10% down on new construction secured by WHAT?

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Real Estate Agent with Keller Williams Realty - Cary

 

I am working with a buyer who is interested in a neighborhood of new construction homes in the $500,000 to $900,000 price range.  These are custom built homes, where the lots are predivided among about 5 builders.  So you pretty much either choose your builder or your lot, as the lots are pre-assigned to the builders.

 The "standard practice" for local builders is to collect 10% down from the client, pre-construction.  This money is not held in escrow, it is cashed and used on the begining phases of construction.   The contractor holds the construction loan, buyer closes when home is complete.  My question to the builder and listing agent was about how these funds are secured, since they were not being held in escrow.  We're talking about $75,000 - $90,000 here.  What if ill fortune, either business or personal, were to fall on the builder?  The response I received was that they weren't sure, this question had never come up before.   I then checked with some personal contacts in the custom home building business who told me the same thing.  10% down, to be cashed and used, was customary - even required by most, and they had never been asked about what would happen to those funds if they could not perform the contract and didn't know how that would be handled.  The builders are certainly reputable and established, but sometimes the best of plans do go wrong.

I recognize that the builder has some risk of the clients contract not performing if they have agreed to contingencies.  But they still have a sellable structure and a handsome sum of cash downpayment if they need to carry the property for a longer timeframe to sell(part of their contract).  But, if misfortune would prevent the builder from performing his contract, what recourse does the buyer have other than waiting in line with all the other creditors for restitution?  Is it crazy that buyers are handing over such large sums of money for immediate use instead of being held in an escrow account?  It seems to me that buyers are being asked to hand over an awful lot of cash with a wish and a prayer that all goes well.

 If anyone has been through this, please let me know how it all shook out.  Call me conservative, but I'm real nervous about handing over such a large check without guarantees.  At least locally, that is how it is commonly being done.

  

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Rainer
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Julie Hite
Guaranteed Home Mortgage Company, Inc. - West Bloomfield, MI

Well this is why it is best to advise a customer to get their own financing for the construction loan. The draws are only released upon completion of the build according to the builders plan. The builder goes through an approval process with the lender who checks their licenses, pulls title and looks at the tax returns and/or profit & loss/balance sheet of the builder.

 Usually, after the approval of the builder, the lender will guarantee the build of the property during the draw loan. So if the builder fails in any way, the lender will continue to finance the remainder of the project with another approved builder of theirs.

I would not advise going through the builder for the financing, just not a good idea!

March 05, 2008 09:58 AM #1
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Rainer
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Wendy Burns

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