The other real estate boom: Scams
Yes, we're all eager to spend what it takes to protect our biggest asset. Sometimes too eager.
NEW YORK (MONEY Magazine) - Sybil Pryor thought she was getting a deal.
Early last year, a contractor showed up at the 77-year-old's Oakland, Calif. home and offered to install a new roof and new siding.
The cost? Not to worry, he told her. All Pryor had to do was sign a few papers.
Big mistake. The documents turned out to be for a home-equity loan, one that authorized a bank to pay out the proceeds of the loan -- more than $90,000 -- directly to the contractor.
You can probably guess how this story ends: Prosecutors say the contractor skipped out on the job the moment the loan check arrived.
"It's awful, but I probably see 20 of these cases every year," says William Denny, the deputy district attorney on Pryor's case.
It's not just the elderly and the poor who are victimized. Awash in paper profits and refi cash, homeowners of all economic stripes are overly eager to protect and improve their investments. But good contractors are typically booked months in advance these days, making hurried owners especially juicy targets for home repair scamsters, incompetents and everyone in between.
Consumer complaints about general contractors climbed 67 percent between 2000 and 2004, according to the Better Business Bureau. Bruce Hahn, president of the advocacy group American Homeowners Grassroots Alliance, calls home improvement scams "a widespread problem -- probably the single biggest source of complaints from our members."
Here are some of the most common and destructive swindles to watch for.
Scam 1: "Hello, we're working in the neighborhood..."
It's surprising how many people hire a stranger to do work that they're going to have to live with (and under) for years.
One pitch that's particularly popular with the knock-on-the-door types: "We've got a job down the street, and we noticed that your roof is missing some shingles. We have some leftover materials in the truck and can give you a great price on a repair job." Then comes the kicker: "We'll just need a few hundred dollars to start."
Either they never return to do the job or the work is shoddy. Sometimes, says Sheila Adkins of the Better Business Bureau, "they'll pull a bait and switch, telling the owner that they ran out of materials and need a lot more money to finish the job."
The most brazen of the bunch do what allegedly was done to Sybil Pryor: loot a target's home equity.
So how do you distinguish legit tradespeople from scam artists? First, never hire anyone who cold-calls you or shows up in person with a special deal on a new roof, deck or driveway. (Even coupons in the mail from legitimate-sounding outfits should be treated skeptically.)
Good contractors aren't readily available on short notice, and they don't spend time trolling neighborhoods for work. "They're tied up in other jobs," Adkins explains.
With contractors and fix-it types, you want to find them, not the other way around. Of course, you'll ask friends and neighbors whom they use and trust. (Try posing the question this way: "Would you be happy to see them in your house again on another project?")
And if you're new to the neighborhood, you'll want to hit up your local home inspector or real estate agent for suggestions. But also remember: The best builders, plumbers and landscapers know one another. A trusted plumber can suggest a good tile installer for your bathroom makeover.
Scam 2: The chimney burn
The dirtiest home scams prey on our deepest fears. That's why chimney rip-offs are so widespread. After all, a faulty chimney can be fatal, causing house fires or carbon monoxide poisoning.
A classic chimney scam, says Evan Grugett, a home inspector in Scarsdale, N.Y., begins with a homeowner getting a coupon in the mail or seeing an ad in the Yellow Pages advertising a chimney cleaning for $45 -- about half what a legitimate chimney sweep would charge (at least in suburban New York).
Almost inevitably, he says, the cut-rate cleaner will report back that the chimney needs a new liner or other major repairs costing several thousand dollars. Horrified to learn that the family is at risk, the homeowner's first instinct is to write a check.
Always get a second opinion, preferably from a member of the National Chimney Sweep Guild (ncsg.org) or a state guild. Most of the guild members that Grugett knows use videoscopes that provide owners with photographic evidence of cracks or crumbling. The pros don't expect you to take their word for it.
CHIMNEYS In some towns, the local fire department will inspect your chimney for free.WHAT TO DO An active fireplace should be cleaned every two years.COST $60 to $90 for cleaning and inspection
Scam 3: Pest control that swarms out of control
In much of the country, termites and other wood-eating pests are a homeowner's worst enemy, causing $2 billion in damage each year, according to U.S. Forest Service researchers.
Killing and containing termites is now a multibillion-dollar industry. But given how little most homeowners know about pest control, it's no wonder that the industry itself is teeming with bad elements.
