Licensed Contractors: Are They Always Needed?

The situation is somewhat commonplace here in Arizona. An investor scoops up an investment property in a great neighborhood with the goal of re-selling the property for a profit. After consulting with some real estate professionals, the investor learns she can earn an extra $150,000 on the re-sale of the property if she “fixes up” the property prior to listing it for sale – i.e., remodeling of the kitchen, replacing all the baseboards throughout the house, upgrading the bathrooms, painting the entire exterior and interior of the house, re-designing the landscape of the front and backyard, etc. Upon mapping out a “rehab” plan, the investor contacts several contractors for bids, and ultimately wants to use a team of unlicensed contractors to perform the work. Is this legal?

Generally, an owner of property can build a house even in the absence of being a licensed contractor if the owner intends to occupy the home. If, however, the owner plans to re-sell the property, then a licensed contractor must be used to build the home. The licensing statutes are designed to protect the public against unscrupulous unlicensed contractors who may perform substandard work. Arizona law has various exceptions, including what is known as the “handyman exemption” for smaller projects of a casual or minor nature totaling under $1,000. If the work requires a local building permit, a license is required. If an unlicensed contractor unlawfully performs work it cannot maintain an action for compensation in a court of law.

It is important to hire a licensed contractor when the law requires it. Some homeowners file complaints against contractors with the Registrar of Contractors (“ROC”) believing the contractors who performed work on their home were licensed. Unfortunately, the ROC may not be able to provide a remedy to the homeowner if an unlicensed contractor was used. Further, although an unlicensed contractor cannot sue for unpaid compensation, a court will probably not force an unlicensed contractor to disgorge monies already received from the homeowner (the homeowner can still sue the unlicensed contractor for faulty work and hope to obtain a judgment against the contractor). In a situation where a licensed contractor was used, the ROC can provide redress to the homeowner. Also, the homeowner may be able to access the recovery fund through the ROC for a full or partial recovery from the damages incurred.

Hiring an unlicensed contractor also gives rise to disclosure issues. For instance, if the investor uses an unlicensed contractor to remodel the home and re-sells the home without disclosing this fact, the buyer may sue the seller for non-disclosure, in particular with respect to the fact that an unlicensed contractor performed substandard work at the home. In the end, saving money by hiring an unlicensed contractor is likely to be penny-wise but pound-foolish. If you have additional questions, you can contact Ben Gottlieb at mailto:ben@mandglawgroup.com or 602-533-2840.