Construction loan question

[maxmojo]

How do I insure my general contractor is paying the sub-contractors? If I understand correctly, if a sub fails to get paid, they can place a lien on my new construction. Please help me understand what that means and steps I can take to protect myself.

 

[barks]

Get a performance bond from your General Contractor.

 

[Thumper68]

Who is paying the GC you or the bank?

If it is the bank then they will get lien releases as standard practice as they make the payouts.

If you are paying him then you can do the same thing.

I used to get them at an office supply store and would have any subs fill one out when I paid them.

 

[maxmojo]

Get a performance bond from your General Contractor.

My bank conducts regular inspections to insure the value of the loan does not exceed the value of the new construction, I'm guessing that involves a performance bond. But I'm guessing that doesnt guarantee the subs are getting paid.

 

[Dick in Wisconsin]

My bank conducts regular inspections to insure the value of the loan does not exceed the value of the new construction, I'm guessing that involves a performance bond.

NO!!!!!!!!!!!!!!! Not even close. A performance bond provides you with protection much further beyond that.

What are you building? What is the total amount of the project?

But I'm guessing that doesn't guarantee the subs are getting paid.

Correct.

You should have control over the money being paid out by the bank. Regardless of what any contractor, sub-contractor, or material supplier says ... that is YOUR money. You signed the note, you're obligated to pay it back.

Answer the questions asked, and we'll be able to give you good guidance.

 

[maxmojo]

Who is paying the GC you or the bank?

If it is the bank then they will get lien releases as standard practice as they make the payouts.

If you are paying him then you can do the same thing.

I used to get them at an office supply store and would have any subs fill one out when I paid them.

The bank issues a draw and requires my signature to release it to the general. So, what I think youre saying is the bank obtains the lien releases?

 

[Thumper68]

Yes but check with them just the same to make sure that they are. You can also request copies for your own records.

 

[Dick in Wisconsin]

The bank issues a draw and requires my signature to release it to the general. So, what I think youre saying is the bank obtains the lien releases?

While its "good business practice" for the bank to obtain lien waivers from the sub and material suppliers (they both of lien rights), there is no "bank regulation" or probably "no law" that says the bank should obtain lien waivers.

Sit down with the bank and ask them what there procedure regarding draws and lien waivers.

I've established and managed construction loan procedures for a number of banks. In most cases, if the contractor was known to the bank to be of reasonable character and decent financial shape, we'd give the contractor a draw and before the next draw we would want the contractor to bring in lien waivers from the first draw. In many cases, most subs and material suppliers won't sign a lien waiver in advance of receiving their money ... and I don't blame them. When a general goes sideways, the subs and material supplies can lose enormous amounts of money very, very quickly.

Without knowing the magnitude of the project and the financial situation of the general, its hard to tell the OP exactly what to do. Requiring a of signed lien waiver in exchange for a check made out to the sub or material supplier would be cumbersome, but that is the safest for the borrower.

 

[NitroSun]

It's worth a one or two hour consult with a lawyer. Laws in every state differ.

 

[TommyK]

You can make payment to your GC/subs in the form of joint checks to make sure the subs are getting the money.

 

[wssix99]

How do I insure my general contractor is paying the sub-contractors? If I understand correctly, if a sub fails to get paid, they can place a lien on my new construction. Please help me understand what that means and steps I can take to protect myself.

Everyone who you owe money to for your property has a lien on it. The bank has a lien on it, which keeps you from being able to sell the property before they get paid - before you do!

The bank has a first lien. They get paid first. Everyone else who comes along and files liens would have secondary liens, which would need to be resolved before you would get anything out of a sale. That's all a lien does, unless someone tries to foreclose on it. (It's rare that a contractor would try to do that because the process would probably loose them more money in the end than they would gain.)

You can actually see what the value of any mortgage is on a property by looking up the lien value on it.

My bank conducts regular inspections to insure the value of the loan does not exceed the value of the new construction, I'm guessing that involves a performance bond. But I'm guessing that doesnt guarantee the subs are getting paid.

Your bank is protecting their lien. They want to make sure what is put in place is worth more than the value of their lien. (So, if they had to foreclose on the property - they would get their money back.) It will have nothing to do with a bond.

A bond is probably a waste of money for you. In the end - you will will pay for it like an additional insurance policy and its just more money bleeding out of your wallet. The process by which money is drawn from your construction loan should protect you - you just need to figure out what is going on...


Who has the construction loan? You or your builder?

Do you own the land outright?

^ The answers to these questions will help figure out where this goes next.

