What happens to mechanics liens from unpaid contractors when I buy a construction note and foreclose?

Mechanics liens on real property that were properly recorded before the construction mortgage was recorded (or within the priority period under state law) have priority ahead of the construction mortgage and will survive the foreclosure. Mechanics liens recorded after the construction mortgage had priority may be extinguished by foreclosure, but this is state-law-specific and must be verified with local counsel. Always confirm the mechanics lien situation before bidding on any defaulted construction note.

How do I verify that construction draws were actually used for the project I'm buying?

Request the complete draw request documentation from the lender: each draw request should include a schedule of values, lien waivers from contractors and subcontractors who received payment, an inspector certification that the work was completed, and paid invoices. Discrepancies between draw documentation and what an independent inspector observes on site are red flags for fraud or gross mismanagement. Engage a forensic construction consultant for any note purchase above $2 million.

Can a stalled development project still receive financing for completion?

Yes, if a credible developer with sufficient equity submits a realistic completion plan. Lenders evaluate stalled project completion requests on the same underwriting criteria as original construction loans, but with additional scrutiny on the completeness of the prior work and the credibility of the completion contractor. Having an experienced general contractor attached to your completion plan dramatically improves financing prospects.

What is the typical timeline from purchasing a defaulted construction note to completing the project?

From note purchase to project completion: 18-36 months is typical. The timeline includes: foreclosure or deed-in-lieu negotiation (30-90 days), permit reinstatement and plan modification if needed (30-90 days), contractor mobilization and remobilization (30-60 days), and actual construction completion (6-18 months depending on percent complete and project size). Add a 20-30% buffer for contractor delays, material supply issues, and inspection scheduling.

What are the biggest financial surprises in buying a defaulted construction loan?

In roughly descending order: (1) hidden mechanics liens from subcontractors not paid by the general contractor; (2) completed work that fails inspection and must be ripped out and redone; (3) permitting changes requiring expensive code upgrades to currently completed work; (4) environmental issues (particularly for projects with prior ground disturbance on historically contaminated sites); (5) dramatically higher cost to re-mobilize a construction crew than to maintain a continuously working crew.

How to Buy a Construction Loan in Default