Are YOU a Contractor? October 3, 2007
Based on recent changes in Washington law, you might be if you own real estate and either work on it yourself or hire others to work on it.
Without great fanfare, the Washington legislature recently made subtle, yet significant, changes to Washington’s Contractor Registration laws (RCW 18.27 et seq.). Generally, the Contractor Registration laws deal with the regulation, registration, and licensing of contractors. Historically, a contractor’s failure to comply with the registration requirements could lead to civil fines and criminal prosecution. The legislature, acting under pressure to better protect consumers, expanded the definition of contractor; stiffened the consequences for violations and strengthened the Department of Labor and Industries’ enforcement powers against unlicensed contractors.
The biggest change occurred in defining who is required to be licensed. RCW 18.27.010(1) now defines a contractor as:
. . . any person, firm, corporation, or other entity who or which, in the pursuit of an independent business undertakes to, or offers to undertake, or submits a bid to, construct, alter, repair, add to, subtract from, improve, develop, move, wreck, or demolish any building, highway, road, railroad, excavation or other structure, project, development, or improvement attached to real estate or to do any part thereof including the installation of carpeting or other floor covering, the erection of scaffolding or other structures or works in connection therewith, the installation or repair of roofing or siding, performing tree removal services, or cabinet or similar installation; or, who, to do similar work upon his or her own property, employs members of more than one trade upon a single job or project or under a single building permit except as otherwise provided in this chapter. “Contractor” also includes a consultant acting as a general contractor. “Contractor” also includes any person, firm, corporation, or other entity covered by this subsection, whether or not registered as required under this chapter or who are otherwise required to be registered or licensed by law, who offer to sell their property without occupying or using the structures, projects, developments, or improvements for more than one year from the date the structure, project, development, or improvement was substantially completed or abandoned. (emphasis added)
These changes now make it clear that businesses engaged in real estate development activities, even on their own property, must now register. For example, under the old law, a developer who subdivided their own property and made required plat improvements would have previously fallen outside this definition. Now, that same developer fits squarely within this definition, especially if the developer does not “occupy or use” their work for more than a year after substantial completion of the improvements.
Notwithstanding this broadened definition of “contractor,” there are still a variety of exemptions that apply. For example, someone who “constructed an improvement” on their own property or personal residence was exempt from registration unless the improvement was constructed “with the intention and for the purpose of selling the improved property.” So, one who built a home on their own lot for their own use was exempt, but if that same person builds a house for resale purposes, registration is required. This exemption has been narrowed and now states:
Any person working on his or her own property, whether occupied by him or her or not, and any person working on his or her personal residence, whether owned by him or her or not but this exemption shall not apply to any person who performs the activities of a contractor on his or her own property for the purpose of selling, demolishing, or leasing the property;
The “activities of a contractor” include one who, for their own property, employs members of more than one trade upon a single job or project or under a single building permit. Arguably, then, a homeowner who employs multiple trades for typical “pre-listing” improvements may no longer be exempt from registration requirements. Likewise, the real estate “flipper” who buys and updates a home may also no longer be exempt from registration. Also covered may be the real estate investor who buys a home for rental purposes but improves the home prior to leasing it.
If you are now required to register, the amendments also raise the stakes against those who fail to do so. Instead of being a misdemeanor, it is now a “gross” misdemeanor if any of the provisions of RCW 18.27.020 are breached. In addition to failing to register when required, a violation occurs if a contractor hires an unregistered subcontractor.
Failing to register may also create an unforeseen impact on the ability to enforce purchase and sale contracts or leases. RCW 18.27.080 provides that contractors are not allowed to bring a claim for breach of contract unless they can prove they were registered at the time they contracted for the performance of such work or entered into such contract. If an owner performs work on their property that requires registration with the intention of selling or leasing the property, a crafty attorney working for the buyer or tenant may attempt to use RCW 18.27.080 as a defense to enforcement of that contract or lease.
In addition to imposing what could be significant civil and criminal penalties for failure to comply and the potential limitations on contract enforcement, non-compliance may also increase exposure (in the latent defect or warranty context) to owner-developers related to the purchase and sale. While violation of RCW 18.27 does not give a purchaser a separate cause of action against an owner-developer, it could be used in litigation as evidence of malfeasance.
Despite the many uncertainties with how this new law will be interpreted, property owners and developers who perform work on their property must at least take a closer look to determine if they must now register as a contractor. Until the courts help clarify these new amendments, the safest course of action is to register. While there is certainly time and cost involved, the alternative may prove even more costly.
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- Posted in : General Real Estate
- Author : Russ Cofano
Comments
Russ, when was this enacted and in force? I personally know several cases of recent flips and the homes are still listed for sale. How might the listing agents handle this law knowing that the owner did much of the actual work? Complicating matters, what if the listing agent IS the flipper/owner?
July 22, 2007 was the effective date.
I think the new law would apply only for work done on or after the effective date. My guess is that the Dept. of Labor and Industries will be relatively lenient in enforcement until they get rules in place. I’d have to think about whether the fact that the seller was not registered would be a disclosure item. I’ll reply back tomorrow….
-Russ
Russ
Not sure if you know that this was enacted in Pierce County last year (2006) and when it was challenged by some people who were buying lots and having contractors build homes for resale on the lots. Pierce County backed down when the case was given a court date. Obviously the same group of people who were upset with the idea that someone can make an “obscene amount of money” hiring a contractor to build a home for resale found a way to get their law enacted. {quote is a paraphrase of actual statement from county employee.]
I hope this gets to court quickly.
This will cause some real propblems for my clients who do not occupy properties they own and need to repair the properties to sell them.
