Joe contacted a builder who seemed to have a good reputation. Instead of financing through a bank, Joe secured his own construction loan through private financing. Neither Joe nor the lender were very experienced with the construction process. The building provided the construction contract, which detailed a “draw schedule.” The builder would draw down on the construction loan as the house was being completed.
Everything went fine until Joe started noticing that the builder was never on the job site, and that subcontractors would come in some days and not others. Some days there was no sign of them. Delay after delay occurred, and then one day Joe was served notice that the builder had filed for bankruptcy.
Investigation revealed that the builder was robbing Peter to pay Paul. Various subcontractors, who were not paid by the contractor in a timely fashion, had filed liens against the property. The builder had drawn the construction loan down more than the state of construction for Joe’s house would warrant, in order to pay overdue debts on other projects.
To complete the house, Joe would need another $200,00 out of his own pocket, and the builder was in bankruptcy, so Joe’s house was tied up in litigation. It took months to untangle the mess.
Lesson Learned: Joe could have hired a real estate attorney, along with a property inspector, to monitor the draws on the money. The inspector would have determined whether the contractor had completed the amount of work necessary to be entitled to a draw, and the attorney would have obtained appropriate lien waivers, to make certain that all subcontractors had been paid in a timely fashion by the general contractor.