need advice on how to protect against GC cash issues

michoumonsterOctober 2, 2011

Hi wise home builders, this is the first time i am tackling building an entire house (I previously did a major remodel), and am learning so much from everybody. I was wondering if you could offer me some tips on what to do about our contractor and how we can protect ourselves.

The situation is that we signed a contract with a payment schedule based on milestones for completion, mostly based on passing inspections. However, the past three times, our contractor has ask for payments in advance or tried to switch payments (like if we owe 5% at one stage and 10% at the next, he would try to see if we could pay him the 10% first). We have not agreed to any of his requests, but his constant asking is making us worried that he might be having some cash issues. So far, everything has been on schedule. But just as prevention, is there anything we can do to make sure we are not left with a bunch of liens from his subs and suppliers should something bad happen?

thank you very much for any advice!!

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Are you paying out cash to the builder or is a bank involoved with a construction loan? Banks have a draw schedule based on percent complete of the house broken down into the different phases of construction. The payment schedule should also be outlined in your contract with the builder. What does it say? If you're paying out cash, make sure you're keeping receipts on everything you pay out to him & make sure you get the lien releases in return. Make sure you get any of his "promises" in writing, too. Without more information, I can't offer much else by way of advice.

    Bookmark   October 2, 2011 at 9:19PM
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mydreamhome, thanks for the info. We are paying out cash to the builder. The way our contract is structured, it is with the passing of each inspection, we pay about 5-10%. Unfortunately, it does not always correspond to the lien releases. For example, one lien that is currently on our house is from one of his suppliers, which is a running line of credit for materials. So we are not likely to get a lien release from that until completion.

    Bookmark   October 2, 2011 at 10:05PM
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I see two red flags: the builder asking for more $$$ sooner than agreed upon. The lien with the supplier. Who will pay the supplier? You or the builder?

Talk to your lawyer. Better now than later. You're in the driver's seat.

    Bookmark   October 2, 2011 at 11:06PM
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still_waters, i guess i should clarify, that it is not a lien on our house from the supplier yet. it is just a notice that the GC has entered into a contract with the supplier who could potentially file a lien if he is not paid. so far, there has been no wrong doing, but the GC asking for money in advance has us worried quite a bit and we want to see what ways we can be prepared for the worst. should we still see a lawyer at this point since it is strictly preemptive?

    Bookmark   October 2, 2011 at 11:44PM
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I would pay the suppliers directly and collect lien releases along the way.

    Bookmark   October 3, 2011 at 9:01AM
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michou - it is hard to give advise for a specific circumstance with only a few lines of text that changes (first you say there is a lien on the house, then it is a potential lien). As others mentioned, you have a lot of red flags waving here. The builder apparently has a cash flow problem, never a good sign. If he uses your payments for other bills and then fails to come up with another job/cash and can't pay the supplier for your supplies, then, yes, they will lien your house to get paid. Are you simply wondering what the odds are of that happening and hoping you can beat them? Since you seem worried enough about it to post here, the odds are probably not in your favor. Personally, I would have a good lawyer read my contract and advise me how to protect myself under these conditions. Good luck.

    Bookmark   October 3, 2011 at 7:33PM
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You not only need lein releases from the GC and subs, but from sub-subs (if they're permitted in your contract) and the sub's suppliers.

You can get partial releases too. No reason to wait for the end of the job for some kind of protection against that "line of credit" your GC's supplier notified you about. Ask for a partial relase at or by each payment.

Consider asking the GC why he is asking for more money up front. Then clam up and listen very carefully to what he has to say.

    Bookmark   October 3, 2011 at 7:38PM
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spf5209, Sorry if my posts were confusing. Our GC has not skipped payment to his subs as far as we know. His subs and suppliers (by law in our state) notify us whenever he enters into contract with them for materials and work on our house. I understand that the lien risk is always there with any house build if your GC uses subs, except in my case, the risk seems much higher since our GC keeps asking us for advance payments. I am posting to seek suggestions from all of you experienced home builders on what safeguards or "best practices" have worked for you in the past to mitigate the exposure to this kind of risk.

I will also look into finding a lawyer for advice too! thanks!

booksandpages and pps7, thanks very much for your suggestions. i will try to get partial lien releases from the supplier, though i have to figure out how that will work when it is a line of credit.. I may have to resort to paying the supplier/subs directly if needed.

    Bookmark   October 3, 2011 at 9:30PM
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Whose name is on the line of credit? I would think your partial payments to the GC would cover the ongoing suppliers cost. How does your contract provide satisfaction for the line of credit?

A friend of mine got too far ahead of the GC with cash flow problems. GC quit and she ended up having to hire someone else to finish the job. She, also, was paying cash for her build. Your GC knows it too and is trying to milk you.

Keep us posted. We'll be starting a cash build next year.

    Bookmark   October 4, 2011 at 4:24AM
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hi stillwaters, the line of credit is in the GC's name. we actually had no idea about it until we received the notice of it. i don't even think our contract covers lines of credit. it definitely makes us more exposed so we are going to talk with our GC about removing it, if possible. i never knew that doing a cash build could be treated differently by the contractors. this has definitely been an eye opener. thanks for all of your thought-provoking questions and comments. these are definitely things that we need to find out the answers to and how to protect ourselves more. i will keep everybody posted. I really appreciate everyone's help!!

