Man and woman looking at blueprints together

Before a contractor begins work on your home, draw up a detailed contract with the required materials, schedule of progress payments and a timeline for the job. (Getty Images)

We've all heard the horror stories: contractors who took thousands of dollars and then disappeared, home renovations that dragged on for months or work so shoddy it had to be completely redone.

These nightmare scenarios may frighten you, but if you do your homework, you can prevent yourself from being ripped off by a bad home improvement contractor.

"It's beyond just finding the name of the person you want to use," says Angie Hicks, founder of Angie's List, which provides reviews of contractors and other service providers. "These are big investments and can be highly emotional because it is your home."

Many homeowners spend weeks and months planning their projects and then expect to hire a contractor in a few days. But if you want a good contractor, expect to spend anywhere from a few days to a few weeks investigating prospects and hammering out contract details.

"You should definitely research the company you're getting ready to do business with," says H. Dale Contant, president-elect of the National Association of the Remodeling Industry and president of Atlanta Design & Build. "Make sure that the company is reputable. Double-check and double-check again."

Spending time on contract details at the beginning of the process can save you headaches later. The contact should be extremely detailed, if possible listing products by name and serial number. It should include a timetable for completion of the project and a schedule of progress payments, as well as how you and the contractor will handle changes. Don't be afraid to negotiate changes to the initial contract you receive from the remodeling firm.

"Don't forget your gut instinct," Hicks says. "If it feels like someone you're talking to is not communicating well, that's a big sign." She warns that you should pay especially close attention when you first initiate contact with the contractor. "Watch the little things at the beginning because they might be indicative of bigger things later."

Expect the unexpected, and budget for it. Once work on your home begins, there will be expensive surprises: bad wiring or plumbing behind walls, rotted subfloors, termites and other problems that you won't know need work until you open up the walls. You may also change your mind along the way about how you want things done.

Here are 12 ways to avoid home improvement rip-offs:

Beware of people who knock on your door. Good contractors rarely have to solicit business, and those who want more customers try advertising, not door-to-door solicitation. People who knock on your door are often thieves or scammers who will take your money and do a shoddy job, then disappear. Or they may even rob your house.

Avoid contractors who seek a big payment upfront. A reputable contractor will ask for 10 to 25 percent of the contract price before the job starts, then ask for progress payments as the job is completed, with the schedule detailed in the contract. The only time a big upfront payment may be legitimate is if you need a large quantity of custom materials to start.

Check licenses, references and insurance. Ask for references, proof of insurance and license documents, both contractor and business licenses. Then call to verify that everything is still current and valid. You may want to be named as an additional insured on the contractor's policy while he is working at your home. If you're interested, ask the contractor to add you to the policy and then bring you back the paperwork with you listed.

Check courthouse records for litigation. In most municipalities, the basic information is online, though you may have to pay a few dollars to read it in some municipalities. If the contractor has been sued, read the lawsuit and, if possible, contact the complaining homeowner for details.

Check for complaints against the contractor. This step should include checking in with the Better Business Bureau, local building departments and state licensing agencies. Remember to search for both the individual's name and the company name.

Read online reviews. Reviews are not be-all and end-all, since anyone can get friends or relatives to write positive online reviews. Cannon Christian, president of Renovation Realty in San Diego, says he finds the negative reviews particularly useful because he learns a lot from how businesses respond to those reviews.

Avoid contractors who suggest working without permits. While permits cost money and add time to the project, working with them also brings a second set of eyes to inspect the work. If you get caught working without permits, you could be subject to fines. In addition, unpermitted renovations can cause problems when you sell your home and may jeopardize your insurance coverage. "Your home is your single largest investment, and it's an issue of safety," Contant says. Don't work with a contractor who suggests you, rather than he, get the permits.

Talk to current customers. Past customers who love their new kitchens may have forgotten that the contractor showed up late every day. Ask for phone numbers of current customers and visit a job in progress to talk to the homeowners.

Beware of high-pressure sales tactics and "buy it today" pitches. The cost of labor and materials is not going to change by next week. "Don't be lured by some great deal," Hicks says. "A deal today should be a deal tomorrow."

Draw up a very specific contract. Make sure it includes the exact materials, down to brand name and item number, as well as the schedule of progress payments and the timeline for the job. "The detail in the contract matters a lot," Hicks says.

Get lien releases from subcontractors. If the contractor doesn't pay his subcontractors, those companies could come after you and put a lien on your house. As each subcontractor finishes the work at your home, get a lien release. You can make receiving those part of the progress payment schedule.

Withhold at least 10 percent of the total payment. You shouldn't hand over the entire amount due to the contractor until all inspections are completed, lien releases are in hand and you are completely satisfied with the work. Once you make the final payment, it's hard to get the contractor to return to fix those last few items on the punch list.

Tags: home improvements, real estate, money, housing, housing market


Teresa Mears writes about personal finance, real estate and retirement for U.S. News and other publications. She was previously the real estate blogger for MSN Money and worked as the Home & Design editor for The Miami Herald. During her journalism career, she worked on coverage of immigration, religion, national and international news and local news, serving on the staffs of The Miami Herald, The Los Angeles Times and the St. Petersburg Times. She has also been a contributor for The New York Times and The Boston Globe, among other publications. She publishes Living on the Cheap and Miami on the Cheap. Follow her on Twitter @TeresaMears.

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