The 6 Critical Documents: Keeping the Peace

Whether or not you have been doing real estate investing, I am sure you have had an incident with someone you hired to do a job for you that didn't turn out the way you envisioned it, they stopped in the middle of the job or you paid them upfront and they disappeared and stopped answering your phone calls (I had this happen to me once and its a crappy situation to be in). The following 6 documents are ones that you should be using with anyone who is not directly employed by your company: vendors, maintenance technicians, contractors, etc. If a company is very well established, you may find you don't need some of these, but if you find someone who is running a one-person operation, it is best to play it safe and have these documents. The following documents will help ensure that the IRS never sees contractors as an employee, that you are getting apples to apples bids for jobs and that you have peace of mind that you are protecting yourself and your assets from unscrupulous people.

Document 1: Tax Responsibility: W-9/1099-Misc

Businesses can use Form W-9 to request information from contractors they hire. When a business pays a contractor in excess of $600 during a tax year, the business is required to file Form 1099-MISC. To fill out Form 1099-MISC, the business may need to request information (such as address and Tax Identification Number) from the contractor, for which Form W-9 is used. Another purpose of Form W-9 is to help the payee avoid backup withholding. The payer must collect withholding taxes on certain reportable payments for the IRS. However, if the payee certifies on the W-9 they are not subject to backup withholding they generally receive the full payment due them from the payer. (1)

In a business–contractor arrangement, the following must apply:

• Payer must be a business and not a private individual; personal payments should not be reported using this form.
• Payee must not be a business or employee (so must be a contract worker). Employee payments are covered by Form W-2. (2)

Document 2: Independent Contractor Agreement: Code of How We Will Work Together

Although all six of the documents are important, this, along with the Scope of Work, are the ones you want to make sure you have no matter who you work with, and no matter how big or small the job. This document is the agreement of how you and your contractor will treat each other in terms of legal and tax purposes, among a few other things. This will mostly be boilerplate, but a few sections will be changed for each project and contractor you are working with. Make sure to have your base contract reviewed by an attorney to ensure you have captured all items necessary to protect yourself.

• Services – SOW will be provided and adhered to
• Compensation – Payment Schedule as document added to ICA
• Representations and Warranties (EIN, maintain insurance, comply with applicable laws, job site cleanliness)
• Indemnification and Independent Contractor Status Paragraphs (multiple items are repeated throughout many documents (CYA)
• Acknowledgement – Items stating the contractor is not an employee and they are responsible for all of their own workers comp and taxes etc.
• Insurance – Outlines minimums they must carry
• Limitation of Liability – States your company will not have any responsibility in terms of damages
• Assignment – Contractor cannot assign this contract to anyone else
• Warranty – If something fails, outlines the time frame the contractor must come back and complete the work
• Waiver, Severability, Governing Law – Boilerplate items
• Resident Interaction
• Clean Up
  

Document 3: Scope of Work: Manifesto of the Job – i.e. Script of a Movie

Just like actors have lines and directions they must use and follow when making a movie, you as the "producer" and "writer" of the script, must give clear and concise direction to your contractors and vendors. Over the years I hear about people letting contractors pick out products for their projects, like carpet, tile, paint etc. DO NOT LET THEM PICK OUT THE FINISH MATERIALS! Contractors are not designers and you will wind up paying for something you don't like and had no intention of ever having in your property. I am very direct with my contractors and tell them if the words "I THINK" come to their mind, that means I happened to miss something that should have been on the SOW, and know to stop what they are doing and call me for direction. Do not let your contractors take liberty in making decisions unless it is directly related to a specialty they perform, for example a plumber deciding to use one brand of pipe sealant vs another. Get down to the nitty gritty - tell them what handles you want in the shower, what shower bar you want, which kitchen light etc. I go so far as to tell them that they only bid on labor, and not materials, because I will buy the materials myself and provide those materials do them. I don't care what saw blade or hammer they use, but any decisions that I can control, are written in the SOW.

Document 4: Insurance Indemnification Agreement: Additional Insured on Contractor Policy

This document protects you from a lawsuit if a contractor or their sub-contractors is injured due to negligence while working on your project. Always review these types of documents with your attorney before using to make sure they will adequately protect you based of your local and state laws.

Document 5: Payment Schedule: Based on passing inspection

A payment schedule can be by time frame, or certain stages of work completed i.e weekly or bi-weekly i.e. demo, rough in, drywall etc… However, always do a final inspection of the work before handing the final payment to the contractor.

Document 6: Mechanics Lien Waiver: Final payment acknowledged by contractor; prevents future lien rights to property.

In the mechanics lien process, a lien waiver is a document from a contractor, subcontractor, materials supplier, equipment lessor or other party to the construction project (the claimant) stating they have received payment and waive any future lien rights to the property (of the owner) for the amount paid. Ensure your contractors sign this right before you hand them the final payment for a job they completed. Contractors are entitled to be paid for their labor contributions to the improvement of property. Having this document shows that you both agree that all payments have been completed based on your Independent Contractor Agreement, SOW and Payment Schedule.

Always remember to protect yourself as much as you can. While these documents cannot always help you 100% of the time, they are a strong shield for you to use in the defense of your business and assets. As always, I am not an attorney or CPA - this info is what I have learned from being in the real estate investing world for a long time, info that I want to share with others. Don't want to re-create the wheel and pay an attorney thousands of dollars to create these documents? Check out my . Once downloaded, have your attorney review the documents and make changes according to your needs, as well as local and state laws. This will save you tons of time and funds that could be used on your real estate investing activities.