Builder bankrupt, buying from the bank

ccinindianaMarch 29, 2009


Last fall we contracted with a builder to have a custom home built. We paid him 5000.00 down payment. He carried the construction loan and it was to convert over to us at closing. Over the course of time we have put in about 12,000.00 in upgrades. Three weeks ago he notified us that he was going under.

Our construction loan and where we bank are the same bank. He signed the deed back over to the bank and the bank had the title and everything changed immediately. Only one sub had time to put a mechanical lean on the house. I believe it was about 7000.00 for plumbing. According to the bank he has drawn 75% of the loan and only paid out 30,000.00 for our build. Our contract was 282,000.00.

We met with the bank Friday and they are willing to complete the build. They said they have a builder they typically use in these scenerios or if we have one in mind we can use ours. (we don't). The plan is to meet with their builder next week to see if the house can be finished for what is left. I believe he said their was about 65,000.00 left. Any upgrades we cabinet allowance is 13,000.00 our cabinets are actually 18,000.00 we have to pay the 5000.00 ourself, but that everything we put in, including the other 17,000.00 counts towards the down payment.

The bank is not paying for anything that has been previously finished that doesn't have a lean on it. They are saying this is a financial issues not a moral one and they've already lost 100,000.00 on the deal? How have they lost anything if we end up buying the house?

My next what if there isn't enough to finish it? We still have all the concrete work (garage, driveway, sidewalks, 16x16 patio, two pads outside of side doors) garage door, opener, cabinets, tiling, carpet, lower level floors, lighting, 16x16 screened deck, 12x6 unscreened deck, steps, final paint, final electrical, final plumbing, oh yeah toilets, interior doors, knobs, fireplace mantel, screens, trim work. I am sure I am forgetting things, but hopefully you get the idea.

We of course are very emotionally invested in completing our house. We are their daily and want it. However we want the house we contracted for. My fear is they will say there isn;t enoug money for the deck or crown molding etc.

Does any one have any experience with situatons like this? Any and all advice, perspectives would be appreciated. Thanks in advance. Cathi

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Just because the bank accepted a deed in lieu of foreclosure does not prohibit subcontractors from filing Mechanic's Liens. They may still file a Mechanic's Lien if under State statute they are under the legal time frame - in many states this is four months from completion. If you have advanced money for items such as upgraded cabinets you may have the right to file a Mechanic's Lien yourself. (Please check with local counsel.)

The property is what it doesn't matter how much money the bank has already advanced. I would take the position with the bank that, first of all, to sell a partially completed house is near impossible & their loss will be much more than $100K. If they complete the house, the house will only be worth what the market dictates & not what the bank has advanced. Their poor lending practices should not impact what you have to pay for the house. I would approach the bank, preferably with counsel, and explain that in this market if they want to get rid of their REO they can either sell it to you "as is" at a huge discount or complete the property & you will buy it at a market price, according to your specifications. Unless your builder recorded your purchase contract, the lender took the deed in lieu free & clear of all encumbrances, except Mechanic's Liens & taxes. That includes your contract....meaning they do not have to honor your contract. That is why you must check to see if you can personally file a Mechanic's Lien.

Whether there's sufficient funds left in the construction is no longer relevant. The bank owns a property that they need to sell. It's unfinished. You are the logical buyer. And, if they have any common sense, which with a bank is a big question, they will deal with you in good faith. By completing the property & selling it to you at current prices they will lose less money than if they have to either sell "as is" or complete & hope to sell to another buyer.

As per your above description, it really sounds like the bank is trying to take advantage of your emotional investment in the house. I highly advise you retain counsel (real estate attorney!). Also, don't expect the bank to act in a manner that you would consider "rational". Banks run to their own drummers & you can't alter that...

You might also have a possible legal action against the builder...unless they file bankruptcy. Again, bring this issue up with the counsel you retain.

If you like to post what state you live in I can be more specific with regards to the Mechanic's Liens.


    Bookmark   March 29, 2009 at 10:56AM
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Hi Tricia,
Thanks for your follow up. We live in Indiana. The bank told us once they had the deed put into their name, no one else could put a lien on it. That the liens were against MBS construction (our former builder) and not against them?

