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Do You Know Who Has Been Working on Your Home?

August 16th, 2006 · 1 Comment · General Contractors & Mechanics' Liens

and more importantly, do you know whether they have been paid?  When a homeowner undertakes a remodel, they can decide whether to act as the general contractor themself, engaging and coordinating all the subcontractors directly, or simply retain the services of a general contractor. 

When engaging a general contractor, the first step is to verify that they are licensed, and in good standing with the California Contractors State License Board.  The website has a search function that will tell you the status of the licensee.  Even more importantly, it will tell you whether or not the general contractor is bonded and carries workers compensation insurance.

Once you have satisfied yourself that your GC is in good standing, the payment structure will need to be negotiated.  Often, the GC will ask for a time and materials basis cost, and profit and overhead over that.  The going range for the profit and overhead is usually 10% to 15%.  At 10%, that means if all the materials like lumber and sheetrock, etc. cost $100k, you will pay $110k.

However, the GC has a discount with the lumber suppliers and should pass through his savings to you.  So if he has a 10% discount on the materials, his cost is $90k, and you would pay him $99k.  This is the built in incentive for using a GC as opposed to hiring the subs yourself.

Now, for the time component, the GC will normally need to engage subs for labor.  If the hourly cost of the worker is $30/hr, and the total labor cost was $50k, the time and materials (with discount) would be $140k.  Your total payment to the GC, including his profit and overhead would total $154k. 

What does this mean for the homeowner?  That means that if the labor cost is $30/hr, the GC cannot charge you $50/hr, in addition to the profit and overhead percentage.  This would be a deceptive and an unfair business practice.  How can a homeowner protect themself when beginning a remodel?  The homeowner needs to arm himself or herself with knowledge of these industry practices.  Word of mouth referrals are usually the first way to find a contractor.  If you don’t know anyone who has used the GC, ask the GC for references from other homeowners.  Call these homeowners, do a driveby of the properties that this GC has worked on.

Lastly, when it gets down to contract time, take it to an attorney.  The review of the contract will reveal how payment milestones should work, how mechanics’ liens should be handled, and further assurances from the GC of how they will handle your job.  Failure to do these preventative steps often leads to the horror stories of the GC taking payment in advance, failure to pay subcontractors, mechanics’ liens clouding the title to the property, unfinished jobs leaving the property in shambles and more. 

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  • John

    Purchasing a new home to bail out on a mortgage that will soon be too expensive can often provide homeowners with additional benefits in terms of their credit, as well. With two mortgages, the late payments and foreclosure of the first house will not drag down the homeowners’ credit scores as much as if they owned only one home. This can offset some of the devastating effects of foreclosure and allow foreclosure victims to obtain new credit in a much shorter time than if their only home was foreclosed. If homeowners understand the moral and financial consequences of such an action, this method of avoiding becoming a former homeowner can give families a great head start on the road to financial recovery despite a very recent foreclosure.
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