As a construction lender, you have many things to prioritize.
Registering a builder is just one item on a long list but this key decision can impact your entire investment. We’ve all heard (or experienced) situations where general contractors performed faulty or incomplete work, failed to provide an expected service or – even worse – took payment and disappeared without a trace. (If you need help with builder evaluation, check out Trinity’s Builder Information Report.)
These nightmares are not just urban legends but alarming scenarios that can happen every day. To avoid being taken advantage of, we’ve compiled a short list of warning signs to consider when taking on a new construction investment:
1. Builder/Merchant/Occupant requests a specific inspector. Any builder, merchant, or homeowner suggesting (or outright requesting) a specific inspector should automatically be examined closely. A construction project must adhere to the highest levels of standards and this requires an unbiased inspector’s review. However, when a specific inspector is requested (or offered more compensation for his or her services) directly from a builder or homeowner, a definite conflict of interest may exist, creating a prospective bias and could lead to a misrepresented inspection result more beneficial to those said parties.
2. The Builder is also the Borrower. Occasionally, lenders encounter borrowers who intend to act as their own general contractor/builder. Often the borrower/builder has difficulty qualifying for these types of loans (titled owner-builder construction loans) because lenders refuse to offer them to anyone except certified builders (or at all.)
If a lender does decide to go forward, potential borrowers must provide a well-researched construction plan with detailed budget that convincingly lays out a strong background in construction detailing a schedule for implementation and their associated tasks.
3. The Builder has “a few” references or lacks longevity. One way to vet a builder is by checking his/her references and said builder should provide a full page of happy customers. Moreover, the best references aren’t from houses still under construction but instead from those with proven longevity and success over time.
4. The Builder is from out of town. Most reputable builders possess a longstanding connection to their communities. Make sure to research out-of-town builders to ensure they are forthright and be skeptical of those that are new to your neighborhood. While he/she might be excellent, it’s better to let someone else be the “guinea pig” on this type of investment.
5. The Inspector is contacted directly by a Builder to schedule an inspection. In order to maintain the propriety and transparency of a construction build, inspectors should be contacted by a third-party inspection service or the lender themselves. Builders should not schedule their own inspectors to inspect properties as it can potentially lead to a biased inspection result and favor the builder rather than the borrower.
While construction lending can be challenging, it can also be an extremely successful venture and at Trinity, we’d love to help. Our Builder Information Review report assists and assesses builders, which ultimately reduce lender risk. Most importantly, trust your gut and take the necessary steps to educate your team and mitigate your risk in order to protect your investments.