When a contractor and a borrower have a disagreement on a rehab loan, it can cause delays and complications in the project. Here are some common issues I’ve encountered and potential solutions so you can keep your project on track.
Common Areas of Disagreement:
- Scope of Work: The contractor and borrower may have different understandings of the work to be done, leading to disputes.
- Solution: Refer to the original agreement or contract. It’s important to have a clearly defined scope of work, including detailed plans, material specifications, and timelines.
- Costs and Budget: Disagreements over costs, especially if unexpected expenses arise, can strain the relationship.
- Solution: Set up a contingency budget in the loan to account for unexpected costs. If the dispute is over costs already agreed upon, reviewing the original estimate and ensuring both parties stick to it can help resolve the issue.
- Solution: Set up a contingency budget in the loan to account for unexpected costs. If the dispute is over costs already agreed upon, reviewing the original estimate and ensuring both parties stick to it can help resolve the issue.
- Payment Schedule: Some borrowers might feel the contractor is asking for payments prematurely, or contractors may feel they are not being paid on time.
- Solution: Rehab loans often have specific draw schedules where payments are made as work is completed. Stick to this schedule and ensure inspections are completed before releasing funds.
- Solution: Rehab loans often have specific draw schedules where payments are made as work is completed. Stick to this schedule and ensure inspections are completed before releasing funds.
- Quality of Work: If the borrower feels the work is not being completed to their standards or within code, they may refuse to approve payments.
- Solution: Have a HUD 203k Consultant, licensed inspector, or third-party mediator assess the quality of work. This helps provide an objective opinion.
- Solution: Have a HUD 203k Consultant, licensed inspector, or third-party mediator assess the quality of work. This helps provide an objective opinion.
- Timeline Delays: Delays in the project timeline are common, but they can lead to frustrations on both sides.
- Solution: Review the contract for specific completion dates and penalties for delays. Ensure any delays are documented and, if justified, negotiate an extension.
- Solution: Review the contract for specific completion dates and penalties for delays. Ensure any delays are documented and, if justified, negotiate an extension.
- Change Orders: Changes requested during the project may not be properly documented or agreed upon by both parties, leading to disputes.
- Solution: All change orders should be in writing and agreed upon by both the borrower and contractor before any work begins. This helps prevent misunderstandings.
- Solution: All change orders should be in writing and agreed upon by both the borrower and contractor before any work begins. This helps prevent misunderstandings.
- Project Delays: Delays by the contractor may frustrate borrowers, especially if loan terms have timelines.
- Solution: A clear timeline with penalties for delays can be included in the contract. Regular progress checks can help manage expectations.
How to Resolve Disagreements:
- Communication: Foster open and transparent communication between the borrower and contractor. Misunderstandings often arise from a lack of clarity.
- Mediation: If direct communication fails, a mediator or arbitrator can help resolve disputes without escalating to legal action.
- Legal Recourse: If the disagreement cannot be resolved through other means, it may be necessary to involve an attorney. Contracts and agreements will be critical in this process.
Ensuring proper documentation from the start can prevent many of these issues from occurring.
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