By: Morgan C. Jones, CEO BidMyCrib.com

Spring 2009

When the US economy was strong and lending was very accessible to contractors who needed bridge loans to help them complete construction and remodeling projects, property owners knew if any legal matter arose they were going to deal directly with the contractor they hired in most cases.  Today, the rules are different because the bridge loans from banks are hard to come by, which has spawned new companies providing contractors alternative funding resources to assist them until they get paid from customers. 

These new companies are not traditional lending institutions, but instead regular companies who have private capital to lend contractors on a short-term basis.  Contractors simply take a signed customer contract to one of these companies and receive a loan for 50% of the anticipated revenue from the job up front, which enables them to purchase materials and cover overhead costs until the project is completed, which is when the contractor collects final payment from the customer.  The term of the short-term loan will typically include the contractor having to pay interest ranging from 4-12%, depending on various factors, such as their personal credit history and length in business.  Once the contractor is approved for the short-term loan, instead of the contract’s lien rights residing between the property owner and contractor they selected, the contract’s lien rights are transferred from the contractor to the third-party lending company.

For a contractor, this alternative lending instrument is a great deal.  However, for property owners it can become their worst nightmare if they are unaware the contractor they chose has this type of arrangement behind the scene. 

The company providing the bridge loan to the contractor has the ability to sue you in civil court to place a lien against your property if you fail to pay the contractor for perceived just cause, or if the contractor does not payoff the bridge loan after you pay them in full.  Why is this scary?  The company providing the bridge loan has a team of lawyers on retainer who specialize in legal matters associated with lien rights on properties, where the traditional contractor does not have this team of lawyers.  Believe me, the third-party company with their team of lawyers will aggressively go after the property owner to recover their financial loss.  Moreover, contractors are going to pass the cost of their loan (the interest) to customers, which means property owners will pay more for their project.

What can I do to protect myself?  First, ask every contractor who submits a bid if they have this type of arrangement with a third-party company.  If they do, do not select them. 

Second, once you select a contractor include in the project agreement a provision prohibiting them from using this type of lending solution for your project. 

Last, be sure to get lien releases/waivers from every subcontractor, service provider, and/or supplier the contractor uses on your project.  Why?  If the primary contractor fails to pay any of these parties they can legally attempt to place a lien on your property through civil court proceedings in order to recoup their revenue loss.   

What is the name of a third-party company providing bridge loans to contractors?  Contractors Financial Warehouse (View website).

Selecting the right contractor for your new home, or remodeling project, is a guessing game and can be very stressful.  You also assume a lot of risk if the project and relationship with the contractor go sour.  Don’t let this new type of lending instrument, from non-traditional lending institutions, increase your risk anymore than you have to.  Be a smart consumer!

Resources:

Lien Release/Waiver

Sample Contract (you can modify the terms)