Residential home construction is steadily rising across the U.S. as a lack of inventory continues to plague the housing market. To ensure a successful construction project, it is best practice to regularly confirm that there are no liens filed at any point in the process.
In a perfect world, lenders and the originators who work with them would have the ability to be notified as soon as a lien is filed on any given project. Currently, many lenders still rely on title agencies to manage this process, which can be costly and lengthy.
The discovery of liens can add headache to an already time-consuming construction loan administration process. Lending teams need to ensure that everything from invoices to inspections are compliant, all while managing a number of projects that span months or even years.
For one reason or another, many lenders don’t run title or lien searches, which creates an opportunity to uncover painful problems at the end of a project. Lenders that do request title and lien searches from title agencies have to pay a premium and wait days for them to be fulfilled — time that lenders should not have to wait.
Lenders that are not actively checking for lien issues could have project-related problems piling up under the surface. Liens that go undetected on a project are costly for everyone involved, especially when legal teams and fees have to get involved.
Involuntary liens are a clear indicator of issues with the project that inevitably fall upon the lender to solve. They may be evidence that a contractor is not getting paid, that taxes are not up to date, that the general contractor or owner are in financial trouble, and more. These liens have the potential to supersede the lien position of the lender or cause the borrower to go into default.
A lien that goes undetected could prevent the lending institution from being able to disburse the final draw, convert the construction loan to a permanent mortgage or sell the loan. Ensure that the safest borrowers are the ones receiving loans by keeping track of all project information in a way that allows you to discover problems before they arise.
On a residential project in Utah, for example, a lender used a digital lien-monitoring service and was alerted to a mechanic’s lien for $10,000. (These liens are typically filed by contractors or suppliers when they haven’t been reimbursed for work completed.) The lender was able to pause the draw process to discuss the lien with the owner.
The owner, maintaining that the lien was filed under the wrong circumstances, was able to contest it and have it quickly released. Early detection enabled the owner and lender to not only prevent delays with final title updates at the end of the project but also to avoid racking up interest and legal fees due to the unresolved lien.
To mitigate risk and extra expense throughout the duration of any construction project, it’s key to find the opportunities to turn reactive tasks like lien monitoring into proactive processes. Between draws, a digital tool can consistently and proactively monitor any lien filings on your projects. This way, if any claims are filed, your team will be notified the same day, and will be able to quickly and easily take action based on the information at hand.
If there is already a digital system in place for all loan-related information, then this notification will connect lien information to the project, making it clear where work needs to be done. The digital process then puts the lender in the position to work proactively and resolve the issues associated with the lien, so that when the draw request comes in, they can still push the funds out on schedule.
In another example involving a commercial construction project in Washington state, lenders were aware of multiple lien issues that the owner and general contractor had brought to their attention. While communication from the owner was inconsistent, the bank was under the impression that everything had been resolved.
After implementing a digital lien-monitoring tool for their portfolio, however, the bank found that there were two additional liens on the project that it did not know about. They froze the loan and dug into the issue to find problems with ever-changing project management and financial troubles. Proactive monitoring helped the lender expedite the process to sell the loan before time could exacerbate the problems.
There’s good news: The data that title agencies use to search for liens on a property is available digitally. Lenders and originators can connect to the same source of data that an agency would reference, and gain the ability to put this data in the context of the project as a whole.
Lenders have an opportunity to take advantage of digital tools that will take work off their plates and save them money in the process. By moving from reactive tasks to proactive processes, loan administration teams are empowered to not only work more effectively but also reduce the risk involved with draw disbursements. Don’t wait to check for liens — get notified when they’re filed. ●