 

[TheOtherChris]

It's worth a one or two hour consult with a lawyer. Laws in every state differ.

^THIS^
(just make sure the attorney fully understands real property law)

Many banks pay contractors with what they call "lien waiver" checks. However the wording on a lot of these constitute a subordination rather than a waiver which means the workman/supplier only agrees the bank lien has priority.

More and more mechanic lien holders will foreclose a lien/judgment because their margins are thin.

 

[reader2580]

When I had a construction loan for my first house the bank required lien waivers for checks to be written. If I was a sub I wouldn't want to sign a lien waiver before the check was cashed and in the bank. What if I signed a lien waiver and the check never showed up?

 

[buddyboy]

you trade the check for a lien wavier... if the check bounces you use the bounced check as evidence and go to small claims court.

if you never get a check you never signed a lien wavier, so in that case you file a lien.

never sign a lien waver without payment
never pay without lien wavier

 

[blkhonda1991]

you trade the check for a lien wavier... if the check bounces you use the bounced check as evidence and go to small claims court.

if you never get a check you never signed a lien wavier, so in that case you file a lien.

never sign a lien waver without payment
never pay without lien wavier

this, get lien waivers from all major subs and suppliers...obviously with the first draw you wont receive any but all subsequent payments require a lien waiver that proves the sub was paid for work to date.

 

[maxmojo]

I talked to the bank, they require, from the general, lien waviers (either complete or partial) from all the subs listed on the sworn statement. They require this before they issue a draw. They agreed to send me the waivers they have up to this point in time.

Who has the construction loan? You or your builder? Loan is mine

Do you own the land outright? Yes

 

[wssix99]

I talked to the bank, they require, from the general, lien waviers (either complete or partial) from all the subs listed on the sworn statement. They require this before they issue a draw. They agreed to send me the waivers they have up to this point in time.

Who has the construction loan? You or your builder? Loan is mine

Do you own the land outright? Yes

Great. Getting copies of those lien wavers should be all the protection you need. You'll want to keep copies for yourself.

Before the bank is releasing money and collecting lien waivers, you should also be signing off that the work has been done to your satisfaction and the people can be paid, right? This is another key step in that process that protects you. You signal that people can get paid and then the lien wavers prove that people have been paid and that they promise not to lien you.

That being said... things can still go wrong on the project and people can lien you for any number of reasons. However; since you are monitoring the work and releasing funds to pay people you should be on top of that and making sure that people can't lien you for more money than is outstanding on your loan. ie: if you have the wavers, the maximum anyone should be able to lien you for is the in-progress work for which people have not yet been paid - and that should be less than or equal to the money still left at the bank.

 

[RayBob58]

Have your GC get lien waivers from subs and suppliers BEFORE you pay him. He has no incentive to get them after you pay him. And they have no incentive to give them after they've been paid. DON'T TRUST THEM.

 

[RayBob58]

I recently had a contractor ask me, "How am I supposed to get a waiver from a supplier when you haven't paid me?" I told him, "If you've been doing this for 30 years, like you told me, you should either have enough capital to cover a few materials for a day or two, or good enough credit with your suppliers to get a waiver in advance."

 

[Dick in Wisconsin]

I recently had a contractor ask me, "How am I supposed to get a waiver from a supplier when you haven't paid me?" I told him, "If you've been doing this for 30 years, like you told me, you should either have enough capital to cover a few materials for a day or two, or good enough credit with your suppliers to get a waiver in advance."

Very, very well said.

If a material supplier or a sub doesn't trust the general with a signed lien waiver in advance, then no one should trust the general.

Very plain. Very simple.

I will qualify this a little bit. If the amount in question is in the 100's of thousands or better yet millions of dollars ... its very unlikely the sub or material supplier will sign a lien waiver in advance of getting paid, regardless of who the general is. But on a garage, shop, or reasonably sized house deal ... the general should be strong enough with the subs and material suppliers to get a lien waiver in advance. Unless they are working with someone new.

 

[wssix99]

^ Over the years, I've worked for LOTS of people I wouldn't trust by giving a lien waiver in advance. (That's a good portion of the industry...)

A sub always has the option of going to the bank/title company in person and signing the waiver there when they receive their check, as the checks are cut for everyone. Usually, it isn't worth the effort and they will sign the waivers ahead of time so others can pick up the checks.

It's not uncommon for very large payments to be done in person at the bank, even where everyone "trusts" each other. (The bank/title company can also cut the checks and hold them at the location until people show up to sign the waivers.)