5 of the most common risks when granting construction loans


Risk # 3: Thinking that hiring an entrepreneur is a done deal
It’s not over until it’s over, and just because a borrower has received an offer from a contractor doesn’t mean the job will be done quickly, well done, or not at all.

“The guy doesn’t have to finish it; he can quit work if it is not profitable, and the initiator has a half-built house. The scratch and dent on a half-built construction loan is probably 20 cents on the dollar, compared to a scratch and dent where you missed someone’s FICO score by a point, ”Mingham said. . “There is a huge opportunity for loss, at all levels. “

It often happens that a borrower fires a bad contractor halfway through a project, leading to another set of problems, the two most important of which: budget and schedule. The next person to bid may be better, they may be worse, they may be busier, they may work slower, and / or they may cost more. Hiring a contractor is not necessarily a task to be settled and forgotten.

Risk # 4: Fail to exercise due diligence towards the contractor
A bad contractor and a bad offer start a bad project, and there are a lot of ways things can go south from there. Is the contractor licensed? Are they not insured? Are they experienced enough to notice and speak up that the planned budget is far from the scope of the desired work? Taking the extra time to talk to vendors and contractors tradespeople, for example, may seem unnecessary, but can glean invaluable insights when it comes to whether they communicate well and have well-established partnerships. .

A contractor may have been paid, for example, but he’s not so good when it comes to paying his subcontractor, who still has pledge rights.

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