FOR INFORMATIONAL PURPOSES ONLY. NOT INTENDED TO BE LEGAL OR FINANCIAL ADVICE.
You’re likely here because you’ve heard the horror story of Renovo filing a Chapter 7 bankruptcy, leaving homeowners unsure if they’ll ever get their money back for incomplete projects. Or you want to be sure your money is protected when you start a home improvement project. Regardless, you don’t want to be one of thousands of homeowners who paid large swathes of cash to get their project started, only to be left unfinished.
What’s worse, many homeowners are treading water, unsure what will happen to their project or money. You don’t want to find yourself in a nightmare scenario where you write the check, and the company folds before the project is complete.
Shugarman’s Bath works in the home improvement industry as a tub and shower remodeling specialist. We want to help you make an informed decision about the financial aspects of the home improvement industry before taking on a remodeling project. We want to be as transparent about this as possible. It’s important to us that you feel more secure about your money, that your project will be completed, and that you won’t be paying for a service you never received after signing with a contractor.
In this article, you’ll be provided with information on how remodel financing works, learn some tips we’ve received from others on reducing your risk, and be given questions to ask a contractor and lender before you sign a contract. By the end of this article, you’ll have methods of how you can better protect yourself financially before signing with a contractor.
What Are the Main Ways Homeowners Pay Contractors?
Most homeowners pay for home remodels in one of two ways:
1. Cash, Check, or Credit Card
This is a common approach in the industry. Basically, you have all the money and are ready to pay.
Many contractors ask for 10%-50%. The first $1,000 or 10% is typically for a deposit. “If a down payment will be charged, the downpayment shall not exceed one thousand dollars ($1,000) or 10 percent of the contract amount, whichever amount is less” (Cal. Bus. & Prof. Code § 7159). Anything else is likely a progress payment, which typically includes efforts made by your contractor to move the project forward.
Here’s the issue: when you write that check, that money is gone after leaving your hands. So if a company goes out of business, there’s a possibility you may never get that money back.
2. Financing
Financing works differently. Instead of paying a contractor directly, a lender provides the funds for the project. You typically make monthly payments after work is completed or after the lender officially activates the loan. These payments can span as little as 1 year and up to 180 months. It depends on the lender.
Here’s the thing: Not all loans work the same. Ask whether or not a contractor uses stage funding.
Note: there are exceptions for payment, such as Insurance, VA Grants, HELOCs, etc. The two mentioned above are the main methods of payment.
What the Heck Is Stage Funding?
Stage funding means the lender gives money to the contractor in stages.
Here’s an example of how stage funding works:
- Stage one: 30% paid when the job is scheduled
- Stage two: 50% during installation
- Stage three: The final 20% is paid at completion.
The problem is that if the lender pays for the first two stages and the contractor goes out of business before finishing your project, you may still have to pay back the loan for the money that has already been sent.
This isn’t always the case. It depends on the lender. Again, it would benefit you to ask lenders how they handle stage funding if a contractor goes out of business. If you have any questions about what the loan documents say about this issue, consult an attorney of your choosing.
Why Some Contractors Use Stage Funding
Stage funding can be a red flag, but not all of the time. Using stage funding might signal:
- The contractor doesn’t have enough capital to operate without upfront payments
- Financial instability on the backend
- A risk of the homeowner being financially responsible for work that was never completed if the contractor closes its doors mid-project.
If a Contractor Uses Stage Funding, That Protection May Not Exist
The way your lender handles funds can change your financial risk. Every lender works differently. They also work differently depending on the contractor they work with.
Some lenders release money to the contractor early. Others pay the contractors when the work is complete. Some use stage funding. Others don’t. Because lenders work differently, your risk level changes.
Again, it would benefit you to ask the lender how their financing options work. This includes what happens if the contractor fails to deliver or goes out of business mid-project.
How Shugarman’s Bath Uses Financing Options
At Shugarman’s Bath, we work with an established lender that has won 3 Best-of awards from NerdWallet for personal loans to offer a variety of financing options that best help you.
Have a look at the financing options available with Shugarman’s Bath.
Shugarman’s Bath does not use stage funding. While the lender we work with offers stage funding with other contractors, we choose not to use it to benefit you. This means:
- No money is released until the job is complete.
- You don’t pay anything upfront.
- Your loan payment won’t activate until approximately 30 days after you approve the payment request via email. You are sent this email after your project is complete.
What Happens If Shugarman’s Bath Doesn’t Complete Your Tub or Shower Remodel?
If Shugarman’s Bath doesn’t complete your project, the lender would forgive the loan.
Note: Still be sure to double-check your lending agreement to confirm that the lender would forgive the loan, even with the lenders we work with.
Because we don’t use stage funding, no money is sent out until your remodel is fully finished and signed off. So if the job isn’t done, the loan never activates. You owe nothing.
Plus, you aren’t penalized if you decide to pay your loan off early.
Suggestions Before You Sign Anything
Now that you have some information on deposits, financing, and how stage funding works, here are some questions to ask your contractor before signing the contract.
Ask your Contractor: Do you require more than a deposit?
Again, “if a down payment will be charged, the down payment shall not exceed one thousand dollars ($1,000) or 10 percent of the contract amount, whichever amount is less” (Cal. Bus. & Prof. Code § 7159). Anything else is likely a progress payment.
If the total cost exceeds 50% before project completion, that should raise more questions. A contractor wanting those large payments might mean they can’t operate without upfront payments, or there may be financial instability on the back end.
Ask: Does this project use stage funding?
This is a question to ask both the contractor and the lender.
Using stage funding could mean the contractor doesn’t have enough financial stability. It could also mean you would owe a lender if they released payments and the contractor went out of business. That, or they didn’t complete the project.
Ask: If the job is not completed, what happens to my loan?
Reputable lenders forgive stage funding if a project is incomplete. However, every lender works differently. You need to know if you’re responsible for paying the portions already released if the contractor went out of business or didn’t complete the project.
Ask: When Does My Loan Actually Start?
See if your loan starts before, during, or after your project. If a loan starts early, you could be financially responsible for repayment depending on the lender. So you could be at financial risk if a contractor goes out of business mid-project.
There is no reason you couldn’t get a clear answer to any of these questions. If you can’t get a clear answer, consult another contractor of your choosing that’s willing to answer your questions.
Work With A Remodeler That Works With You
You know how terrifying it is to feel financially exposed if you’ve been following the Renovo story or have second-guessed where your deposit is going. Protecting your money during a remodel shouldn’t be scary for you. This is why we want to provide you with some information on how you may be able to protect yourself financially.
You now know the questions to ask, warning signs to watch for, and how financing can either safeguard your money or put it at risk. We want you to talk to a contractor or lender fully prepared so you can take steps to better keep your investment secure.
Next, have a look at the financing options Shugarman’s Bath offers.
If you have any questions or want clarity on how different financing setups work, Shugarman’s Bath is here to help. Even if you aren’t ready to do a tub or shower remodel, we want to make sure you’re informed before making big decisions.
The information contained in this article is provided for informational purposes only. It is not intended to be legal or financial advice of any kind. You should not act or refrain from acting on the basis of any content included in this article without seeking legal, financial, or other professional advice. The general information provided in this article may not address current legal, financial, or other developments and may not address your specific situation. Contact a licensed professional of your choosing to obtain specific information about your individual circumstances.
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