quality materials and who finish a job within a reasonable amount of time. They’ll also know who has the most experience, what type of person they are, and whether they can be relied on for the long-term.

The easiest way to frame the question is to ask people who they’d hire if they were renovating a property.

How To Vet Contractors

Always check references

It may seem obvious, but one of the most common mistakes people make is either not checking references, or half-heartedly calling one person on the list and ignoring the rest of the names on the list.

You’d be surprised how many people give honest feedback. Ask the right questions, and you’ll learn a lot about the contractor and what to expect from them.

Here are some questions that can help you search about  useful information:

  • Did they finish within a reasonable time?
  • What was their work routine like?
  • What did you like about the way they managed the work crew? What didn’t you like?
  • How did they deal with additional charges?
  • Did you have any disagreements? How were they dealt with?

Don’t forget to confirm that the projects were relatively recent and that they were similar in scope to yours. It’s also a good idea to try and take a look at a few of the jobs as well, so you can get a first–hand view on the quality of the project.

You can also check state licensing bodies, professional associations, state and local courts, insurance providers, suppliers, Better Business Bureaus, municipal departments, and of course, online.

Keep in mind that a one or two negative reviews aren’t necessarily a red flag. Instead, pay close attention to the average reviews to see where potential problems might crop up, and use the good to excellent reviews to discover what they excel in.

Make Sure They’re Licensed

Never hire a contractor unless you can verify they are licensed and have liability insurance

Never hire a contractor unless you can verify they are licensed and have liability insurance. Don’t rely on what the contractor tells you – check your local state business licensing board to make sure they are currently licensed, and to find out whether any complaints have been registered against them. You should also ask them to send a copy of the license and of the insurance.

In general, commercial real estate contractors may be licensed as a Class A, B, or C along with any licenses specific to their trade, such as a plumbing or electrical license. Each contract type allows them to work on one or more contracts up to particular price point. Each of these classifications has separate contracting rules.

Each of these license classifications has separate contracting rules, and rules regarding when work can be performed by the contractor.

A Class A license is for general engineering contractors, and allows contractors to on single projects up to a bid of $120,000, or multiple contracts as long as the total sum of the bid is no more than $75,000. Class B licenses allow contractors to work on one contract of up to $7,500 or several contracts whose total does not exceed $7,500 (these totals may differ from location to another).

Note that if a sub-contractor is hired to perform any of the work, as long as the cost of the project exceeds the specified amount, they will be required to have a license – even if the cost of the actual work they are being hired for is less than the stated sum.

For example, if a subcontractor is hired to put tiles in a bathroom, even though the cost of that smaller project is just $200, and the total cost of the project is more than $500, the sub-contractor would still need to have a license.

Class B licenses are general building contractors. They are allowed to perform nearly every type of work involved in a project. They may work on a single contract of up to $7,500 or several contracts whose total does not exceed $7,500.

Class C licenses are specialty contractors. In addition to the work they are licensed to perform, they may also perform work that is incidental and supplemental to the project they were hired to complete. For example, a specialty contractor hired for landscaping may also do the plumbing work for an outdoor sauna, as long as it is an incidental part of the larger project.

Insurance Is A Must-Have

Any contractor you hire must have both liability and workers compensation insurance

Any contractor you hire must have both liability and workers compensation insurance. Otherwise, you could be held liable for any accidents which occur. As in the case of licensure, you should make sure to get a copy of the insurance certificate, making sure that it’s current. May also ask for proof, before specific work is performed that you and/or your company is listed as “Additional Insured” on the contractor’s policy.

Once you find the right contractor, ensure a good relationship by being clear on your expectations, maintaining regular contact, and regularly supervising the project. Finally, remember that finding a good contractor isn’t about the lowest bid, but about finding a contractor with the right balance of speed, quality, and price.

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