The credit check is one of the most sensitive aspects of the relationship between customer and remodeler. In fact, not all remodelers take this step. “It's not prevalent even with some of the more sophisticated contractors,” says D.S. Berenson, an attorney with Johanson Berenson LLP in McLean, Va. But he and other lawyers who work with builders and remodelers say that it's a prudent one to take.
Greg Janian, an associate attorney at Governo Law Firm LLC in Boston, Mass., says that credit checks should be mandatory on expensive remodels. “I think it should be done for any job over $25,000,” says Janian, who has an MBA in addition to his law degree. “It's an essential part of the risk-analysis process. Remodelers are essentially loaning services until they receive payment, and they're not getting collateral. They need to view the situation the same way a bank looks at a loan.”
Credit checks are usually performed by one of three major financial firms: Equifax, Experian, or TransUnion. The credit report spells out the customer's debts and liabilities, including the name of each lender and the amount owed, as well as evidence of previous bankruptcies. In some cases, the report will also show a credit score; anything over 700 is considered excellent, while anything under 600 can indicate problems.
But Janian says that the credit score alone can be misleading. “You need to look into the nuts and bolts of their assets, debts, and liabilities,” he says. “I think the debt-to-income ratio is a better indicator. The magic number is 60% for the banks. If the debt is higher than 60% of the monthly income, there could be cash flow problems.”
A credit check also won't show whether potential clients have been involved in a previous lawsuit against a builder or a remodeler. Berenson says that such information is available through background checks or a search of court records, but Janian doesn't have much confidence in such searches because a case that was settled and never went to trial wouldn't show up.
Janian recommends a title search to augment the credit score. “You can get a real estate lawyer or a bank to recommend a title search examiner,” he says. “The title exam will show the mortgages and tax liens on the property, along with attachments that any other contractors might have. Title exams are a great tool, and people should use them more, especially since 90% of the registries are now online.”
Regardless of what tools remodelers use to check a customer's financial viability, the process remains a delicate one. Courting customers while checking their credit may seem contradictory, but Janian says that asking for authorization for a credit check in a client questionnaire is just good business practice. “You have to be a salesman,” he says. “You have to tell your customer that you're laying out hundreds of thousands of dollars in expenses, and you need the answers to a few basic questions to go forward. In my opinion, a customer who balks at that stage is only going to become more difficult later on.”
Charlie Wardell is a freelance writer in Vineyard Haven, Mass.