There are far too many stories of property owners victimized by unprofessional building contractors. These stories most often involve an inexperienced investor renovating a property they do not live in.
Janice was excited about renovating an inheritance property. Her grandmother recently passed away and bequeathed the home to Janice. The property was located in a valuable part of Philadelphia, but needed substantial work. Janice heard how easy it was to generate rental income from friends who did house flipping. She had no investment experience, but had high hopes for creating a passive income stream. The only obstacle was that the property required $50,000 in renovations.
Janice did not know a professional contractor so a family friend recommended Bob. The friend recommended Bob because he installed a lighting fixture a few years ago. Janice was unsure whether Bob was competent to handle a $50,000 renovation job, but she trusted her friend.
Bob met Janice at the property where he did a 20 minute assessment. He also brought a “renovation agreement” with blank fill-in sections so that the proposal could be created on the spot. He estimated $50,000 for the project, but explained that the final price would depend on whether new problems were discovered.
Bob’s one page “agreement” was light on details. Bob hand-wrote the items to be completed along with corresponding sections of the house. Bob also listed the $50,000 estimate, but no other financial details. The agreement did not provide any target dates, timelines, project stages, or a payment schedule. There agreement also lacked a breakdown of how the $50,000 would be used. Janice expressed concern over whether the estimate included the cost of materials, but Bob assured her the quote was a “flat fee”.
The lack of specifics made Janice nervous, but then she remembered her friends’ stories about how easy it is to make money in real estate. She handed Bob a check for $20,000 check to get started.
Bob began work right away when he brought in a subcontractor to do a cleanout. Janice did not receive an invoice or receipt for the subcontractor’s cleanout but was happy the project was underway. After a several week delay, Bob’s employees began flooring replacement and electrical systems installation.
Problems began when the City of Philadelphia issued a “stop work order.” It turns out that Bob didn’t obtain the required permits. Janice was angry, but Bob assured her it was just a misunderstanding with the City. Janice’s fears were confirmed when it took four more months for Bob to obtain the permits. She later discovered the long permit delay was due to the fact that Bob was not a licensed contractor. Bob had to first complete the licensing process before he could address the permit situation.
Work eventually resumed but progress moved at a glacial pace. After completing a few minor steps toward project completion, Bob began insisting on additional payments. Janice reluctantly agreed to give Bob two additional payments of $5,000 each with the hope that the rental income would follow. Unfortunately, one year after the project commenced Janice was out $30,000 and her property remained uninhabitable.
When a property owner becomes impatient, contractors like Bob typically demand more money to continue work. These contractors often cite “unanticipated problems” and “additional funds for materials.” When proof is demanded, the contractor will often generate invoices to justify the prior use of funds – usually for the very first time. Of course, the truth is that the funds were misused and never properly accounted for.
The best practice is to thoroughly vett a prospective contractor. Below are 5 tips to reduce the risk of construction project fraud:
- Treat your investment like a real business. Property renovation is not easy and requires skill and diligence. If you treat the project like a hobby, you will likely lose your money.\
- Do your due diligence before starting the project. Verify the contractor’s license, research the required permits and find out the cost of materials and supplies. Avoid any contractor cannot supply you with detailed information.
- Oversee your own project. Do not trust the contractor to act as the project manager. Hire a project manager if you are unwilling to do so.
- Insist on a project timeline and disburse funds only as milestones are met.
- Verify that the contractor has insurance coverage. You are at risk of many legal claims if the contractor lacks insurance.
What are the remedies for a victimized property owner?
A property owner whose funds were stolen by a contractor can recover lost funds through a fraud lawsuit. Depending on the circumstances, the owner may be able to recover both out of pocket losses (known as “actual damages”) and an additional penalty (“punitive damages”). The contractor could be forced to satisfy the victim’s monetary award by liquidating the contractor’s properties if there is no insurance coverage.
As a real estate attorney to property owners, I help resolve legal disputes. If you know a property owner scammed by a contractor, please forward our contact information:
Phone (484) 690-4613
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