New House Building: Money Saving, Convenience and Healthy House Tips
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This month’s newsletter is devoted to selecting a builder for your home and mechanic liens that may apply if your builder defaults on payments to sub trades or suppliers.
We will explain what mechanic liens are, how they can impact you and how you can protect yourself when selecting a builder.
As usual with all of our newsletters we will provide useful links for our readers to find out more detailed information about each of these subjects throughout our newsletter.
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Selecting a Builder
Before we delve into the topic of choosing a builder – let’s examine for a moment what a builder is and what a builder does. A builder is a contractor that is hired by a consumer to build your house. When you set a contract with a builder you are actually you are also causing the builder to set contracts with sub trades as well as suppliers. It has been said that when you hire a builder you are really hiring four other groups: the builder, the builder’s crews, the builder’s subcontractors, and the builder’s suppliers. Virtually all builders build houses by using outside subcontractors to do part of the work--plumbers and electricians are good examples. Virtually all builders are general contractors to some extent.
Except for a few very large builders who have the requisite staff and tradesmen on their payroll to build a house from start to finish, most builders are not only builders, but also are general contractors, or GC’s. They hire and schedule other specialized subcontractors to work for them in the building of your house.
This is a standard practice among the building trade for homes as well as commercial buildings.
A well built house and a poorly built house depends on the materials being used, the tradesmen working on the house, the builder or general contractor! The builder’s job is to schedule the tradesmen and materials, while keeping a close eye on the subcontractors, and keeping everyone on time, while dealing with the impact of weather and the late arrival of materials or trades people.
The builder you hire to build your house should be an expert , so it is important that you select someone whom you are comfortable with, someone whom you can trust and someone with experience. Doing a good job of hiring a builder, should make construction go reasonably smoothly. If you don’t, then you are going to put yourself in the unenviable position of supervising your builder and maybe end up with financial problems that you never dreamed about. And, if you haven’t been through the building process before, there won’t be enough hours in the day for you to learn all you need to know to have a chance of doing this well.
Before we discuss more about finding the right builder, it is important to explore some of the financial issues of a poor builder, particularly if your builder fails to pay suppliers and sub trades. A builder who does not manage the project well , hires poor sub trades etc will no doubt see costly increases during the project and may overspend on the project. The net result may be that your builder fails to pay his suppliers and trades and they slap a mechanic lien against your unfinished home!
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What is a Mechanic Lien
A mechanic lien is a type of lien commonly used in the house building industry. A mechanic’s lien is a claim for payment put against your property by either laborers or material suppliers who have not been paid.
While you may have been paying the builder faithfully on time, if he has not paid suppliers etc, they may resort to applying a mechanic lien against your new home. If your builder goes bankrupt or just refuses to pay one of his subcontractors or material suppliers, a mechanic’s lien can be filed against your property by those companies or individuals who have not been paid. Settling such a claim may mean that you have to pay those individuals, which amounts to paying twice for supplies or a service, if you have already paid your builder for this work. While this is difficult to do, it may be the only approach to getting clear title to your home.
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Common Mistakes To Avoid in Building Your New Home
Finding the wrong contractor!
All construction projects come with problems. Some are mere snags– minor glitches we all expect. Others present some real headaches. One of the worst– by far– is to get stuck with the wrong contractor.
Finding and hiring the right contractor is absolutely essential to the successful completion of your new home or remodel. More than any other factor, if you skip your homework here, you will pay out thousands of wasted dollars and reap years of frustration as a result. Even with cheesy plans, missing details and nothing but enthusiasm to embellish your ignorance, a great contractor will deliver success– even as a flake will bring misery into your life.
First: never compromise honesty and integrity for a cheap price. During the process of trying to find a contractor to complete your project, you will hear many promises. Listen to them all, but apply Reagan's excellent advice: "Trust, but verify!" No matter how cheap the bid, insist on three references. You need three independent, completed projects you can inspect. Plus, you need to sit down and talk to each owner.
If any contractor's references turn out to be: a "friend" on vacation, someone who's just moved to Alaska, sold their house, is in jail/hospital/went deaf/has been kidnapped by terrorists... smile sweetly and say "I'll be happy to work with you as soon as you give me referrals I can speak with today..."
As you look for the right man, or woman, for your project, integrity and quality– the desire for excellence– must be core values. Even though you may be an excellent judge of character, independent references deliver the gold standard of true accountability. In addition, these core values must be coupled with experience. There are simply too many opportunities, even in a small remodel, for people to take advantage, misinterpret, misunderstand or twist things in their favor.
