How To Perform Due Diligence On Contractors

Episode Transcript
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(00:02):
Welcome to the Real Estate Especial podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash. On today's show, I'm going to
detail The Dirty underbelly of contracting work and the
importance of due diligence. But first, at my development
company, Washy Capital, we have an extensive due diligence
process and we're willing to share our due diligence

(00:22):
checklist that we use for our projects with you, the listening
audience. If you'd like to get a copy of
our due diligence checklist, click on the link in the show
notes and we'll be happy to sendyou a copy to your e-mail
address. On today's show, I'm sharing the
story from this past week of someone who is in our investor
ecosystem. She owns several properties in a
tertiary market about an hour outside Toronto.

(00:45):
She's in her 70s and her husbandhas several physical
limitations. She's her husband's principal
caregiver. She's invested in several of our
projects over the years and is someone who our team holds dear
in their hearts. One of her properties is over
100 years old and it was in needof some exterior brick repair.
She hired someone who was in thearea performing masonry work.

(01:06):
They had a business name that sounded big and impressive, and
they listed an address in Toronto with their website that
had plenty of testimonials and photos.
I got a call midway through the week with an urgent request for
help that the contractor was asking for a large upfront
payment. I made it clear in no uncertain
terms that she should not pay inadvance and should only pay in
tranches as the work was completed.

(01:28):
It was no contract, the price changed part way through the job
and the demand for payment was huge and a huge red flag.
The work was being done by some Spanish speaking workers who
seemed hardworking and highly skilled.
I'm going to guess they were from Mexico.
The manager was speaking Englishwith a pronounced Scottish
accent. By all accounts the work was
well done. This is one of those stories

(01:49):
that does have a relatively happy ending now.
I advised her that she could make daily progress payments as
the work was being done, but only at the end of each day.
At the end of the week I got another urgent call.
Contractor was asking for payment in bank certified funds
and once the work was completed,the home owner went to the bank
to ask for a certified check forthe balance of the payment.

(02:10):
The work estimate directed the balance of the payment to be
made to another individual that up until that point had not been
introduced. The ethnic origin of that name
sounded Middle Eastern. So, so far, we have a Scottish
person who claims to own the business.
The phone number on the website rings to the Scottish person's
cell phone. There's Mexicans doing the stone
work, and there's a third personwith Middle Eastern name ready

(02:33):
to receive payment. Naturally, the bank refused to
issue the check. They wanted to make sure that
their client was not being takenadvantage of.
Now when I was asked to advise, here's what I did.
I went to the website and lookedup the address of the business.
The only business at that address was a dental clinic, a
chicken fast food restaurant, and a Mexican burrito
restaurant. There was no roofing and masonry

(02:53):
business. I then went to the national
Corporate Registry, searched thename to see if the business
actually existed, and I found nocorporations matching that name.
The closest business having a partial name match was over 1000
miles away. It was definitely not a match.
So the business that was claiming more than 1000
satisfied customers didn't really exist.

(03:13):
Now, after all, it's not every day that a woman in their 70s
walks into a bank branch and asks for a check for 30 grand to
be made out to someone they don't know.
It's at that point that I got a call from my friend standing in
front of the bank teller asking me for advice on what to do
next. So this is where I stepped in to
do additional due diligence. Meanwhile, the contractor is
waiting outside in his truck to get paid, so I asked to receive

(03:35):
all of the paperwork that my friend had received.
The first document looked like aset of regulations stating the
contractor didn't need a business bank account to conduct
business. It was interesting, but not
particularly relevant. The next thing I found was an
estimate that was valid for 30 days but had no date on it, so
the estimate was valid in perpetuity.
Third was the name of the business.
I got on the phone with the contractor directly and asked

(03:58):
him if he could provide his business registration
information and proof of insurance.
He was extremely agitated, concerned he was not going to
get paid. I made it clear we were working
on getting him paid, but in order for him to get paid we
needed proof that the business actually existed and a copy of
the receipt for the first payment that had already been
made. And then I also asked for the
date to be added to the quote for the work being done.

(04:20):
So he added the date, and after a few hours and numerous phone
calls, he provided what looked like an official document, which
registered the business name as a sole proprietorship.
But the business was registered and yet another name that we had
not seen up until that point. And when I asked who this other
name was, he said it was his business partner on the roofing
side of the business. But the registration of the
business name was from April of this year.

(04:42):
There's no way that from April until now there would be
thousands of satisfied customers.
So clearly all of that was a fabrication.
We reconfirmed the address of the business again and I
confronted him with the fact that there was a dental clinic,
a chicken restaurant and a burrito restaurant and he stated
that he was above the restaurant.
Well, when I asked him what kindof restaurant was there, he
didn't know. The other problem with his story

(05:04):
is the restaurant is in a one story building.
There is no second level to the building now.
At one point the contractor was so agitated he was literally
begging to get paid. He mentioned he was suicidal and
he was terrible at paperwork andhe was paying his workers cash
under the table. Like I said, this story does
have a happy ending in that the work was actually done and

(05:24):
quality of the work appears to be good.
Not all projects that are built on a bucket full of lies like
this turn out well. It's yet another reminder of how
important due diligence is. And due diligence is a mindset
and a process. It requires attention to detail
and being thorough. So remember to click on the link
in the show notes that you get acopy of our due diligence
checklist. As you think about that, have an

(05:46):
awesome rest of your day. Go make some great things
happen. We'll talk to you again
tomorrow.

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