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6 Rehabbing Contracts Every Investor Should Know About

Key Takeaways

  • There are six documents that you need when working with a contractor: An independent contractor agreement, payment schedule, final scope of work, insurance indemnification, W-9 and final lien waiver.
  • All documents should be signed and prepared before construction starts, except for the final waiver, which is only done after all work has been completed.
  • Using all six of these documents not only protects you from possible legal entanglements, but also builds credibility with potential contractors.

Finding a contractor to work on your rehab investment property is just the first step. Once you have found the right contractor, it’s crucial that you use these six rehabbing contracts in order to ensure that you are given the legal protection you need, in the event that something goes wrong with a rehab project.

Unfortunately, many investors mistakenly believe these documents are optional. Maybe they ask themselves a few questions as a result: What are these six critical documents? When do you have the contractor sign them? Are they just for contractors, or are they for other types of rehab practitioners as well?

The six must-have documents are the independent contractor agreement, the final scope of work, the  payment schedule, the insurance indemnification, the W-9 form, and the final lien waiver.

Here’s a quick guide to these six must-have rehabbing contracts that will safeguard your interests in the event that a rehab project experiences significant trouble.

6 Rehabbing Contracts You Absolutely Need Signed

Scope of work template

A Note About Timing

The first five critical documents that we’re going to discuss should be given to a rehab contractor, and signed and returned to you, before construction begins, but after you close on a property. (No point in getting signatures until you claim ownership.)

The last document should never, under any circumstances, be delivered until the contractor has finished working on the project. It bears repeating: do not sign the final document until you are satisfied with every single deliverable on a rehabbing project.

Also, before you hand over any documents, be sure to have a real estate attorney look them over; even if you’re using a template (sometimes, especially if you’re using a template). You want to be absolutely sure you haven’t missed anything.

1. Independent Contractor Agreement

This is the main binding agreement that establishes the ground rules of the proposed relationship between you and the contractor. It is one of the most important things you can do to make sure a rehabbing project goes smoothly, as it outlines the major roles and responsibilities for each party in the transaction.

This agreement covers such things as permits (the responsibility of the contractor), materials (you choose the materials; the contractor will purchase them), the use of subcontractors, work and completion schedules, the role of arbitration, and insurance.

2. Scope of Work

There may be no bigger sign of your credibility, or lack thereof, than a finalized scope of work. Learning how to write a scope of work is not altogether challenging, but it can be overwhelming for new investors.

Creating a scope of work for real estate requires precise language, no ambiguity to your wording, and the specific deliverables, schedule, technological needs, overview, and materials required to see a project completion.

Though there are some fine contractor scope of work templates out there, it’s vital that, whatever you use to build your scope of work, it be updated with the latest information. Nothing screams amateur like an out-of-date scope of work, using some antique scope of work template, with materials information that references items no longer available.

3. Payment Schedule

The third document is the one that your contractor is most interested in, obviously: the payment schedule. It lays out how the contractor will be paid throughout the project. Generally, this is done through benchmarks that you choose — not the contractor. It’s vital that both parties agree to this schedule before construction begins.

4. Insurance Indemnification

This is a stand-alone document that clearly stipulates the insurance requirements that a contractor needs to fulfill before beginning work on a real estate rehab project. Though this insurance indemnification element is also spelled out in the Independent Contractor agreement, it’s a good idea to have your contractor agree to these requirements in multiple places in your paperwork.

This insurance requires more than just a signature. Your contractor should include with your packet of documents:

  • Proof of liability insurance
  • Proof of worker’s compensation insurance
  • Certification from insurance company (that adds your investment company as an “additionally insured” party)

5. W-9

The Internal Revenue Service (IRS) requires that any contractor you pay more than $600 to, within a calendar year, be issued a 1099 form. To accomplish this, you will need to have the contractor fill out a fresh W-9 form, each year, to gather information, such as a social security number or a Tax ID number.

It goes without saying:  you want to get this W-9 filled out before construction starts. In the event something goes haywire with a project, and communication with a contractor sours, it’s almost impossible to get sensitive personal information of this kind after the fact.

6. Final and Unconditional Lien Waiver

As we stated earlier, you should never send a final payment to a contractor until all work has been completed to your satisfaction. But once you have done your final walk-through, and have signed off on every single deliverable indicated in the scope of work, it’s time to have the contractor sign the lien waiver, and then cut your contractor a check. Know that you have executed a rehab project in a most professional and experienced manner — even if it’s your very first rehab real estate project.

Have you had experience sending rehabbing contracts to contractors to sign? Did you learn something in the process? Let us know in the comments below.

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