Construction Escrow

Proper Payout Management Is Vital to Maintaining Clear Title

When you embark on a construction project — from a simple remodel to a brand-new building — you must manage the process closely to ensure not only a quality final product but also the appropriate payout of your funds. Fortunately, you can rely on Hometown Title, Inc., to help with your construction escrow payouts.

Why is escrow necessary for a construction project?

Instead of making one large lump sum payment or lots of little payments along the way, a typical construction loan will include four to five draws or payouts. This approach enables the title company’s or bank’s inspector to verify the work is being completed as billed and the bank and construction escrow agent to review and approve each funding request. The escrow agent will obtain signed lien waivers for each payment, helping you to rest easier knowing you’re only paying for what you agreed to and your property’s title will remain clear.

What is the construction escrow process?

Usually, your assigned construction escrow agent will attend the closing with you and your loan officer. After your loan documents are signed, the escrow agent will review your construction escrow agreement and any other related documents with you, including providing an overview of working with contractors.

You (the homeowner), the builder, or project manager will prepare a verified statement that breaks down every line item included in your build out. That document becomes the basis for every draw, as it sets the funding amount available for the project.

When a draw request is made, it should be submitted in writing and detail all amounts to be paid, as well as include copies of all applicable invoices. Your escrow agent will review and reconcile the draw request with your verified statement and prepare an owner’s authorization for payment to be signed by you. That authorization and any other pertinent documents are provided to the inspector. He or she will visit the worksite to confirm that the work is completed and/or materials are delivered. Please note it is not this inspector’s job to ensure quality, just that the stated work is done.

The inspector returns the report to the escrow agent, who forwards it, together with all applicable draw documents, to the bank for approval and transfer of that draw’s funds to the agent’s escrow account. Before distributing the approved payments, your escrow agent will prepare lien waivers that every individual receiving a payment must sign before getting a check.

This process is repeated until all the draws — and the project — are complete.

What if I want to amend my construction contract?

To avoid spending more on the project than you have remaining in your loan and personal funds allocated for the project, you must get all change orders and the costs therefor in writing, so your verified statement can be revised accordingly. What may seem like small, insignificant changes can add up quickly if they aren’t quoted, logged, and tracked with the rest of your escrow funds.

What if a vendor or worker asks me for a cash payment?

You and your contractor signed a contract setting forth the scope and costs for the job, and your escrow agreement establishes the payout policies. No additional payments should be made directly by you, as those amounts will affect the final balance of your verified statement and could diminish your available funds before your final draw is made. Any requests for payment should be submitted to your escrow agent.

Hometown Title, Inc., is here to help!

We employ a dedicated construction escrow agent who manages all our construction escrows. A diligent advocate for you, our construction escrow agent will closely examine every payout request and point out any questionable items before finalizing the authorization for payment. That way, you can rest easier knowing you’re only paying for what you agreed to and your property title will remain clear.