TxAG#2011 said:

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There has to be some logic behind allowing someone to file a lien on a property all because some other entity didn't pay them. That sounds really dumb.

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Because they did all of the work at said property and presumable their work and materials are still there. Should a subcontractor just have to eat the labor and material costs?

My attorney validated the largest lien. His initial guidance was 'absolutely do not pay they are likely not valid'. That changed yesterday, which prompted my frustration and this thread creation. Yesterday was the closest I've ever been to a nervous breakdown.

My attorney said as of yesterday, bankruptcy had not yet been filed. I'm gathering as much information as I can. I do want to talk the owner that had the large valid lien. But it's sickening to think I would have to pay any of it, negotiated down or not. I didn't extend the absurd line of credit to the builder. (Obviously I made my own mistakes with him).

OP, sorry you have to go through this and I have no suggestions. I appreciate this thread b/c I was just lucky with my previous 2 large home builds that could have resulted in the same bankruptcy.

I will verify with any future large builds. I just have no idea how to verify this. A builder who is intending to steal money can make it appear everything is going well and then just skip town with hundreds of thousands if not millions of dollars. How does a homeowner verify any of this? Go to the job site and everything appears well.

Most of my contractors require 1/2 of the money up front for materials before building even starts. What is to prevent someone from taking the money and never calling back?

You can prevent it by using a good bank who won't issue payment until verifying the work is done. jja79 is a very good resource. Also, don't use a builder who requires significant money up front.

arrow said:

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I don't know what they did to vet the builder.
What questions do you recommend I ask of my banker?

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I would want to know the vetting process, if any, they followed. I would want to know what their position is in this as they have a partially funded loan with collateral that isn't clear of liens that are clouding title. It's in their best interest to see the house be finished I would think. You were partners with them from the beginning and even more so now.

Perfect storm for me I guess. We spent over a year with our custom design and reviewing builders. Went and visited reference work. The builder was in good standing with BBB and had been in business for over a decade.

He got in over his head with some fixed priced contracts, a volatile material market, and apparently some sub-division spec homes. I could excuse them for bad business decisions over the last year, but I can't excuse them for taking my money and not using it for my project.

It would be one thing if I was just scrambling to find a replacement builder. Instead I'm talking to attorneys and dealing with possible foreclosure.

arrow said:

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Perfect storm for me I guess. We spent over a year with our custom design and reviewing builders. Went and visited reference work. The builder was in good standing with BBB and had been in business for over a decade.

He got in over his head with some fixed priced contracts, a volatile material market, and apparently some sub-division spec homes. I could excuse them for bad business decisions over the last year, but I can't excuse them for taking my money and not using it for my project.

It would be one thing if I was just scrambling to find a replacement builder. Instead I'm talking to attorneys and dealing with possible foreclosure.

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I'm surprised there's not a lot more of this with materials prices being what they are for the last year. The BBB is a racket, for future reference.

I work for a company that does large scale projects and there were lots of not very fun conversations over the course of a few months about lumber and drywall. The customer doesn't want to have to go back to the bank for more money to complete the project, and even if they have a signed contract it doesn't do any good to run a sub out of business by playing hardball with unprecedented material price increases.

It's a completely different situation for an individual trying to build their home. An apartment builder can pick their favorite projects and go back to the bank to get a few million extra dollars to complete a project. A person with a family being in a position where they have to find an extra $30k or $50k or whatever or deal with all the repercussions of putting the project on hold for some indeterminate amount of time or force the issue with the contractor and risk them going tits up and disappearing is a terrible spot.

It still doesn't excuse this contractor. They needed to sack up and get with their customers and tell them "I can't complete this project for this price at this time". It's still going to cause problems for everyone involved, but it's the most fair and least bad option.

On a more useful note, sometimes we have to provide Performance and Completion bonds. They cost a percentage of the total value of the job and pay if the contractor fails to satisfactorily complete the job. I don't know if that's something that is available for residential jobs, but maybe it's an option.

CS78 said:

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I'm sorry to hear that. Can you at least tell us who it is?

As someone who might build a house in the coming years, how do you protect against this?

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Performance Bond

This sounds awful. Hear about this with pool builders a lot, but that's typically much less money involved.

Hopefully insult to injury doesn't come when you spend thousands on attorney and court costs only to find there's nothing you can do short of getting in line and hoping you can get blood from a turnip.

I'm curious what the bank says.

Thieves suck. How difficult is it to get a contractor's license and contract out all the work yourself? You can throw a rock and hit any sub-contractor it seems. Those guys then "know a guy" who could frame up after the slab is poured and so on until completion. Go your own pace, distribute money how you like, and vet any sub. For a once in a lifetime expenditure wouldn't it be worthwhile?

Just to be clear, I didn't think you had forced the issue on material pricing or anything like that (you didn't come off that way.) I've had experiences in my personal life where I do everything I can to make a business relationship successful and still got taken for a ride, so I can understand how that would make it even more frustrating,...

We had a couple projects where GC's/customers tried to play hardball with us and we're lucky enough to be in a position where we can just let those jobs go.

Ducks4brkfast said:

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CS78 said:

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I'm sorry to hear that. Can you at least tell us who it is?

