Construction title services
Construction presents a completely different kind of title work. Every contractor that works on the project is entitled to place a construction lien against the property, and even foreclose on the property, if they are not paid. Under the law, these liens have priority over other liens, even the original mortgage securing the lender. Every day work is being done on the project, new situations arise that have the potential to jeopardize the lender’s collateral. Before releasing funds to the borrower, therefore, the lender needs to be assured that its title to the property remains clear, unclouded, and superior to any other claim. The lender looks to us for assurance.
In construction deals, more than simply searching old title records to trace the chain of title, the title agency needs to keep abreast of the complex and fast-moving construction process itself, in real time—without ever talking to contractors or visiting the site. Title agents become forensic accountants and project managers, while continuing to examine the property’s title on an ongoing basis.
Birmingham Title Agency has extensive experience providing construction title services, both residential and commercial, to a variety of lenders, banks, and credit unions. No need to have another agency handle the work once you close on your purchase and begin construction—we can handle it all.
Our construction title products
There actually is no separate “construction title policy.” Rather, our construction title product is an expanded, more complex version of a lender title insurance policy. (Construction title products are not necessary when construction is being self-funded by the property owner.) Construction title coverage is provided by endorsements that the title agency issues periodically during the construction process.
When a lender is making a real estate loan for a project that involves construction, whether the borrower is purchasing the property at the same time or is already the property owner, the lender knows that contractors and other third parties will be doing work to the property that is protected in Michigan law by the ability to place liens against the property.
The lender therefore asks the title company, not only to ensure that the property’s title is clean when the loan initially closes, but also to oversee the construction process itself to ensure that construction proceeds in a proper way, that all contractors and subcontractors are paid for the work they do, and that no third party involved in the construction ever places a lien against the property that would jeopardize the bank’s first-lien position on the property.
The lender begins the construction title process by sending us a request for lender’s title insurance and telling us that the loan will be used for construction purposes. When we receive the order, we perform a thorough and wide-reaching examination into the recorded title records for the property being mortgaged, to ensure that the borrower owns the title to the property free and clear. We also look to identify any existing mortgages or other monetary claims against the property, so that we can have them paid off at closing and cleared from the title.
For a construction title file, our underwriters require additional documents before approving us to close on the file and issue insurance:
- A formal contract budget for the construction between the property owner and the general contractor
- Architectural site plans for the planned construction
- A full ALTA boundary survey for the property
- A draft of the construction loan agreement to be signed at closing between the borrower and the lender
- Sworn statements and waivers for any work done pre-closing
At closing on a construction loan, the lender fees, third-party costs, and borrower closing proceeds (sometimes called the “initial draw”) will be funded through Birmingham Title Agency’s escrow services. The remainder of the loan amount, often called the “construction holdback,” remains with the lender. Birmingham Title records the mortgage (and deed, if applicable), and issues the lender’s title policy.
On a construction title file, our work does not end there. Periodically, the property owner needs to “draw” additional funds from the lender, out of the remainder of the loan that was not funded at closing, in order to pay contractors and other construction costs for the work they have done so far. When the borrower requests a draw from the lender, the lender asks us to issue an endorsement on the lender policy certifying that, if the lender does issue the funds, all the work done on the property to date will be fully paid. To do that, we request additional documents from the borrower:
- An owner sworn statement (also called an “AIA”), which lists the total amount of both construction and non-construction costs to be paid with the requested funds.
- A sworn statement from the general contractor, listing in detail the construction-related costs for all work done, both by subcontractors and by the general contractor, that the GC wants to pay for with the requested funds.
- And finally, waivers from the general contractor and all subcontractors listed on the sworn statements, waiving their rights to place a construction lien against the property for the amount of their work to date, so long as they are paid the amounts listed on the sworn statement.
When the construction project comes to an end, the title agency closes out the construction title file by requesting a final set of documents:
- Full unconditional waivers from the general contractor and all subcontractors, covering all the work each has done on the project from the beginning, warranting that they have been paid in full for their work.
- A termination of the notice of commencement that was filed with the county register of deeds when construction began.
- Finally, the title agency goes back through all of the construction documents that have been provided on the project, in order to review and reconcile the original budget, the lender’s loan amount and/or title insurance coverage amount, and the total payouts on the project.
As you can see, the construction title insurance process is lengthy and can be extremely complicated. Our experience handling construction projects for millions of dollars, sometimes over multiple years, gives us the expertise to follow your project as it is happening and give your lender needed assurance that the project is paid-up and ready to move forward, at each step of the way.
Who handles your funds
When closing on a construction loan, the lender fees, third-party costs, and borrower closing proceeds (sometimes called the “initial draw”) is funded through Birmingham Title Agency’s escrow services. The remainder of the loan amount, often called the “construction holdback,” remains with the lender. After the closing, during the ongoing construction process, we have found that banks prefer to fund each individual construction draw directly to the borrower. Thus, when you are ready to draw additional funds on the loan in order to pay contractors and other construction costs, the lender asks us to issue an endorsement for the draw, and then the bank itself releases funds to the borrower.
Like underwriters, it’s important to find the best lender for your construction project. More than any other lending relationship, construction lending involves a close collaboration between borrower and lender over months and even years. Choosing a construction lender is about much more than just the lowest interest rate or the highest loan amount. We have decades of experience connecting clients with lenders, in the process forming connections with the best in the industry. If you are looking for top rated construction lenders, we are happy to provide referrals, backed by ours and our clients’ repeated positive experiences. Birmingham Title Agency can connect you with the right lender, who will provide the same dedication and exemplary service we hold ourselves to.
Construction is never a one-size-fits-all process, but we’ve found certain underwriters to be more flexible and responsive when it comes to construction lien coverage. We have worked closely with underwriting on several years-long, multi-million-dollar construction projects, and our relationship with underwriting can benefit your project.