Unbelievable.
I moved from California to Idaho in 1991 due to similar nuttiness down there.
Sounds like WA is a clone of CA.
Protect the citizens for they are too dumb to take care of themselves, right?
Really does wonders for entrepreneurs and your economy.
Well I have complained and lost sleep over this now it is time to figure out how to comply with SHB 1843 or walk away from the business in the state of Washington. My real estate goal for this year is to buy and sell 4 homes and 5 for next year keeping the one as a rental. So far I have been right on tract.
Wholesaled two properties prior to the asset back paper freeze mid July. I figured the profile of my buyer had just changed and now after a little settling, I was going to target the first time buyer and buff out a three bedroom that would resale some ware between 160 and 180. I buy at trustee sale with my cash and it is scary. For me the worst case was to wind up with a property as a rental and have to go back to work as a machinist. I can accept that, but I do not want to. Now I need to be a general contractor to have a rental. Houses always need work it never ends. How much more liability does having a general contractors license place on the investor as a reseller or landlord? I did read that if I sub out some work and the sub did not pay his employees taxis that I would become liable for his employees taxis as a general contractor. Maybe some one can help and shed some more light on the liabilities before we run out and buy a general contractor license. Is there an up side to this for a small fri like myself?
really good and useful post. I’ll be following discussion about this as I know of quite a few people who will be affected and are not aware of the new code.
Hi Russ, I am concerned with how this will effect a sellers ability to get their house “market ready”.
Many owners have work (painting, new flooring or coverings, minor or major repair work etc.) done before putting their house on the market.
It is a fundamental thing about the marketplace that you want your “merchandise” to be shown at it’s best advantage to get the best price. Many homes become dated or “worn” over the years and are in need of some work done to them before being put on the market.
Owners get used to how their homes look over time, and some allow deferred maintence to accrue. But these things do matter to buyers and will effect the pricing of a home. This will interfere with a sellers ability to get the best price for their home.
I believe only a very, very small segment (perhaps none) of sellers will become licensed contractors to allow them have work done on their houses to get them market ready. This will restrict and penalize a homeowner from realizing their home’s maximum potential value. I think it could also add downward pressure on home prices.
How can re agents help their clients with this development?
If a homeowner hires a general contractor, would that allow the owner to have work done by multiple contractors?
What about the homeowners who have several kinds of work done to their home because they were expecting to be living there for a few years, and now find that their situation has changed less than a year after work has been done, and now find they have to sell?
Also, last question to consider; how would this effect buyer’s requests for repairs on a house that is in the inspection period?
Russ, this is certainly going to be a can of worms!
Hi Russ, these questions are to provoke thought and discussion, not necessarily directed at you to answer.
Thanks for the interesting topic!
What I see happing here the real estate community is blind sided cause the Washington association of realtors has let them down and keep them in the dark for some reason. What of the buyers that were not told and closed after July 22? There no test its just some money to become a general contractor, no biggie. I just can’t help but think we will have tens of thousands of general contractors running around. Maybe Home Depot will ask for your card before checking out. O.K. The real question is when we comply and go out and buy our general contractors license what are the extra liabilities we are paying for???? I am thinking that I will drive the 140 miles to the investors meeting next Monday. I am not a contractor nor do I want to be one. Now if I have to be, what are the liabilities created by my new paid fore expertise. Now I are one.
PS. Thank You for this cite been coming around since mid July after the ABS paper freeze looking for some direction.
Russ,
Thank you for the post and information. Just on more thing to keep an eye out for (coming from an out of stater). I hope that Michigan does not get wind of this… but I will see what I can do to direct people to read this helpful item.
Thanks again and as always was a very enjoyable read.
The idea that being a registered contractor protects consumers is a bit crazy. It just requires a small bond, and any client of the contractor can access the bond, so it’s unlikely it would cover anyone’s loss.
You could protect yourself better just by looking for lawsuits involving the contractor.
Just plain goofy.
In the end how much of this law is really enforcable?
It’s not so much is it enforceable, it’s what happens to you when they catch you.
The penalties for not being licensed include a violation of the Consumer Protection Act. That can lead to limited treble damages ($10,000.00) and worse, having to pay the other side’s attorney fees. Also, it can make the claim they have against you non-dischargeable in bankruptcy with the right fact pattern.
So, let’s say you flip a house and are not licensed. The buyer discovers a problem with the house. Ordinarily it would take certain fact patterns for you to be liable for the defect. If you’re not licensed I could see them being able to prove liability in a lot more fact patterns, and under almost all of them you’d also owe attorney fees.
Last night at the REIA meeting there was a very animated discussion on this and a very real horror story was told. I will not be taking this lightly and encourage every real estate professional and investor to join in to do what we can to get this law changed - quickly.
[...] For a synopsis of what all this means from a real estate attorney’s point of view read the following post from Russ Cofano over at Rain City Guide. http://www.raincityguide.com/2007/10/03/are-you-a-contractor/ Tags: financial matters, buyer’s agency, financing/lending, listing agent, land use, For Sellers, legal issues, investment property, For Buyers, Uncategorized [...]
Russ, thanks for the usual excellent post! We’ve got clients that we’re making aware of this change in the law so it’s nice to see a place where they can come and learn a little more rather than just reading the document by itself, although we recommend they read it in its entirety and contact their attorney, if applicable, for their own interpretation and to strategize how they’ll move forward with their investment plans.
[...] Russ Cofano posted about the changes in “Are YOU a Contractor? “on October 3rd, and Eileen Tefft posted another in “Home Owner Quicksand “ on October 10th, both sparked comments and questions. [...]