Earlier this year, for instance, a MONEY writer received a $110 bill from his New York termite-control company with a notice that his annual termite inspection had turned up "no activity." Given that the inspection was done in the dead of winter with a foot of snow on the ground -- conditions under which all but the hardiest bugs are inactive -- the work was largely worthless.
"You want to have them do the annual inspection when there's the highest probability of finding termites," says entomologist Roger Gold, a professor at Texas A&M University. "Generally that means in the spring."
Gold knows of at least a dozen different pest-control rip-offs. One that really bugs him involves new construction. Research shows that people building new homes can greatly reduce the risk of termite infestation by pretreating the sill (the first layer of wood atop a cement foundation). The chemicals themselves typically cost no less than 10¢ a square foot, yet it's not uncommon for total bids (chemicals plus labor) to come in at 8¢ a square foot.
"That should tell you they're not putting the chemical in," says Gold. "Or at least not enough."
And beware of construction materials marketed as termiteproof. "Termites won't eat metal studs or vinyl siding," Gold notes slyly. "They'll just eat everything around them."
The good guys don't offer a permanent solution to what is inevitably an ongoing problem.
TERMITES Most termite damage is invisible to the untrained eye. And in southern climes, a third of all homes have some termite damage.WHAT TO DO Get a professional inspection once a year.COST $75 to $100
Scam 4: Pump you up
If you live in a rainy area, you may have had the misfortune of waking up to a soggy basement. Frustrating, especially since most insurance policies don't cover basement water damage.
Homeowners who consult basement-waterproofing companies are often sold on the virtues of sump pumps. While not truly a scam (sump pumps do work, after all) the installation of these expensive drainage systems may be a $9,000 solution to a problem that frequently can be fixed much more cheaply with better gutters, well-placed driveway drains or landscaping modifications that divert runoff away from the house.
"You might be able to fix it on the outside for $3,000," suggests Grugett, "and still have money left over to get your gutters cleaned twice a year."
GUTTERS Water in your basement? The problem may be your gutters.WHAT TO DO Clean them once or twice a year.WHAT ELSE Consider downspout extensions that carry water at least three feet away from your house.
Scam 5: What you don't see
With mysterious dangers like radon and asbestos, you're paying for a result -- the removal of dangerous gases or airborne particles.
But how to tell whether the work has been done correctly? You must rely on the contractor's assurances that a home's radon or asbestos levels now test at or below federal standards. In a competitive market in which firms often win on price alone, that can lead to shortcuts.
So demand copies of independent lab results before payment. And make sure bids are apples to apples. In the case of radon, better companies may charge more because they're installing more extensive ventilation systems.
Also be skeptical of lowball bids, a truism that applies to all home projects, not just radon and asbestos. The low bidder may intend to cut corners or use cruddy materials.
If you're installing a new roof, for example, ask the bidders for the brand names of the roofing materials they plan to use. With a little research (Builderonline.com's Product Guide, which rates builders' favorite brands, is a good place to start), you can compare bids more effectively.
RADON is an odorless radioactive gas that's a leading cause of lung cancer. Released by rocks and soil, it seeps into homes through basements.WHAT TO DO All homes with permanent foundations should be tested.COST $10 to $20 per kit
Dos and don'ts of home repairs
DO ask friends and neighbors for recommendations when shopping for a contractor. If you're in the process of buying, ask your home inspector for contractors and pest-control companies he recommends. In most states, inspectors can't collect referral fees from contractors, so odds are you'll get an honest answer.
DO make sure your contractor buys roofing, windows and other building materials that come with manufacturer's warranties. But remember: The contractor and subcontractors must install the materials in the manner dictated by the warranty or the manufacturer will not be obligated to honor its promise.
DON'T hire an inspector who's popular with local real estate agents. The best inspectors are often despised by agents because they find problems that give buyers cold feet or spur them to renegotiate. Find credentialed local inspectors through the American Society of Home Inspectors (ASHI) at ashi.org.
DON'T assume a licensed contractor is a good one. Warns Arizona inspector Coleman Greenberg, a former president of ASHI, "Being licensed doesn't mean a thing. In some states all it means is that they passed a written test on contracting law -- not that they know how to work a hammer."
For MONEY Magazine's special report, "Your Home 2005," click here.
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