Guest Blog: Protect Yourself from a Lawsuit by an Unlicensed Contractor

By Richard Lansing

          Every home owner in the country wants to get as much as they can for as little as possible. That is reasonable, but it can lead people down some risky paths. One of those paths, which is quite commonly utilized by first time buyers especially, is the hiring of an unlicensed contractor.

          Some needed home repairs and a simple web search leads a homeowner to get measurements from a gentleman who shows up at your door. He is dressed reasonably nice for a contractor (jeans and a polo), and all his construction equipment looks right. He takes measurements, provides a quote that is almost too good to be true (1/3rd less than the first contractor you called) and the next week he and his crew are ripping out your kitchen sink or replacing the master bathtub.

          What happens when Mr. Contractor gets injured? It might seem “fair” that he’d have to pay his own medical costs. Businesses should carry insurance, after all. Except that without a license, your contractor cannot apply for a business license. According to construction consultant Lyle Charles, “the reality is that home owners often end up carrying that burden when the contractor is uninsured. It is one of the dirty secrets of low-cost home renovations.”

          In order to become a licensed contractor, there are a few things a person must demonstrate to the state a number of items, and usually take a competency exam. Contractors must pass a contractor’s exam in order to acquire a contractor’s license. A contractor must also carry insurance when you register as an LLC, or other business entity. That insurance protects employees and the job site.  To protect the public, Florida actively pursues unlicensed contractors by performing sting operations in conjunction with local police.

          As you can imagine, all this licensing and exam work takes time and costs money. Contractors who charge more for their work have earned the right to do so through state licensure. They carry liability insurance that protects you, the homeowner, from the consequences of their on-the-job injuries.

          Before you hire that unlicensed contractor, stop and think about the potential hazards:

          Natural Disaster: If your home was recently damaged by a natural disaster, the unlicensed contractor may not be able to perform the work legally. That could limit your insurance settlement.

          Property Value: Someone unlicensed who performs major work, such as adding a room to your home, could reduce the property value because the addition will not have the proper permits or be built to the building code. Plus, homeowners are required to disclose unlicensed/unpermitted work when selling their home.

          Protection from Injury: Not just of the contractor, but the surrounding area. If the contractor drops a heavy tool on a car, for instance, whatever dent or scratch is left behind might end up costing you for the repair. The same goes for personal injury claims if that contractor hurts a neighbor. 

          Damages: If an unlicensed contractor fails to complete the work, does it in a poor manner or causes damage, the unlicensed contractor might disappear entirely, and often cannot be found if you need to sue.

          There is both good news and bad news. Before we continue, it’s best to speak directly with an attorney, as they will provide recommendations more directly related to local laws you must comply with regarding permits and association requirements for repairs. That said, there are some general guidelines you can keep in mind when you’re looking for a contractor and considering going with someone who is unlicensed.   

          You can file a lawsuit against an unlicensed contractor if there are damages to your property, or if he causes injury somehow (either to himself or someone else). Being unlicensed is, in some ways, actually a bigger risk than whatever risks come from the job itself. As a homeowner dissatisfied with a job, you can also stop payment to the contractor or refuse payment altogether. Most unlicensed contractors also do not write up agreements, so there is no contract that details their responsibility. Prices change, homeowners refuse payment, and accidents happen.

          Generally, if you try and sue an unlicensed contractor you will probably have to show the two of you attempted to work out a solution between yourselves. It should not cost you much more than a few thousand dollars in attorney’s fees to get some representation on your side if you need it for a default (if the contractor doesn’t show). You’ll have to wait a few years to collect, but once that default is renewed you can send the bill to collections and hope for your money to arrive.

          If you decide to file a lawsuit, consult an attorney familiar in construction law over someone who is general practice. That expertise will come in handy, as the intricacies of construction law require someone well versed.

          Going with an unlicensed contractor might sound great because you will save on the upfront costs, but it can cost you in the long run. There is simply too much risk with injury lawsuits, property damage and a lack of dispute resolution, to chance hiring a contractor who does not carry a license. 

Renting or Buying 2016

       The dream of home ownership is as American as hot dogs, baseball and apple pie.  At least that was the theory until the great recession that ruined home ownership for millions.  With the economy mostly recovered, mortgage interest rates at all-time lows and rents rising, is it now better, once again, to own or rent.

