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What is a Third Party Inspector and Why Do I Need One?

August 22, 2017

The first line of defense in protecting the health of your construction and development portfolio is your third party inspector.  Their role is to determine if the project being constructed is consistent with your agreements and sufficient funds remain available to complete the project at the time of billing.  The experience and expertise of this inspector should be understood from the onset and their qualifications should be matched with your project.

 

The typical project types subject to inspection are residential, commercial, and industrial.  Numerous subcategories and distinctions can be spun off these broad headings. Residential construction can include spec homes, custom homes, tract housing and may be part of a larger subdivision which is funded from a revolving line of credit.  Commercial loans can include nearly any type of a commercial project such as a grocery store, retail centers, restaurants, office buildings, multi-family developments, health care, etc. Industrial projects can also run the gamut and demand specific industry knowledge. Matching the complexity of the loan to the third-party inspector is your first challenge.


In addition to relaying information back to the lender regarding the accuracy of the request for payment and capturing a supportive photographic record, your inspection team should be equipped to report on any number of potential project health symptoms.  These early warning indicators may include the condition of the site, number of active workers, the security of stored materials, significant structural concerns, the lack of inspections, inaccurate or missing documentation, stop work orders, and many other countless variables which can impact your collateral.


From a security prospective, demonstrating and maintaining the recommended third party requirements is one of the biggest challenges in the construction industry today.  The cost of safe guarding data through encryption and secure storage is often well beyond the capacity of many inspectors. Access to construction loan administration and management software can help resolve this dilemma, however, it must be supported with demonstrable documentation and must facilitate communication channels with those accessing it. 


Today’s market place offers three broad inspector options for your consideration.  Understanding each of these options and matching them with your needs is vital. Price is often very similar among all three types and is not a differentiator in the level of experience. The three broad inspector categories include the professional inspector, semi-professional inspector, and the 1099 photographer.

 

Professional Inspector

 

The professional inspector is a dedicated and trained expert in conducting and advising banks of project progress.  They generally work for a firm which is established and has a set protocol for field work and reporting.  These inspectors are not sub contract employees and can be reached anytime for questions and clarifications.  They often help maintain a sound client relationship as they are looking out for the deliverable which protects the borrower and the bank.

 

Semi-Professional Inspector

 

The semi-professional inspector generally has experience in construction and provides inspection services as a supplemental effort to a different core business.  Typically, these are appraisers, title agents, or even bank personnel.  Also in this category are retired construction professionals operating on a part time basis.  Generally, the semi-professional provides reliable information, however, they may not be looking at big picture elements.  As a secondary profession, their availability is not always as convenient as the dedicated inspector.

 

1099 Photographer

 

The last category and riskier inspector type is the 1099 photographer.  Some banks are unknowingly using these inspectors to maintain large portfolios.  This type of inspector is a sub-contractor charged with simply providing photographs and percentages of completion on a mobile application or to a clearing house which in turn generates a report.  Unfortunately, in either scenario, qualifications can often be lacking or absent and flexibility in noting problematic project symptoms is not an option. The cost of these inspectors is generally the same as a more qualified team however, the lending institution is not aware of the details behind their front-line team members.

 

The ultimate goal in funding pay applications is to maintain project health and turn around the funding request in an efficient and confident manner.  Significant gains in interest income can be realized with the timely release of funds. Construction loan administration tools are available for lenders to help third party inspectors manage the entire pay application process online which will allow for faster turnaround times, increase efficiency and reduce construction loan risk.

 

Of the two viable inspector options (professional and semi-professional) understanding and matching the correct team member for your construction and development project is a matter of weighing the selection criteria.  The categories are:

 

  • Competency – For the project type, is the inspector experienced and able to provide proper guidance and opinions?

  • Location – Will the location represent limits which could affect the turnaround speed of the inspection process?

  • Cost – Are there cost restraints which may influence the decision process?

  • Automation – Does the bank maintain or inspector provide a standardized construction and loan administration platform for reporting and maintaining project security?

 

Understanding your team and exercising sound judgement in your selection process will decrease exposure and enhance your customer relationships. “An ounce of prevention is worth a pound of the cure.” – Ben Franklin

 

Get More Information

 

CodeFi Solutions provides construction loan administration and management software technology to financial institutions for residential, commercial and industrial projects. Book a demo online, check out our range of loan administration solutions, or speak with one of our representatives at 877.868.9009.

 

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