Home as a House of Cards

Question: Please write an article on how a homeowner should deal with a building or roofing contractor. How can the homeowner protect himself against such things as unethical liens, performance bonds and completion notices? I understand that some contractors operate under a third-party license and are not genuine contractors.

Answer: You can go further than “a third-party license.” How about no license at all? According to studies made a few years ago of the home-remodeling business in California, it was estimated that the homeowner who contracts for a substantial remodeling job would face these obstacles:

--There is a 1-in-2 chance of ending up with a contractor who isn’t licensed to do business in the first place and is, therefore, accountable to no one.

--There is a 1-in-3 chance of getting a licensed contractor, all right, but one who obtained that license by perjuring himself.

--There is a 1-in-3 chance that the job contracted for won’t be finished on schedule.

--There is a 7-in-10 chance that the contractor doing the work for him will be out of business within three years.

--There is a 1-in-5 chance of getting ripped off for all, or a substantial portion, of the money he has laid out.

“And, if anything,” Woodland Hills attorney Jerry D. Kove says, “the situation is worse now than it was when that study was made because the state has cut back on the number of deputies for following through on complaints.”

Cheery statistics for a field of endeavor peopled by so many skilled, conscientious and honest craftsmen. Why such justifiable suspicion of home remodeling exists, according to those familiar with the field, is a mix of factors running the gamut from how difficult it is for state investigators to keep up with a non-stop flood of inquiries and complaints to the fact that the field can be a type of moonlighting activity that attracts virtually anyone who can (or cannot) drive a nail without impaling himself.

Another big element in it: An extremely high percentage of the “bad apples” in the barrel aren’t really motivated by greed at all but are simply bad businessmen--in their choice of subcontractors, in their buying of materials, in their payment of subcontractors and in their cost estimations.

Sloppy Practices But, however it comes about--sloppy business practices or just plain larceny--the out-and-out risk to the contractor (unlike the homeowner) is slight, Kove adds, because the odds are that he will not get caught by the overworked and understaffed Contractors’ State License Board in the first place. And “if he does,” Kove says, he simply goes underground and then resurfaces with another corporate name, and he’s back in business.”

Kove, former attorney for the Building Material Dealers Credit Assn., speaks as one with broad experience on the painful side of the remodeling-project-gone-awry problem. “A big part of my office’s job, unfortunately, was suing homeowners to recover moneys due under the mechanic’s lien law--so that they were paying twice for the same work.”

Three States Tighten Laws And that’s the other, and doubly bitter, side of the coin for the homeowner: He not only ends up with either an incomplete and/or shoddy job, but he ends up paying for the whole thing twice because of the mechanic’s lien law. This law permits subcontractors and material dealers to sue the homeowner for what is owed them even though he can prove conclusively that he has paid the contractor for the services and material. The fact that the contractor has pocketed the money without paying the bills for which it was intended is immaterial.

Nationally, it is generally agreed that only three states--Hawaii, Virginia and Arizona--have contractors’ licensing laws that are not only stringent (the contractor’s license is immediately lifted if he pulls any shenanigans, and it is almost impossible for him to go underground and resurface under another corporate name), but that also include a “recovery fund.” These funds are levied through a one-time assessment on new licensees and are used to reimburse homeowners who have been bilked by a contractor.

Some states virtually ignore the entire contractor-licensing situation altogether, while the overriding majority fall, limply, somewhere in the middle. California’s law, most practitioners say, is probably better than most.

Dave Phillips, the state’s regional deputy registrar of contractors in Santa Ana, concedes that Kove’s comment about the cut in the field staff “is true--we’re down from 147 investigators to 88,” but disputes the “worse than ever” claim.

“We’ve cut the backlog of complaints down from about 24,000 a few years ago to 9,000 or 10,000 now. And at the time of the earlier report, we didn’t have today’s citation program, which is proving very effective.”

Previously, that is, shoddy or incomplete work found by the state’s inspectors could only result in a disciplinary recommendation, and any fines or demands for correction could drag through the courts almost indefinitely.

“Now,” Phillips adds, “we can fine the contractor on the spot--anywhere from $50 to $2,000--and demand immediate correction. And we can also directly fine unlicensed contractors--that’s about 25% of our complaints--anywhere from $200 to $3,000 and issue our own order of abatement. Before, all we could do was go to the court and try to get him on a misdemeanor.”

Investigators Cut But whether the gains that the Contractors’ State License Board has made in the last few years will continue is anybody’s guess in the face of the recent cuts in investigators. And, as an economy, the reduction in staff is peculiar since the state agency is self-funding with expenditures being handily offset by fees levied on contractors and, in fact, has approximately $15 million in reserves now.

The question of “worse” or “better” on the home-remodeling front notwithstanding, it is still a jungle out there for the unwary homeowner, all hands agree. What can you do to protect yourself?

Here are tips passed along by Kove, who with John Beck--at the time active in arbitrating disputes among contractors, subcontractors and suppliers--wrote a 100-page book on the subject. “Homeowners Survival Guide, Or How to Keep Your Home and Sanity When Dealing With a Remodeling or Building Contractor” ($7.95, Suite 1002, 6301 Owensmouth Ave., Woodland Hills, 91367) recommends that you:

--Check your contractor out with the nearest office of the Contractors’ State License Board for any disciplinary action taken or pending against him.

--Check his bank references.

--Demand the names of several past customers in your community. Call them and ask to see their completed projects. Any reliable contractor will be happy to refer you to several customers. If he balks at the idea, forget him.

The remaining potential headache (and it can be a dandy) can be 95% solved in the handling of the money involved. Inject a third party--either an escrow company or a “funding control” company (which operates both in an escrow capacity and as an on-site inspector of the work as it is in progress)--into the proceedings to minimize the chance of being slapped with a mechanic’s lien.

According to Claire Hester of C. H. Escrow Co. in Los Angeles, “A lot of lenders today make it a requirement that an escrow company be involved in any of their home-improvement loans. This means depositing the full amount of the contract with the escrow company, which then disburses it to the contractor as the various phases of the job have been completed and approved by the homeowner.”

And the safest way to approach this, Hester adds, is “to approve the bills only after the work has passed the city’s inspection. Along with the payments we make, we require a waiver of mechanic’s liens as to labor and material as a condition of payment. In that way, if the quality of workmanship or material is poor, the owner has recourse against him.”

Retaining an escrow company, either independently or through the lender advancing the money, will cost about $150 “for the accounting and administrative work,” Hester says, “plus about $3.50 for every check written.”

“Escrow takes a big bite out of the risk,” Kove admits, “but it’s still not 100% foolproof. We’ve had a couple of cases recently in which the contractor simply forged the inspection documents and took off with the money anyway.”