This is a small town bank, so I don't if that makes them anymore rational or not LOL. You are right about them knowing our emotional investiment. Our paticular loan officer and I write back and forth daily about rates, kids, schools etc.

Our builder is filing bankruptcy, so we'd be one of many trying to get money back! We really do just want to finish our house. We are going to get an attorney to help us with the contract with the bank. Cathi

    Bookmark   March 29, 2009 at 5:42PM
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I'm running short on time this morning but wanted to write a short note regarding Mechanic's Liens...

Mechanic's Liens follow the PROPERTY not the BUILDER. That's the whole purpose of a Mechanic a subcontractor or supplier has recourse if a contractor goes belly-up.

As example, let's say you hire a plumber to fix your leaky toilet. The plumber fixes the toilet, you pay him/her, they leave & you're a happy camper...until you receive notice that Acme Plumbing Supply has filed a $1.99 Mechanic's Lien against your PROPERTY (not you but your property) because the plumber never paid for the materials used in fixing your leaky toilet. It doesn't matter if two days ago you sold the property & signed a deed...Acme Plumbing Supply can & will still file that Mechanic's Lien.

Counsel is a good idea. Mixing a close personal relationship with business is not a good idea. ("Our paticular loan officer and I write back and forth daily about rates, kids, schools etc.")


    Bookmark   March 30, 2009 at 8:20AM
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I understand what you are saying about the lien following the property. I guess what I am wanting to know is can more liens be filed since the property has changed hands? No work has been done in about 6 weeks so we are about at the 60 day mark. My fear is we will buy it from the bank and a bunch of new liens will be filed or pop up! I did consult an attorney today and he took the info and was calling our bank. Said he would get back with me after he had talked to them. Cathi

    Bookmark   March 30, 2009 at 3:37PM
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For future reference, when any house is being built by contractor/owner etc, before any materials is put on/left on the property, have them sign a lien release and get a signed copy of the materials paid for. We did and it saved a big problem You can get these releases at any good stationary store.

    Bookmark   March 30, 2009 at 3:43PM
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I already answered this on the building a home forum, but again...of course, a lien can be placed on the PROPERTY. It matters not who owns the property or if the property has changed hands. You should be very concerned about new liens popping up. I would BET money on more liens being placed on that property. Your builder didn't pay people...that gives them the right to lien the property. The only thing that might protect you if you buy the property is your title insurance that you will have. The bank (seller) has to guarantee you clear and marketable title...they will have to state that there are no liens and that all contractors that have worked on the property in the past XXX (whatever your state mandates) days have been "paid in full." DEMAND LIEN WAIVERS FROM ALL CONTRACTORS!!!

Kudos for speaking with counsel.

    Bookmark   March 31, 2009 at 12:08PM
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Yes, liens can be filed against the property. It does NOT matter that the property changed hands via deed in lieu of foreclosure. If it mattered, that would defeat the entire purpose of Mechanic's Liens. They are to protect contractors, subcontrators, & suppliers against just that very scenario, and others of course.

I'm assuming you've met with counsel by now & are on your way towards resolution with the bank. If the bank told you no more liens could be filed because the property changed hands...I wouldn't trust anything they say. Mechanic's Liens are Basic Construction Lending 101. For them to make such a silly statement makes it pretty plain to see how the situation ended as it apparently has...with a partially completed house & insufficient funds remaining in the loan to complete. The bank should have been obtaining Lien Releases, title updates, & making on-site inspections throughout the entire build process. No draws should have been approved if there was even a hint of problems.


    Bookmark   March 31, 2009 at 4:01PM
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Your GC has drawn 75% of the funds, and only paid for 10.6% of the work... You will have lots of liens on the property. Especially since the GC declared bankruptcy. The only recourse for these subs is you and the home.
How you are going to pay the $188,000 that has not been paid to subs, and then also finish up the home with the $65,000 left is gonna be a nightmare.
The bank is not going to close on a sale until they know that all subs have been taken care of, the house gets a CO, and the title insurance company beleives that the subs have been paid. You could be sitting around for months and months trying to figure out how it is all going to work out.
Hopefully, he lowballed your project, in order for you to be able to finish up, and still not be too upside down. Good luck.

    Bookmark   April 1, 2009 at 6:57AM
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