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Local guy just went belly up with something like ten houses in various stages of construction. People haven’t been paid- the money is gone-the guy is nowhere to be found. I gotta believe a bank officer or two are wishing they were anybody else in the world right now.
It has been suggested to me that perhaps I could finish some of these homes. Strikes me that playing in a mine field would be safer- but I’m considering it.
If my liabity is limited to only what occurs after I take over the project it is do-able. Maybe.
I’m thinking:
The building permits would all have to be up to speed, home would have to be inspected by an architect or engineer for soundness, any problems would have to be corrected .
All outstanding debt on the home would need to be cleared. Lien releases all around.
I use my suppliers and my subs since I have no question about how they perform.
Retain an arbitrator to mitigate disputes. (I,m stupid enough to consider doing this work- not stupid enough to think I have a magic wand that will make the hostility go away)
Money dispersed to an account requiring two signatures on checks (homeowners and mine) Disputed monies go into an escrow account- governed by the arbitrator
I would require a deposit (varying amount)
I would prefer to finish home on a cost plus basis.
What are your thoughts? I’m sure I’m missing things…
Replies
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Doug,
Yikes. These are all presolds? How many financial institutions were involved?
The solution may be a long time coming. The assumption is that these homes are going to be over budget, and liability needs to be assigned. If the guy was producing fraudulent docs, the homeowner may be on the hook. If no docs were produced, the institution may be at fault. I'm wondering if there might be some single interest coverage that the institutions may have to insure this risk. Anyone know?
The reason I'm wondering about liability is that it will determine how everything proceeds.
Who was it that suggested you finish these?
I would think a simple hold harmless for any work that has been completed up to this point would protect you.
I am wondering how the homeowners are going to come up with the $ to finish these things, depending on how short they are. Several may end up in foreclosure.
Good luck. Depending on when this took place, it might be a good 6 months before the dust settles and work resumes.
What a nightmare. Hope they find the guy. he should do time.
Bill
*Very interesting Doug, because the exact same thing just happened here. Where are you located at, anyhow? Anyways, it was suggested to me that I do the same, take over some of these half-completed homes and finish them up. However, I was quite leery for several reasons; not knowing the GC or subs, how would I know if the work already performed (and not visible), is up to snuff. What kind of relationship with these obviously POed customers going to be? How much time and energy am I going to have to spend to clear up the items you talked about. Lastly, I was a little concerned about the pricing structure; would I be able to get the same profit out of the finished product that I might have had I undertaken the whole project from the beginning.
*That has happened before. Here, when this guy went belly and skipped, the houses sat for years unfinished. Actually, two were bought by private persons and finished as owner/builder. The other six were finlly finished when they cleared all the paper and the guys worked T&M with something like a hold harmless. This can be very profitable for you because the banks, et al, want completion. Just be sure to consult with several const. attorneys and get the low down from bldg/planning.
*Doug, Who would you be working for? Homeowner or the banks? Small town type banks or Bank Of America types? Joe H
*Been There. Done That. Got the T Shirt.The Builder was Bonded. No Bank will make a large construction loan on a project like that without a Performance Bond.The Bond Issuer (called a Surety) guaranties to the Bank that it will perform (complete) the project. When the Builder defaults, the Surety and the Bank discuss (argue, litigate) who will finish the job. The Surety sues the Builder under an Indemnity Agreement. He is probably personally liable.The Surety has the choice of hiring a new builder to complete the project or just paying off the Bank, and telling the Bank to do it themselves. Obviously, if the cost of completion is more than the face amount of the Bond, the Surety just cashes out the Bank. If the Cost of Completion is less than the face amount of the Bond, the Surety completes the project.If you want to complete the project, the Surety and the Bank will also want a Bond from you or your GC on this project. Its good work, but you have to have the staff and be bondable.
*Joe- I'd be working for me first and foremost. I know what you are asking I think- small town financing in a small town. This is everybodies business around here, if you know what I mean, and my name came up as someone qualified to step in and complete the homes.One of my past clients, in particular, approached and asked if I thought I could help- she knows several of the homeowners involved and put my name on their plate. One thing leads to another etc.So I am considering it- trying to get my ducks in a row...
*If these are individual construction loans, it's possible that the builder is not bonded (not often required by institutions in our area, but it's a great idea!). A bond can be required by local governments prior to permit issuance, but in our area, it's a token amount like $10,000 so it doesn't do much good. Bill
*Good info Scooter.thanks.
*Ya- I was thinking I've never been required to post a bond to build a home around here. Don't actually need a licsense either. Liability insurance and workers comp. Have to have everything to remodel or plumb, do hvac or electric. Always struck me as assinine- "I'm a homebuilder! Cuz I say so..."
*hey doug.. you'd get my vote.. if i could just keep you on the golf course where you wouldn't be in the way..check with the lender and the customer.. and tell them you want to review the situation with your const. attorney...you can lay the ground work for the others ..how many you want to take on ? 1.. 2...?time is money.. so the sooner the better .. if you're gonna do it ...b but hey, whadda i no ?
