Since they rely heavily on word-of-mouth to spread their businesses, contractors are motivated to fully satisfy their customers and build a solid reputation. But because bad news travels faster and farther than good news, it's far more common to hear stories about bad contractors than it is to hear about good ones. (You think your updated house looks great, but potential buyers may not feel the same way. Check out 4 Types Of Home Renovation: Which Ones Boost Value?)
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Hiring a top-notch contractor will pay off in the long run, even if the initial cost is a bit higher than if you simply go with the lowest bidder. If the job is done right to begin with, it will last longer and avoid the cost to correct shoddy workmanship. Plus, you save yourself a lot of time and aggravation because you're dealing with someone you can trust.

The Search
Millard Blakey, cofounder of the remodeling company WreckCREATIONS, in Lexington, KY, says that it's best to know the qualities you're looking for in a contractor before you begin your search. Once you determine those qualities, use referrals from friends, family and neighbors to come up with an initial list of names. Interviewing at least three potential contractors before deciding to ask for a cost proposal is recommended, in order to ensure that you are comfortable with your decision.

Shaun Smith of Koru Landscape Construction in Louisville, CO says that the interview process works both ways. "My experience lets me know very fast what they are really trying to achieve, and if I am the right contractor for them." He encourages homeowners to contact local resources for a list of local contractors. This will help to narrow the search and support the craftsmen in your area. He also recommends touring nearby neighborhoods to find a few homes that are undergoing construction. "Stop by and talk with the owners about how their project is coming along," he advises.

Smith warns against contractors who try to convince you they are the only one for your job. He says that their work should speak for itself, and a strong portfolio, good references and pictures of previous jobs can often say more than the answer to any interview question can.

Once you have narrowed the list of potential contractors, check their license numbers with the state license board and Better Business Bureau. Other sources of information and referrals are the National Association of the Remodeling Industry and the National Association of Home Builders.

Many homeowners get into trouble because the work they want done isn't clearly defined at the outset. Then, as the work progresses, they change the scope of work causing additional costs to the contractor that are passed on to the owner. That's not the contractor's fault, but he often gets the blame. The way to avoid this is to produce a thorough remodel plan that completely covers every aspect of the job, including the specific materials to be used. A good contractor will let you know if your proposed project and budget is realistic. (Some renovations will mean a bigger sale price on your home, while others will just cost you. See Will Your Home Remodel Pay Off?)

Get everything written down in the form of a contract that includes cost, schedule, materials, bonding and insurance information and a list of subcontractors. For the homeowner, a fixed-price contract is preferred over paying by the hour, because it locks in the maximum liability. However, this leaves you open to price increases if you change any of the work content.

Contractors are entitled to a reasonable down payment in order to cover their initial labor and material costs. This is negotiable, depending on the nature of the job, but should usually not exceed one-third of the total contract amount. The balance of the money can be allocated to completion milestones that incentivize the contractor to stay on schedule. For example, discrete milestone payments could be made upon completion of the framing, plumbing and electrical installations. Hold a sizable amount of money for the final payment that is contingent on your personal inspection and satisfaction of the finished project.

Perhaps most important is to keep the lines of communication open. A failure to effectively communicate may be the reason for many failed relationships between homeowners and contractors. Whether the issue is money, jobsite cleanliness, finish expectations or even how to deal with additional work, it's critical to discuss these matters as soon as they arise. If you believe the work being done is unsatisfactory, approach the contractor immediately and attempt to get a resolution. Most contractors will work with you to try and solve the problem.

The Payoff
The importance of hiring the right contractor can't be overstated. A good contractor will save you money by doing the job right the first time, and will not only save you money in the long run, but also eliminate stress by ensuring a quality finished product. (This method can help first-time buyers afford a home using a rent-to-own strategy, and it can also be good for investors. Check out Rent To Own; Own To Rent.)

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