    Bookmark   October 4, 2011 at 12:23PM
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Your GC needs money now, that's why he's asking to switch payments and requests $$ ahead of agreed schedule!
GC's have quite a large repertoire of previously used excuses/reasons, that usually sound plausible to the home builder.
I'm assuming you both agreed to the payment schedule in the contract. What does he say has changed? Can you verify that?
Request to see all invoices from materials already delivered and paid. Call vendors and verify that the materials/labor was for your address build! Some vendors won't disclose without the builder's permission.
The $ you pay an attorney with construction experience will save you many $$$ down the road.
I suspect your GC is paying on the last house he built with monies from this build. Not unusual, the best scenario is that he has a house lined up after yours! If he doesn't, well the subs and vendors will file liens on your build for the amount he owes them! That way you get the privilege of paying twice.

    Bookmark   October 13, 2011 at 8:53PM
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PS.We did the cash build thing. By the time we caught on to the builder's excuses, as to why he wasn't able to get the various material/labor to date liens, he had over $100k of our money.
He also kept asking for monies ahead of agreed building stages. At that point we started to pay the vendors and subs directly. The builder quit showing up at the construction site after that, his building supervisor occasionally supervised.
At the end of the build we had to get our own Certificate of Occupancy. A couple of months later we had several liens placed against our home.
It turned out that the GC had a line of credit with the company that laid the foundation. Our address pour was never paid, although he paid for a later pour at another address! Same with the rough in for electric and plumbing.
We filed charges with the DA's office, which had other complaints and he was arrested. His family paid the $40k to the vendors. We ended up eating $30k.
The new DA dismissed the case with the rationale that since the monies had been paid to the vendors there wasn't much of a case! So the message in Lafayette LA, was builders, go ahead steal with impunity, unless you get caught, then pay it back without any consequence!

    Bookmark   October 13, 2011 at 9:18PM
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emilynewhome - in very similar situation, the DA in my county wouldn't even pursue criminal charges against my builder! Said that with all the money changing hands in every which direction... and most of the evidence of what payments were due when and to whom and for what work being in the builder's hands, it was just too hard to prove a criminal case. DA said he had tried several times to indict builders who pulled this kind of s--t (including MINE) in the past but could never get a grand jury to indict. Builder's lawyers always claimed that, at worst this is just a breach of contract matter - and grand juries had a hard time keeping up with the "shell game" of where the money all went to see that it was continually going into the builder's pockets and it took a humongous amount of time and effort to gather the evidence necessary to begin to make a case. Plus, as a DA (which is an elected office here) he had to focus a certain amount of his energies on the rapes, murders, and other sensational crimes. Dealing with this kind of "white color" theft wouldn't get him re-elected.

The DA did encourage me to pursue a civil action for breach of contract, conversion, and civil fraud...which we're still in the process of doing. My builder previously lost another civil suit for fraud, breach of contract and coversion to the tune of a judgment over $300K. Shortly after I filed suit, he filed bankruptcy to keep from paying anything to the other homeowner. My suit is "stayed" due to his bankruptcy action so, after spending an additional $15K on attorney fees, I'm no closer to resolution than ever... and now I'm having to convince the bankruptcy court NOT to allow him to discharge his debt to me before I can even get the lawsuit competed. (If I win in civil court AND the jury finds that my damages are due to his fraudulent activity, then he won't be able to discharge the debt and - someday - I might collect...maybe.)

The same DA also told me that if he personally wanted to steal money, he wouldn't bother going out and getting a gun and trying to rob liquor stores or convenience stores. He'd just go register as a home builder with the state of Texas and rob his clients b/c he'd get a whole lot more money and never wind up having to serve any time for it!

So, it is not just Lafayette LA where that message to dishonest builder goes out that they can steal with impunity. Thank heaven that there are HONEST builders out there or, I swear, we'd all be living in caves and tents!

    Bookmark   October 14, 2011 at 1:39PM
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bevangel, Sorry to hear that you also were taken. We also went with civil court action, the builder filed bankruptcy, his lawyer dragged everything out, requiring more money to be spent pursuing the case, After a year we called it quits, the stress wasn't worth it.
Yes there are honest builders out there, it's just so hard to find them!

    Bookmark   October 15, 2011 at 4:39PM
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wow, emilynewhome and bevangel, so sorry to hear about your tough experiences with your GCs. thanks so much for sharing your knowledge with me. I will try to prevent this from happening to us too! we thought we could avoid a lot of this headache since we called over 20 of his references before selecting our GC! but alas, i guess situations change very quickly in the construction world.. thanks so much!!

    Bookmark   October 17, 2011 at 1:27PM
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Draws against work completed is about as safe as you can reasonably achieve.

    Bookmark   October 17, 2011 at 3:09PM
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Consider this scenario: Your GC has a supplier put a lien for materials the supplier did not deliver directly to your site; for stuff the GC picks up himself. How can it be proven that the lien is legit? You need to be VERY careful and thorough when dealing with these kind of liens.

It would be more forthright for the GC to file his OWN preliminary liens for everything. That would put your level of exposure to liability equal to the contract. The way he's doing it, your liabilities could total the full contract amount plus supplies. You need some sort of reciprocation from your GC when he uses your assets rather than his own assets, as collateral for credit. For example, a reduced contract amount for each supplier's lien, so your total exposure to liability remains equal to the total contract amount.

    Bookmark   October 17, 2011 at 4:55PM
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Sorry to hear of your experience in my backyard
I find the homebuilders association to be some
of the worst in the trades, everyone covering everyone
elses backs.
guess its not limited to La.
but it surely is disappointing.

best of luck OP.

    Bookmark   October 17, 2011 at 7:42PM
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Find a builder that carries the financing.

Design > Contract (some $$ down) > Build > Mortgage (more $$ down)

No Construction Loan, no Draws.

    Bookmark   December 4, 2011 at 3:00PM
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"Find a builder that carries the financing. "

And then expect to pay for it.

"Draws against work completed is about as safe as you can reasonably achieve."

Only if lien releases are obtained.

    Bookmark   December 5, 2011 at 1:45PM
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