Even small construction projects are substantial undertakings that come with a high degree of risk. Whether you’re lending or managing a small remodel or building from the ground up, proper disbursement of funds is essential. Unless a property owner has the capital to pay for the construction project in full, they will likely need to make payments along the way by using a Florida construction loan.
What happens to the financial institution or lender’s funds after an owner has been approved for a construction loan? In many situations, the money goes into a construction escrow account.
Construction Escrow and Funding
An escrow account is used to hold money designated for a construction project. Most times, the lender or project manager will establish this account. The funds will be held in the construction escrow account until the work is completed, then the money will be released to pay for each stage of the project. Construction loans in Florida are typical, as few people have sufficient liquid assets to 100% self-finance big renovation or new construction projects.
Why Escrow is Needed
Working with an escrow and title agent is vital to ensuring that construction draws are properly disbursed and that title clouds are prevented along the way. Lenders need to ensure that contractor (or mechanic’s) liens do not create a title issue that may jeopardize the lender’s first position lien on the property. For the property owner, clear title is necessary to ensure that they are able to freely sell the property in the future. If there is a contractor lien on the property that is not properly released, this can appear on a title search and interfere with the owner’s ability to provide marketable title to a future buyer.
In sum, the existence of a construction draw or escrow account can assist all parties in a construction project. They facilitate guaranteed payment processes for contractors and ensure that the lender is making proper progress payments and has a secure lien position. They also provide the property owner with the security of knowing that contractor liens are properly being released and that draw payments are being paid out at the correct stage of construction.
How Construction Loans Work
When a property owner is ready to move forward with a big-ticket construction project, they will need to ensure that they have a binding legal agreement that includes each progress payment and the scope of the work that the contractor has to complete to receive each payment. The draw schedule should also have an estimated time frame so that the construction project is timely completed.
Each draw request should be made in writing and describe the the specific work that the contractor has performed so that the lender or owner can review it and authorize the release of the funds for that stage. Invoices should accompany each draw request. An inspection should also be performed to determine that the contractor’s work was performed properly up for that phase of the construction.
After the draw authorization is received, the title/escrow agent can release the funds to the contractor (or reimburse the property owner if the owner paid them directly). The agent will also ensure that the proper contractor lien releases are obtained and recorded to avoid any clouds on title, and that the lender receives the proper title endorsements.
Our Construction Title & Escrow Services
Farshchian Law offers numerous disbursement and draw services for new construction and development projects throughout the entire State of Florida, including construction escrow agreements, contractor lien release affidavits, owners/lender’s title insurance and endorsements, and the disbursement of funds based on lender instructions. Schedule a free consultation to find out the benefits of our construction title, escrow and draw services. You can call us at (305) 901-5628 or (239) 935-8599, or email us at Info@JFRealEstateLaw.com.