Many people understand fraud in the context of pyramid or Ponzi schemes, insurance fraud or perhaps wire fraud. Unfortunately, fraud also occurs in the construction industry. Contractor fraud arises from illegal acts committed by individual contractors or firms. Usually, fraud on the part of a contractor can be very broad, including things from substandard repairs to offering services that deliberately cheat the other party. Construction fraud arises when contractors work with construction companies to perpetrate the fraud.
Homeowners can be really harmed by contractor fraud, because fraudulent acts or shoddy repairs can lead to more bills (to try to fix contractor’s substandard work), or can cause extensive damage to property (that will require even more work to correct). However, contractors who engage in fraud can often get away with their schemes because they tend to target uninformed people who easily fall into the scam. Often, elderly people may be targeted by these fraudulent contractors because they believe the elderly are an easy target.
Common tactics used by fraudulent contractors include threats or intimidation, with the intent of going after individuals. Common techniques of contractor fraud may include:
- Requiring payment in full up front;
- Written contracts that do not include the entire agreement;
- Contractors not getting the correct permits;
- Contractors revealing unforeseen problems that need extra work;
- Intentionally misquoting project costs; and
- Selling extra materials to you for a cheap price.
When you are planning to engage a contractor to perform work on your property, there are a few steps that you can take to protect yourself. You may not be able to avoid all fraud completely, but you can do your best to keep the transaction as clear-cut as possible:
- Paying Up Front: Do not pay more than $1000 or 10% of the job total, whichever is the lesser amount.
- Written Contracts: Make sure that you read all contracts before signing them. You will want to read carefully to be sure that everything you want, expect, and agree to is included in the final contract. If the written contract is missing parts of the agreement you made verbally with the contractor, do not sign until it has been edited.
- Building Permits: Request that the contractor get a builder’s permit. This will protect you from unlicensed contractors.
- Unforeseen Problems and Extra Work: When you review the contract, before you sign it, make sure that it includes a clause that requires the homeowner and contractor must both sign off on the project before anything is charged or worked on.
- Selling Extra Materials: While it may sound like a good deal, it’s best not to buy anything on the spot, especially if it’s an impulse buy. Always do your research before buying materials, and make sure the contractor has a good reputation.
If the fraud has already occurred, don’t wait. It is in your best interests to talk to an attorney as soon as possible. The legal remedies available to you can vary depending on the specific circumstances of the case, and the attorney can give you advice on what your best options are. You may consider informing local law enforcement, if you believe the contractor’s actions involve criminal activity.
The most common claim you can file in cases of contractor fraud is a theft loss deduction with the Internal Revenue Service (IRS). This claim may not be available for everyone, however. The IRS has certain rules and requirements in order for you to make this claim; the theft must be illegal under the law of your state, for example. Also, the deduction can only be claimed if the losses exceed 10% of your adjusted gross income.
If trying to talk through the situation directly with the contractor is getting you nowhere, you may need to sue the contractor to really get their attention. In most states, small claims courts have limited jurisdiction, which means that the judges are limited in terms of what they can actually do for you. Small claims courts usually can only award money damages, which means that the judge cannot order the contractor actually complete the work on your house.
However, they can order the contractor pay you for the damage done to the property or the amount it will take for another contractor to fix the issue. Keep in mind that it’s called “small” claims court for a reason, as well. These courts usually have a limit on the amount that you can seek in damages (normally somewhere around the $5000 mark).
Small claims court may not be the most effective way to achieve a solution to your problem. The legal process will be slow, and the work on your home will come to a screeching halt in the meantime. However, if the contractor owes less than the limit for a small claims suit and you would rather have the money than a court order compelling the contractor to finish the work, you may consider a small claims action.
If you are concerned that you have been the victim of contractor fraud, contact an attorney. Contractor fraud cases may seem simple at first, but can get very complicated very quickly, largely because they involve multiple areas of law, like contract law and real estate law.
Talking to an experienced real estate attorney or contract attorney can be extremely beneficial. The right attorney can not only talk you through your situation, but can also advise you on the best way to proceed, and represent you in court if it comes to that.