What
is it?
It
is an inspection of the mortgaged property by a lender or title company prior
to closing or funding, for the purpose of verifying that no work has started
or materials delivered for new construction.
What
is considered "work started"?
Clearing,
grubbing, setting grade stakes or batter boards. Delivery is unloading lumber
or building materials on the jobsite.
Why
is this important?
On
homestead property, the lender’s lien is not valid if work has started
or materials are delivered prior to signing the mechanic’s lien: you’ve
got an unsecured loan.
On
all other properties, it goes to lien priority: if any sub or supplier has
started, all subs and suppliers under the general contract are prior to the
lender’s lien.
When
is it most important?
On
interim loans and one-times on homestead property, because if there is an
early start, your lien is invalid. On large commercial projects where there
are numerous subs and suppliers under the general contract, each of which
will prime the lender’s lien.
Is
this risk insured under the title policy?
Lien
validity is insured on a mortgagee policy, and on an interim binder, if you
require the Schedule C deletion of the early start exception on the binder.
Lien priority (as to mechanic’s liens from construction) is not assured
on either a policy or a binder; liability for an early start is specifically
excepted from coverage.
What
practices do you recommend to mitigate the early start problem?
-
Prior
to closing, advise the borrower and general contractor in writing that
no work of any kind can commence and no materials can be delivered until
after the title company has indicated the mechanic’s lien and/or
the deed of trust has been recorded
-
When possible, require that a vendor’s lien be retained in the deed
(if any loan funds are going toward purchase or refinance of purchase)
and if not possible, create a vendor’s lien in the deed of trust
-
A written loan policy should be adopted as to when clear lot inspections
are required. A lot inspection should be done as closely to filing of
the lien as possible. Evidence of the inspection should be preserved in
the loan file (dated photo, officer affidavit or memo to file)
-
Loan documents should include affidavit of no prior activity signed by
borrower and/or contractor. Lender should consider requiring affidavit
of commencement to be submitted at time of first construction draw
-
Title company closer should be instructed to notify borrower and contractor
once loan documents are filed of record
-
If lender or title company gets knowledge of early start, order work stopped
and consult attorney. Typically, the problem can be cured by termination
of the existing contract and mechanic’s lien, and reclosing with
new documents.