A typical property owner who wants to embark on an ADU project as an owner-builder finds the advantages very compelling – reduced project costs followed by a new revenue stream from rental income, potential tax benefits, and increased property value. However, there are pitfalls that can quickly erase or seriously postpone the hoped-for gains.
In many ways, an owner-builder is essentially his or her own general contractor, so one has to comply with the same laws that a licensed general contractor does. In Hawaii, owner-builder permits are exclusive to residential construction – they are not available for commercial or industrial projects.
Once you are granted owner-builder status, you can proceed with your project without a licensed general contractor. However, you are responsible for ensuring that all work is “up to code”, and that all building inspections occur as required.
1 Year Wait for Sale or Lease
There is one key difference between the owner-builder and a licensed general contractor. Unless the value of permitted work is less than $10,000, an owner-builder cannot sell or lease, or attempt to sell or lease, the structure for one year. There are two exceptions when 1) a sale or lease during the first year is to the owner builder’s employee, or 2) a hardship exemption is granted by the Contractors License Board.
Risks and Responsibilities
Success as an owner-builder hinges on maintaining a laser-sharp focus on pertinent detail, along with full adherence to regulations. To that end, the Regulated Industries Complaints Office (RICO) has published a guide for owner-builders entitled “Risks and Responsibilities of Being an Owner-Builder.” RICO is a part of Hawaii’s Department of Commerce and Consumer Affairs.
Here are some key risks and responsibilities for owner-builders:
Licensing – The subcontractors you hire must be properly licensed. For example, electrical and plumbing contractors must be licensed under Chapter 444 of the state statutes. Whether you intentionally or unwittingly hire an unlicensed subcontractor, you could find yourself paying the medical expenses of an injured worker affiliated with that unlicensed entity.
Finally, it is important to beware of unlicensed project managers. Sometimes, an unlicensed individual “assists” an owner-builder to the point that he/she is, in effect, managing the project. In such a scenario, the owner-builder assumes responsibility for the activities of this individual.
Worker status – Any person who is not either a subcontractor or working for one is your employee. Therefore, some owner-builders have to withhold federal (FICA) and state income taxes. They also have to maintain workers compensation insurance policies.
Timely payments – An owner-builder is responsible for making timely payments to all suppliers and contractors involved in a project. An owner-builder who fails to do this may find that a lien will be placed on the property by any unpaid vendors or contractors. A lien effectively prohibits the completion of a sale of the property until the supplier or contractor is paid. Interest and other costs may add significant sums to the amounts owed.
Recordkeeping – State law requires an owner-builder to maintain records related to the project for up to three years, including:
- Copies of building permits
- Copies of contracts with all persons involved in the project
- Proof of payments to employees, subcontractors, and suppliers
Dire Consequences for Violations
RICO advises prospective owner-builders to carefully read the owner-builder permit application. They are also advised to read Chapter 444 of Hawaii’s revised statutes.
Non-compliant owner-builders may face severe sanctions:
- A fine of either, 1) $5,000, or 2) 50 percent of the permit value of the work to be performed, whichever is greater
- A prohibition against filing for new owner-builder permits for a period of three years
Repeat violators face even harsher penalties. They are subject to the greater of 1) a $10,000 fine or 2) 60 percent of the permit value of the work to be performed.
At Owner Built Design LLC, I help owner-builders avoid the expensive consequences of non-compliance with laws and regulations. For prompt, friendly and professional assistance, please contact me today!