Unless you have extensive construction experience, you must learn the process of finding contractors who meet these requirements. I'd like to tell you this is a piece of cake. It's not. In practice, finding good contractors is hard, tedious and often embarrassing work. Your ignorance will be exposed; you have to ask awkward questions and then– you have to do it over and over again! No wonder most homeowners skip this part! It's common to start with a list of twenty or more contractors in order to find just three who are qualified, available and competitively priced. Many don't return calls, or dismiss your requests, or show up an hour late smelling of beer... All in all, it can be demoralizing– even depressing. In the following sections of this article, we'll continue to review and explain this complex process of finding Mr. (or Ms.) Right.
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Questions to Ask Your Builder
One of several steps in the process is to interview the builder. Here is a list of questions that should be asked:
- How long have you been in business?
- Have you or your partners built houses under any other names?
- How many homes do you build per year?
- How many homes do you build concurrently?
- How much time do you spend supervising the building process?
- Do you do the supervising yourself or do you have a foreman or site supervisor?
6A) Apply many of the same questions to the foreman or site supervisor, e.g. experience etc
- What work will you do with your own crews – what work is subbed?
- Do you have contracts with your subcontractors? Can I see a copy?
- Can you provide us with a list of all of your subcontractors, including name, address and phone number?
- How long has each sub worked for you?
- Can you provide us with a bank reference?
- Can you provide us with a copy of your insurance certificate?
- Have you had any suits brought against you by any homeowners for whom you built?
- If yes, why, and what was the outcome of the suit?
- How many change orders would you consider “average” in the process of building a home?
- Are there charges or fees for initiating change orders (other than the obvious costs for the change – some builders charge a flat fee of say $50, plus the construction charges)?
- Can change orders be initiated by the builder?
- If a mistake is made during the building process, who pays to fix the mistake?
- What kind of warranty do you provide? (some States may mandate warranties)
- Do you do the warranty work on your houses or is it some third party?
- Who picks up the tab for delays and costs of alternate housing?
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What You Need to Know About Mechanic Liens
As it pertains to house building anyone who works or supplies material for your house can apply a mechanic lien. It matters not whether this person is your builder, your builder's subcontractors, or your builder’s subcontractor’s subcontractors. The same is true for companies that supply material, and their subs. Whether or not any of these parties have a written contract with you is is largely irrelevant.
How is a mechanic’s lien filed?
A notice of lien is filed with the county clerk in the county where you house or property is located. There is a statue of limitations or a time limit during which such a lien can be filed. This differs state to state, but is usually a few months in duration.
Are there other problems that can arise from the filing of a mechanic’s lien?
In addition to the irritation of having to pay twice for goods or services, there is also the potential problem that mechanic’s liens cause at your bank, assuming you are financing your building project with a construction loan. Every time you request and installment or draw to be paid, the bank will normally check your property for liens. If a mechanic’s lien, or any other for that matter, show up the bank may refuse to issue the installment until the lien is satisfied.
How can I avoid the problem of a mechanic’s lien in my building process?
Assuming you take the advice in the House N Home Building Guide and hire a builder, rather than undertake the building process yourself as the GC, the best way to eliminate this problem is to put appropriate language in your building contract. Your building contract should have a clause that states the builder agrees not to file any liens against you or your property as they relate to the building of your new home. Furthermore, your builder should protect and indemnify you from any liens that may be filed by his suppliers, contractors, subcontractors, and material men, and further agree to settle or pay all such liens promptly.
Even such a clause in your contract is not ironclad. If your builder goes bankrupt and cannot pay his debts, his debts to these suppliers may be forgiven. Nothing would prohibit his suppliers or contractors from filing a mechanic’s lien against your property. To avoid this situation, one would have to have a list all suppliers, contractors, etc. that your builder is planning to use in the building of your house, and require that each of them sign an affidavit stating that will not file mechanic’s lien. While possible, the amount of effort to get this task done can become significant.
There are two additional steps you can also take to help prevent mechanic liens. One, you can arrange to pay subcontractors yourself. This is not practical for many people, but it is a way to ensure no mechanics liens are filed. Yet another way, is for you to insist that instead of paying one check to your builder/GC at each draw, you issue several smaller checks. Each of these smaller checks would be issued in the name of BOTH your builder and the sub. However, your first line of defense should be that you simply hire reputable builder and contractors.
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Designing and building a new home is a major construction project and is not for the inexperienced or naïve. There are many trades’ people to deal with, suppliers, and all must be coordinated to ensure that not only does everything arrive on time, the quality of the work also meets your requirements and expectations.
Consumers who are considering having a home built can avoid many problems by ensuring that their home is well designed, that they hire an experienced General Contractor who has a track record of completing jobs on time and on budget. Hiring a General Contractor is one of the few decisions that will have the most impact on the success or failure of your project.
A poor general contractor can cause all sorts of problems leading to bankruptcy, poor cash flow, failure to pay sub trades and suppliers, project delays and poor quality workmanship. Most sub trades will not hesitate to slap a mechanic lien against your new home if they have not been paid. While you may feel this is unfair, in most cases, there is little choice but to clear this lien by either paying it yourself or working something out with your GC.
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