This question comes from Veronica of Commerce, MI, who writes:
“We took a construction loan out to purchase a lot and build a 2500 sq. ft. home. The process has not been easy. However, now the builder is coming to us and asking us for an additional $80,000 on the project. That is over and above the amount we agreed to in our agreement and price. It also exceeds what our bank approved us for. He gave us a list of items that total the $80,000 and wants our lender to make a disbursement. We disagree with the amount and the quality of the work. We feel he is lying to us and on the affidavits to the bank. Isn’t this mortgage fraud. What can we do?”
Real Estate Fraud Happens
First, there is not a week that goes by that I don’t get a call regarding a matter concerning real estate fraud. Real estate fraud affects all areas of real estate. Fraud is the intentional misrepresentation or concealment of important facts that cause another person to rely on them to their detriment. There is mortgage fraud, deed fraud, realtor fraud, seller fraud, and yes, builder fraud.
Here’s the thing. I don’t believe from your fact narrative at this time that you’ve been defrauded however, the affidavits themselves are troubling. What I do believe however, is that you should be very upset with the surprise $80,000 bump into the construction cost of your home.
Examine Document Terms and Provisions
There’s something seriously wrong with the provisions in your Builders Agreement and the first question I would want to know is what are the terms in the agreement that relate to change orders. What are the provisions in the agreement that relate to budgetary items. How did your lender approve your mortgage loan. Where is the appraised value of the home at time of completion. . How was the loan underwritten.
You state that you did get a construction loan, so there should be lender supervision of this loan between the lending institution, the title company and then the builder. Good lenders keep builders on tight leashes regarding approving a project and allowing the disbursement of the proceeds from a construction loan to further the completion of a building project. These numbers are usually known up front — there is not supposed to be a lot of leeway or gap in your construction numbers.
Fraud or Poor Project Management
Somewhere there is a gap in the communication between the lender and the Builder, and any gap or problem should be addressed by the terms of your contract. It may not be fraud, but it could be attributed to poor project management.
It is not my intent to discount your concerns, however, and I would wait to pass any judgment until I have carefully reviewed your mortgage and builder agreement.
Builder and construction agreements involve large amounts of money and so they should be drafted or reviewed by qualified attorneys to protect against any major problems in the future.
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