*Thanks Mike. Got a call in to the lender now. Waiting to here back and heading for the course...
*you can take advise from us all you want. ANd advice here is often very very good. Had a friend who did the same thing. Bit off more then he could chew, got himself in too deep. Find a good legal adviser who is familiar with construction, a good accountant too.Where my friend ran into trouble was bidding on the compleations, only to find out that he had to go backwards and fix things that everyone thought had passed inspections but indeed had not.
*Sounds like something I'd try....but I have absolutely no business sense what so ever! So, I'll chirp in with.....just be up front with all parties involved with your fears. Let them know you're gonna take time to dot all the "I's", and someone's gotta pay for that too! Sounds like a great situation to get half a neighborhood, a few banks and even the local inspectors office to see you as the good, but cautious builder in town. I'll bet they respect that caution a little more now! At the banks, see which one's the homeowners are gonna finish, and which the banks gonna take. Present a case as the one for everyone to trust to do it right, where the bank is serving their clients better by letting the homeowners get theirs started first, then move on to the foreclosures a little later.....or they could just pick the next guy off the street! Play it right, and ya got them all. Very interresting, keep us posted. Jeff
*Doug,I did one of these jobs back in '88. All worked out at the end even though one part was a real bear for all involved.When I showed up. the foundation walls were up and the deck was built. I put in my agreement that the owners were responsible for any costs involved in changes or repairs to what existed. The inspection of the foundation was done and signed off...Here was the problem. I gave the owners a price on all I could find wrong with completed work, but also said that there may be more...All bases covered that I could think of. The project is started, framed, many errors found and corrected. Extra costs are accepted with minor grumbles. Then weeks later the town hired a new inspector with out my knowledge. First day on the job, he visits my site with no notice and we're off due to rain. He closes down my site because among other things, my foundation had a few errors I didn't catch. This inspector lasted less than a month but did cause a huge storm for a couple of days. So one of my mistakes was, I didn't reach up and check that top blocks were filled for termite stop...What concrete guy or builder or inspector would miss this?!!!...And a few other invisibles...By the way, the previous builder was fired mostly for being too slow and asking for too much money ahead of schedule. Two more of my mistakes were not telling my customer verbally a million times that hidden costs are gonna surprise us daily till he pleaded full acknowledgement of my words...And I should have had the building inspector reinspect all even if there was a fee. My contract said that the owners were responsible for costs cause as I had to tell them repeatedly, "either I get a bedroom in my house that I am paying for or you pay for your home and get all the bedrooms." b Prime advice is...make it clear in writing and verbally to all involved (wife, parents, sisters, kids, smart friends, their lawyer, etc.) that all hidden costs will not be found by the time you start work on finishing their home, and that they will be paying for them and to plan on a reserve of financing to cover it. Keep things positive and enjoyable, not a bitch session about the last guy.Last advice...You are the one who has to inspect the homes and meet with inspectors and make inspectors resign permits or a letter that states they will not be going backwards on any prior inspections...Have an arbiter clause in contract but you don't retain one before hand...You shouldn't need an engineer to inspect...you should do it and the building inspector and your tradesmen...Maybe a home inspector.Cost plus only on the prior hidden and or not found errors...Contract for all the rest with regular payments to the homeowner and then to you...double signatures show no trust and I would never go that way...Best to do your work well to payment phase, present your invoice, and hold out your hand. If nothing hits your hand, invoke the clause Sonny taught you that says work will proceed upon receipt of payment (thanks Sonny.)I would also do one house at a time and if things are going well, then you'll be doing more for sure.Long post cause I've been there and got lucky!aj
*Thanks for the input everybody. First bank told me I was a day late. They pulled someone from their approved builders list to take over. So after a short interview and a financial statement I am one of their approved builders. Of course, so was the guy who flew the coop...still checking-
*I certainly can't offer any advice, but let me say that I am thrilled that you are willing to step in and try and work in this situation. It seems that there are many people who will not do this.
*I would only take one of these jobs as a cost plus. Give them a high hourly rate for the work you plan to do (carpentry, etc.) and get at least 20% on subs. Be sure to go for 20% on your hours too. As far as a surety bond goes....most banks around here do not require them for a single (or even multiple) house loan. Im sure each individual has a loan in there name not the contractors. Inspection or no inspection I would have it in writing that I would only warrant the materials and labor that I provided. I would take lots of pictures of each house before I started work to document the phase it was in. If the bank wants you to be responsible for someone elses work then I wouldnt mess with it. As for the subs (If this is a small town) I would let them complete there work and let them be responsible. You should know all about each one anyway and probably have used them somewhere.....
*Brian...Cost plus isn't sellable in my neck of the woods....Contract price would get the job here only. Cost plus for hidden defects only.near the stream,aj