As someone who might build a house in the coming years, how do you protect against this?

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Performance Bond

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Not as easy as it sounds for residential builders. They don't have the huge balance sheets to tie up assets while building one, two, three, or ten plus projects. Most residential builders barely skate by month to month. The bonding company will force the builder to pledge assets and as the construction progresses, the bonding company will release the builder gradually until eventually the construction is complete and the builder can redeploy his bonding capacity on another project. Also, the builder is just going to pass the bonding costs directly back to you. The BEST commercial contractors get a 1% rate. I'd imagine a residential builders get a 3-5% rate. That means you are potentially paying an extra 5% for your home.

If a residential builder is working on 5 homes at a time with a average of only $300k per project, that means he will need to pledge $1.5mil in assets to the bonding company. How many builders out there can do this?

Best way to handle this is joint check agreements with suppliers. This skips having to wait for lien releases to come in after payment. That or you handle all material purchasing and labor invoices and give the GC a fee for his services. Word the contract to keep the GC liable for deficient work though and warranty work after the home is complete. Hold 1-3% back until the warranty period is complete if you can.

Ducks4brkfast said:

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CS78 said:

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I'm sorry to hear that. Can you at least tell us who it is?

As someone who might build a house in the coming years, how do you protect against this?

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Performance Bond

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Also in this case he would need a Payment Bond. A little different from a performance bond.

MAS444 said:

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I still don't understand how your bank let this happen with the original contractor. It's possible they have some responsibility.

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Not sure it's the bank's responsibility and if I was the owner I certainly wouldn't rely on the bank to protect me from the contractor. Bank has a totally different calculus than owner. For one, assuming no work started prior to banks lien being filed, bank has more protection from lien claims than the owner does. Bank has no statutory duty to retain for subcontractors like owner does, etc. if lien claims start getting filed and owner doesn't address them, this is probably violation of construction loan agreement the borrower undoubtedly signed with the bank and could give the bank grounds to foreclose, putting the borrower in even worse situation than they are already in. If I was the owner I would be careful demanding the bank step in and help because the way the bank "helps" may not be in the owners best interest.

I would imagine the GC and owner were signing draw forms for the bank stating all bills were being paid. Probably even had indemnity language in the requests. Not all lenders require lien waivers (although it's certainly a great practice).

I agree with jja that a bank that knows what they are doing and is very conservative/particular with construction loans can be very helpful in avoiding the situation that the OP is in, and this often gets overlooked by owners who just want the process to be as easy as possible, but I'm not sure the bank has any liability here so long as the draws it paid were done so at the direction of the borrower.

Again not discounting what jja is saying. It's incredibly helpful for the borrower to deal with a lender that will be very meticulous in the construction process, but not sure a bank has a legal obligation to protect the owner (in fact in all likelihood the loan documents that were signed actually create legal obligation on borrower to protect the bank's interest in the collateral).

I'm not going to lose my property due to foreclosure. At this point, it's all about how much more debt I have to incur to complete the build. That said, I'm not being melodramatic when I say "life-changing". My wife and I had very clear retirement goals and this will alter them if we maintain the status quo of spending/income.

Some details without getting into actual numbers yet:

• 5% of the total contract was paid at kick-off. i.e. Down payment (This seemed reasonable at the time.)
• The builder had drawn 38% of the construction loan prior to the first lien notice. (I didn't pay any more after this notice.)
• 56% of this money was stolen. i.e. Not paid to subcontractors or vendors.
• 72% of the money stolen is tied to one lien (lumber).

Regarding the bank:

• I talked to three banks prior to initializing the construction loan. Ultimately choosing the one we had the best relationship with.
• We were a fairly low risk loan. i.e. Property equity > Construction Loan
• Yes our relationship with the bank is pretty relaxed.
• Could more have been done to protect me? Probably. I don't know, this all happened very fast. I suppose the bank or I should have called the lumber company to ensure they were paid. Hindsight 20/20.
• According to my attorney, there is precedent for going after the bank for not protecting the consumer. However, we are not going to pursue. At this point, the bank is actively working with my attorney's plans and trying to help me with the new contractor. That said, they work frustratingly slow.

Two different paths are taking place now.
1. Attorney and potential criminal case to recoup the stolen money. This clearly is going to take time.
2. Contractor substitution. This needs to happen ASAP so I can use my construction loan to complete the build. This is where I need the bank to help me out. If they can't move forward due to the lien, but the attorney advises against paying the lien at this time, we are at a stalemate.

I don't think it's true to categorically say that a bank has no responsibility to its customer in a situation like this. Obviously, much depends on the specific facts/circumstances. As always.

That is true as well. Very possible the bank was negligent in some way, but don't think we can just assume negligence because there is a bad result. That was my point, very likely the bank is a victim here as well, so if I was the owner I would be careful positioning myself as hostile to the lender at this point (as always depending on circumstances).

Hoping for the best for OP, I can only imagine how stressful this is and this is a good cautionary tale on the importance of being diligent during the construction draw process.

unmade bed said:

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so if I was the owner I would be careful positioning myself as hostile to the lender at this point

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Agreed. Basically what my attorney said as well.

What state is this in ?