Most likely there will be some rough patches in the custom home building process, meaning that you will need to resolve some construction related disputes. Most problems relate to your dissatisfaction with the work quality or a cost issue. Remember that in a dispute situation you’re ultimately responsible for the outcome. Even though the bank has a financial interest, it will take the path of least resistance. Never will the lender act as your advocate.
A mechanic’s lien is a debt instrument that attaches to your property and guarantees the contractor will get paid before anyone else does when the house is sold. This takes precedence over all other liens, including your mortgage, which makes it a very powerful tool. A contractor can file a mechanic’s lien anytime up to 90 days after the house is finished regardless of when the work was actually done.
Lenders and title companies charge you extra money and make you sign indemnifications to protect their interest and put the weight of responsibility back on you. If a mechanic’s lien is filed
against your property, you’ll have difficulty getting money from your construction loan, and you can’t roll the mortgage into permanent financing.
You’re better off paying a contractor and suing him after the fact rather than withholding payment over disputed work. You may think you have leverage, but the penalties for a loan that never rolls to permanent financing can far exceed the original contract amount in dispute.
These liens should be avoided at all costs, and the following tips can help protect yourself against them:
- You can require the contractor to supply a performance bond. This bond completes the project and/or pays damages up to the bond amount. This money can pay off any outstanding payments due. These bonds can cost 1 to 5 percent of the construction contract and need to be recorded with the county.
- You can use a joint fund control. Local services that manage the books and take responsibility for paying all subs and suppliers are available for a fee. These services can provide lien waivers and other protections.
- You can pay with joint checks. Joint checks have both your name and the contractor’s. Using joint checks helps to document to suppliers and subs that you have met your obligations. Regardless of whether or not you adopt any of these methods of protections, you absolutely need to collect Waiver and Release forms. Have every sub and supplier sign these forms at the time you pay them, and make sure your contractor collects them as well. You need these forms for your lender at the end as well. You can get these forms at a stationery store.
Arbitration and Lawsuits if Construction Related Disputes Occur
If you and your contractor can’t reach an agreement, then you may have to resort to legal means or at the very least binding arbitration. Arbitration is an alternative to the courts that can save time and money. Instead of hiring attorneys, the two parties present their case to an independent arbitrator who examines the situation and works to find an agreeable solution. If no solution is agreed upon, then the arbitrator creates one based on the information reviewed.
If arbitration isn’t specified, then the last resort may be to engage an attorney. You must assume that if your project has gotten to this stage, then you are prepared to spend tens of thousands of dollars and possibly years of time before a resolution happens.
However, before engaging in a lawsuit, you might want to take the following facts into consideration:
- Do your best to confirm that the party you are suing has the means to pay a judgment or at least has insurance.
- Be sure you truly have legal ground to stand on and you aren’t acting on an emotional basis.
- Be sure you can absorb the costs associated with a trial and any delays to your project even if you lose.
- Be sure you have the emotional strength to deal with attorneys and personal attacks.
Construction related disputes can be tough, but sometimes they cannot be avoided, so you must be very careful about the way you resolve them.