Lately I’ve had some calls from people in trouble because they have accepted a construction loan that didn’t perform. The loan has closed at the lawyers office, its been registered, the fees have all been paid but the full amount has not been advanced or only half the loan has been lent out. When a loan isn’t lending the full amount or stops lending for some reason and you don’t know why, then its possible that your commitment wasn’t adequate from day one. Here are some red flags to look out for when accepting a construction commitment from a lender:
- The deal is ready to close but your told that the lender is only advancing enough for fees at closing, the rest will come later. The fees have been advanced for the lawyer, lender and broker but no more money is being given to the borrower. There could be all kinds of excuses not to lend any more money but generally speaking the fees are out and you don’t know when to expect the rest of the loan to be advanced and the commitment doesn’t tell you when to expect the money.
- The borrower has a commitment that is one or two pages long. The commitment contains the rate, fees, term, name of lender and borrower, loan amount and a signing page. No more information is contained in the loan commitment for the construction draws.
- The commitment doesn’t tell the borrower very clearly when the loan is advancing. For example: $200K when drywall is taped, sanded and primed.
- The borrower has a commitment and received half the construction loan but the lender has stopped advancing because the lender isn’t happy with something. And whatever that something might be, there is no remedy for the borrower in the commitment. A lender will stop lending if they get spooked about something. Usually its because the work thats meant to be completed isn’t finished or passed inspection. I can think of hundreds of reasons but a professional experienced lender will want to protect the borrower as well as themselves. And the best way to protect everyone involved if full disclosure about when money will be released.
These are a few red flags for me when I’m dealing with a borrower in trouble with a private lender that’s not advancing any money. I have seen people with these commitments who had no problem too. But they may have underestimated the construction costs and used up the loan amount. It’s really important that you have a commitment that is detailed about how the loan is advanced. It should detail construction draws and when the draws are released. The loan should specify if payments are interest accrual, the amount of the advance, when the advance will be released, remedies for the lender and borrower. And it will detail the work that will need to be in place, completed and passed inspection to qualify for a draw.
If you don’t have a really crystal clear commitment that spells out exactly what is going to happen, how much, when and why, then your almost blind. Don’t rely on your lawyer to know if your have a good construction commitment. Most lawyers are not loan underwriters or brokers. Lawyers are meant to provide a legal opinion of title and independent legal advice but all the underwriting is meant to be done before the loan is being registered by the lawyer. A really good lawyer might ask some questions about when the money is being advanced, how much is being advanced, who’s advancing, etc. to warn you but you should protect yourself. How do you protect yourself? Make sure you have a solid construction commitment with your lender and know exactly how much money your going to get and when to expect the money in the commitment. If your not asked to provide a detailed construction budget, permits, drawings, contract with GC, appraisal, builder risk insurance, net worth, etc. then your vulnerable. You might be dealing with someone who’s lending money to get some fees and nothing more. So be aware of accepting commitments that don’t give you detailed loan information.