Dear Bill:

What advice would you give to a couple who are facing trouble with their builder? The modular company built and set the house wrong while working with our contractor, and the bank and the title company released all of our funds to our builder with no inspections prior to the draws to make sure that the work had been completed correctly before funding.

As far as I know, only the foundation subcontractor and the excavator have been paid and signed lien releases, yet all of our money is gone. The builder has grossly misused our funds and also damaged our house. When set in place, the modular house was never waterproofed: e.g., the flashing was missing on our roof in two spots, so now we have black mildew in our house in addition to "lots" of damaged drywall.

Who is liable for releasing all of our funds to the builder (except for the last 10% which we can't touch until we get our certificate of occupancy)? Is it the title company, the bank, or both?

Trudie

Dear Trudie:

Construction funding disbursement irregularities is a problem to which I have responded way too often in my 15-year career as columnist. I am sorry to tell you that the responsible party is YOU, but...

The builder is almost always the incompetent or fraudulent party. You only have a claim against the bank or title company if you have a contract with them that requires they verify completion of the work prior to funding. This type of agreement is commonly referred to as a "Builder's Control" agreement.

If a title company, (with the banks approval) enters into a Builder's Control Disbursement escrow contract, they agree to inspect each phase of construction to determine if the work has been completed before paying for it. This usually involves a weekly on-site inspection (often contracted out to home inspectors who were general contractors at some point in their career).

Instead of five or six lump sum draws, Builder's Control disburses the funds by invoice using a voucher system. This is comparable to a check, or authorization, the owner writes for each phase of construction as the owner deems the work complete. When the title company receives the voucher, they obtain a field inspection report to verify that the work is completed, then issue the funds to the contractor or subcontractor, but only after each has signed a lien release.

Using the Builder's Control method of construction disbursement, it is not possible to pay for work that is incomplete. It is also unlikely that contractors will be able to sue or file a mechanic's lien against the project because of the payment procedures.

In your case, the only party against which you are likely to have recourse is the title company, if the funds for construction were disbursed through an escrow. That may be why they are acting friendly toward you when the bank and builder have both blown you off.

As to the construction defects, almost every state has laws that require builders to warranty their work for one year. The challenge is usually that the builder has no resources against which you can collect if you should win a lawsuit. In your case, however, the modular home builder will have assets -- the only issue is whether they are responsible in any way for your dilemma.

The lesson here for other readers is to be very judicious in selecting a builder (even for a mostly factory-built modular home) by checking references, references, references. And, most certainly, insist on the use of a Builder's Control construction disbursement plan prior to signing any documents for purchase, mortgage, or construction.

Published: December 16, 2003

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