The construction or renovation lender does not exist in a bubble. The construction industry doesn’t either. Both entities are perpetually at the mercy of any existing economic climate, which means they constantly need to make decisions to reflect current realities.
An increase in the costs of building materials impacts a construction project significantly, bringing with it implications for home builders and homeowners. Of course, most of them would have put pen to paper on their contracts months before. But there are indeed ways lenders can navigate their ways through such economic conditions without getting financially scarred.
The key is always for the lender to keep an eye on the contract agreement between the borrower and the contractor. For example, the National Association Of Homebuilders set up ‘The Construction Liability, Risk Liability, and Building Material Committee.’ They also put out a contract addendum that allows homebuilders to take advantage of The Escalation Clause For Specified Building Material. This document serves to alter fixed contracts to protect the homebuilder in the event of a rise in the costs of building materials.
As a hard lender, here are three possible practices for dealing with fixed and hybrid contracts:
- Ask For Borrower’s Contingency Reserve Accounts: Demanding for the borrower’s contingency reserve, which would be used to finance the loan directly.
- Builder Acknowledgment Form: This document ensures all parties to the project are on the same page. This form effectively handles all agreements applying to the borrower, including inspection processes and extra costs.
- Review Change Orders: In the construction industry, change orders allow you to alter the construction contract when needed.
To learn more about navigating the rising costs of construction materials as a lender, click here.
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