How Title Issues Nearly Killed a Ground-Up Construction Project in Franklin, Virginia
- Jul 9
- 5 min read
Welcome to Naomi's Notebook #002
Welcome to Naomi’s Notebooks… where I take real deals, real numbers, and real underwriting decisions and show you exactly how I think as a lender. Sometimes I say yes. Sometimes I don’t. Either way, there’s always a lesson.
I hope you enjoyed the first notebook!
This week’s deal is completely different, but the lesson is just as important. Sometimes the biggest risk isn’t the construction budget or the resale value… it’s how you acquired the property in the first place.
Let’s open the notebook…
Ground-Up Construction Loan Review: Franklin, Virginia
The Deal
This borrower didn’t find this property on the MLS.
He went door knocking.
He found an elderly homeowner who was struggling financially and wanted out. They worked out an agreement where he would take over the existing mortgage payments, help relocate her, and eventually tear down the home to build two townhomes.
(I love the hustle!)
Finding off-market opportunities is one of the best ways to create value in real estate.
The long-term plan made sense: Tear down the existing home, build two townhomes, and sell.
Simple enough? Or so we thought.
My First Thought
The project itself didn’t concern me.
What caught my attention was the borrower.
He had no real documented ground-up construction experience, limited liquidity, and a credit profile that needed work.
For a lot of lenders, that’s the end of the conversation.
For me… That’s where the conversation starts.
I did a soft credit pull, walked him through a plan to start rebuilding his credit, and we discussed ways to structure the deal more effectively. One of my recommendations was bringing his general contractor in as a partner. That immediately strengthened the file by adding documented experience and gave him access to better pricing and financing terms.
Everything was moving in the right direction… Credit ✔, Experience ✔ ... until the title work came back.
Hidden Title Problems
When we ordered the title work, we uncovered two major problems the borrower didn’t even know existed.
The first mortgage wasn’t current! The previous owner had been collecting the monthly mortgage payments from the borrower… but she wasn’t sending those payments to the lender. She simply kept the money.
Then we found something even worse. She had taken out a second mortgage due to financial hardship and never disclosed it. It appeared as a lien 6 months into my client's ownership.
The borrower had no idea. He thought he was taking over one mortgage. Instead, he inherited a property with not one, but two defaulted loans. This wasn’t a construction problem anymore, it was a title problem.
Why Title Searches Matter Before Buying Real Estate
This deal taught two lessons that every investor should remember.
First… always close through a title company or real estate attorney when ownership is changing hands. A proper title search could have uncovered these issues before the deed was transferred.
Second… never assume someone is making the mortgage payments for you. If you’re taking over payments, make them directly to the lender whenever possible.
Unfortunately, once the borrower became the legal owner, the property (and everything attached to it) became his responsibility.
Here’s where lending guidelines come into play: To move forward with financing, the mortgage history couldn’t show more than one late payment within the previous 12 months.
Were the late payments his fault? No.
Did they still affect the deal? Oh yes.
Lenders don’t underwrite intentions, we underwrite the property as it exists today.
Creative Financing Solution
At this point, there was only one clean path forward: the existing mortgages had to be paid off.
That would eliminate the defaults, clear the title issues, and allow us to structure a new construction loan from a clean starting point.
There was just one problem… The borrower didn’t have the approximately $67,000 needed to satisfy both mortgages.
So we looked for another solution. I recommended bringing in an equity partner who would provide the funds needed to pay off both mortgages and secure the investment by recording a promissory note in first position.
Once the title issues were resolved, the borrower could move forward with refinancing into a construction loan. At that closing, the equity partner would recover most of the capital that was advanced against the equity of the existing structure, leaving the borrower with a clean project and a clear path to construction.
This is why creative financing matters! Sometimes the best solution isn’t finding another lender. It’s simply restructuring the deal.
Would I Finance It?
As presented? No. After clearing the title issues by adding an experienced construction partner?
Absolutely.
Naomi's Take
One signature can change everything. This borrower had a great vision and found a fantastic off-market opportunity, but he trusted the process instead of verifying it. Real estate investing isn’t just about finding deals, it’s about protecting yourself while you’re finding them.
Always use a title company! Always verify the liens! Always make mortgage payments directly to the lender!
And if something doesn’t feel right… Slow down. Because one extra week of due diligence is a lot cheaper than inheriting someone else’s financial problems.
Every construction loan tells a story. Some are straightforward, while others reveal hidden risks that only surface during underwriting. Whether you're purchasing an off-market property, planning a ground-up construction project, or searching for creative financing solutions, thorough due diligence can save you thousands of dollars and months of frustration. The right lending strategy starts long before construction begins.
Until Next Time...
I hope you learned something from this notebook! Maybe it reminded you why title work matters, maybe it changed the way you’ll structure your next acquisition, or maybe it’ll save you from inheriting a problem you didn’t even know existed. Whatever the lesson was… I hope it helps you make a smarter investment. I’ll see you in Naomi’s Notebook #003.
— Naomi
Frequently Asked Questions
Can you get a ground-up construction loan without construction experience?
Yes, but it depends on the lender. Many construction lenders require prior experience or an experienced general contractor. In some cases, bringing in an experienced partner can strengthen the loan application and improve financing options.
What happens if a property has undisclosed mortgages?
Any undisclosed liens or mortgages discovered during the title search must typically be resolved before financing can close. Lenders require clear title because existing liens affect ownership rights and loan priority.
Why is a title search important before buying real estate?
A title search identifies existing mortgages, liens, judgments, unpaid taxes, and ownership issues before closing. It helps protect buyers from inheriting legal or financial problems attached to the property.
Can I take over someone else's mortgage payments?
Possibly, but it should always be handled through a real estate attorney or title company. Payments should generally be made directly to the lender, not to the property owner, to ensure the loan remains current.
What do construction lenders look for?
Most construction lenders evaluate:
Credit score
Liquidity
Construction experience
Builder experience
Project budget
Appraised value
Title condition
Exit strategy
Each factor helps determine the overall risk of financing the project.
Can an equity partner help qualify for a construction loan?
Yes. An equity partner can provide additional capital, strengthen liquidity, improve the ownership structure, and help resolve title or financing issues that might otherwise prevent loan approval.
What is the biggest mistake investors make when buying off-market properties?
One of the biggest mistakes is transferring ownership without completing proper due diligence. Always perform a title search, verify existing liens, and use a title company or real estate attorney before closing.