          Homeownership levels continue to fall with the level of ownership hitting a 50-year low last quarter.  Currently only 62.9% of households are owner-occupied.  Ownership levels are highest for seniors, and at an all-time low for millennials at 34.1%. The decline is due to several factors

          On strictly financial basis, using a five-year period of ownership and making some basic assumptions (your mileage may vary), renting versus owning is nearly a wash, with homeownership slightly less expensive:

                                                            Renting                            Owning

                                                 

Monthly Payment                                $1,350.00                        $   954.83         

Taxes/Insurance                                           20.00                             400.00

HOA Assessments                                        0.00                              100.00

Maintenance                                                 0.00                              250.00

Monthly Costs                                     $1,345.00                        $ 1,704.83

Down Payment                                                                            $50,000.00

Five Year Cost                                      $80,700.00                    $152,289.80

Less Interest on Down Payment (2%)   ($5,204.40)                    

Less Increase in Value (3%)                                                        $(39,818.00)

Less Principal Reduction/Equity                                                 $(69,105.00)

Interest Expense/Deduction                      $520.40                      $(7,636.80)

Plus Costs of Purchase/Sale                                                         $28,185.00

          Total Cost                                  $75,495.60                       $63,915.00

          This chart is based on a $250,000 home, a $50,000 down payment, an association payment of $1,200 a year, rent averaging $1,350 a month over five years, maintenance costs of $3,000 per year, a sales price of $278,750 after five years, plus the renter investing the $50,000 at an average of 2% and the homeowner’s home value increasing at a rate of 3% per year.  Given these factors, the savings over five years is approximately $12,000.  This includes costs of purchase of $5,000 and costs of sale (including a real estate commission of $23,185). 

                                                                                         

          Longevity: Determining whether to rent or own is dependent on several important factors.  First, how long do you plan to stay in your next home has to be determined, because one of the best benefits of home ownership is tied to longevity of ownership.  Our sample favors renting through year three, with each year thereafter supporting buying.

          One key factor tied to longevity is how mortgage loans are front loaded with mostly interest.  Fixed Rate Mortgages are amortized to provide a fixed monthly payment over the life of the loan.  Initially the payments are mostly interest, with only a small amount going to principal.  A typical $250,000 house with a $200,000 loan will only have principal reduced by $19,000 if sold within the first five years.  It takes nearly 20 years to reach a 50% reduction in the loan balance.

          Tax Deduction:  One benefit of homeownership is the ability to deduct mortgage interest paid on loans to acquire and improve the home. This can be worth thousands in tax savings during the early years of a mortgage.  However, many people do not have enough deductions to make itemizing their taxes worthwhile, and this benefit is lost if the homeowner cannot itemize their taxes.

          Maintenance:  One drawback of homeownership is the requirement of maintenance of the home from lawns, to painting, to repairs and replacements.  Renters mostly rely on the landlord to handle maintenance, repair and replacement costs.  Homeowners have to bear the full cost, which can be very expensive.  A new a/c system costs over $2,000, and a new roof can run from $7,500 to $30,000 depending on whether its shingle, cement or barrel tile roof system. 

          Down Payment:  The down payment is the largest bar to home ownership, especially for younger and first time buyers.  Typically, the down payment is twenty percent of the purchase price.  This is a large sum that may be difficult for many to accrue, and even the three percent down payment on an FHA loan may still act as a bar when coupled with closing costs that easily exceed $5,000.  Renters only usually need first last and security, which is far less than the full down payment, but can be equal to the FHA down payment.  Taking the twenty percent down payment and investing in an indexed fund instead of buying can often result in a substantial gain versus homeownership, which has seen both large value increases and decreases in recent years (the S&P has returned 78% over the last five years).

          Portability.  Renting is for a fixed term, customarily for one year.  Many leases provide a right to terminate early for a two-month rent penalty (an attempt to make this a Florida law did fail).  This ability to move quickly is often better for single and married couples without children.  Having to move for a career opportunity as a homeowner can mean carrying a mortgage and paying rent on two places until the first owned home is sold.

          Given the initial costs, down payment, the burden of maintenance, the loss of the ability to move quickly means that the decision to buy instead of rent can be difficult for many people, especially if they are likely to need to move in less than five years.  Committing to longer term ownership is when the decision becomes in favor of homeownership, ultimately saving money in the long run.

Michael J Posner, Esq., is a partner at Ward Damon, a mid-sized real estate and business oriented law firm serving all of South Florida, with offices throughout Palm Beach County.  Michael specializes in real estate law and business law, and can help sellers, buyers landlords and tenants with their real estate issues.  Michael can be reached at 561.594.1452 or by e-mail at mjposner@warddamon.com.