Residential remodeler here, looking at the possibility of building my first home for a client. My question is this (there are others, but we’ll start here)…If they have already purchased the lot, and have been approved for a mortgage that is more than adequate to build the house, how does the financing of the build work? Do I have to carry a construction loan until completion, at which time I essentially sell the home to them? Or do they have their own construction loan, and I just make applications for disbursements at regular intervals? That would seem more likely, otherwise I’d be attempting to get a loan to build a house on land I don’t own. Any suggestions for resources that would help with structuring a contract for a home build would be helpfull too. Thanks all.
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The loan is their problem, not yours. You're just doing the work. Setup a payment schedule so that draws can be made.
I buy and renovate pt. Typically I get a commercial loan to initially purchase the house, and then a second commercial line of credit loan that I draw upon as I need to. On the LOC, I give the loan officer a copy of receipts when I go to make a draw.
I'm usually holding on to the house for a couple years and move into it, so when the renovation is far enough along, I just roll both commercial loans into a mortgage.
jt8
"All men should strive to learn before they die What they are running from, and to, and why." -- James Thurber
Point #2 (point #1 being they get the loan)...Point #2, is that since your situation is more complex than mine, make sure you get everything spelled out and in writting. You don't want to be spending YOUR $$ to renovate someone else's house. And you DON'T want to be working for free.
jt8
"All men should strive to learn before they die What they are running from, and to, and why." -- James Thurber
They will get the loan as the lot is in their name and that will be the collateral for the construction loan. You will need to provide a contract and a draw schedule to the bank. Also, most likely, a cost estimate broken down to the basic components of the construction process. This will help the bank keep track of where they stand in the disbursment process and help the appraiser do the pre-construction appraisal. They can tell what kind of quality of materials will be in the house by how much will be spent on cabinets, fixtures, floor covering, etc.
You need to be sure that the homeowners have an adequate construction loan and take out commitment to make sure they have enough $ to get their house completed plus any change-orders that are made. If you quote $200K to build their house and they get the construction loan for $200K and their take out loan for $200K, you either don't allow any change orders, or get them to pay it in cash. There has been several times when I've gotten to the end of a construction loan and the final draw is more than is available, and we've had to, at the least, get them approved for a higher mortgage loan and make a separate short-term loan to make up the difference, or even have the house reappraised to determine if the changes raised the value of the home enough to give them the additional $.
It's tough as the bank, with the privacy laws the way they are, to share information about the homeowner's loan or credit worthiness (are they able to borrow the additional $?) with the builder that the builder may feel that they need, but I am unable to give them due to privacy laws.
They secure the loan, you draw off the loan as aspects of the job are completed,or in progress. Ie: site work, footings, foundation, draw. Commencement framing, lumber drop, trusses draw. Ithink you get the picture, check with lender and find out how they are going to release $. They vary but most are typical along these lines.
Make sure every contractor has liabity and (comp. if required)., or you will be paying their rate. All money needs either full or partial lein sign offs
You need to have liabilty ins. yourself and comp. if you have employees doing work with you. You will also need to carry builders risk ins.
Many times funds will be disbursed thru a title co. get to know the indivdual that will be handling your acct. they are your life blood. Find out exactly how they want the paper work submitted do not vary from their recommendations.
Get a copy of commitment from lender so you can go to suppliers and trades, so they know money is available. Pay your suppliers and trades as soon as money is released. Many times title co. will write checks directly to them, depends on lender. Never ever let subs get ahead of you on draws. Carry a pack of full and partial lein statements with you.
When you know the draw schedule ahere to it. ie: all draws for payment must be submitted 10-15 days before payment.
Example you pay on the 15th of month you need draws from subs on the 1st, you pay on the 30th you need draw on the 15th.
Timing and schedule is what keeps the job moving forward.
Just a short list I'am sure others will be along to fill in blanks.
I agree with previous posters so far.
Make sure that your draw or payment schedule will coincide with what the bank is willing to pay out per completed construction.
Ask for a copy of their typical draw schedule and see if you can form your scheduled payments to it. It would be wise to have the owner set up a contigency fund or escrow account in the event that you get ahead of the banks disbursements.
And remember, it doesn't matter wether the bank is willing to pay out or not; if you are do a payment you should be getting it. Make sure that you have this agreement with the owner. And make sure he knows that ALL work stops 48 hrs after NON PAYMENT, NO EXUSES!!
That's why it is good for the ho to have 10k in a fund. Build the house with his money only, NOT yours.
And create a rock solid contract that your lawyer and his both examine.
This should be a win win situation. If you get bad vibes up front from the ho, BAIL.
Been there done that.
Good luck!
Eric
[email protected]
It's Never Too Late To Become What You Might Have Been
Thanks all.That's about how I assumed it would work, and your suggestions are helpful. Anyone have any advice on resources for contract structure? I've never advertised and all my work has been referral business. Because of this, I've always had very good customer relations and although my contracts are certainly more detailed than a discussion and a handshake, I've never been to concerned about all the legal details...here's what I'm going to do and this is what it is going to cost. I'm guessing a home build contract should be a bit more involved.Thanks again.
Last house I built was in '95, on a typewritten contract. It worked for me.
If you email me your address, I will copy and mail itand other pertinent papers to your home or office.
I also have a few others on my computer I would share with you. Several folks here have been generous in the past with this.
You still need a lawyer. Add the price to the cost of doing business.
Don't fool yourself into thinking you don't need to.
Example: Who owns the loose materials that are on the job site but not yet installed on the dwelling??
If you can answer that question with not the slightest bit of doubt, then MAYBE you don't need a lawyer to review your contract.
Be talking.
Eric
[email protected]
It's Never Too Late To Become What You Might Have Been
I have heard of the lot being signed over to the builder and then the builder would be the one that gets the construction loan.I really don't know why that is done and it might have to do with the difference in lien laws and the banking practices from state to state.
There have been some good discussions of construction loans over on the JLC board. The typical loan seems to be 5 draws, and it seems to stretch the average contractor farther than his cash flow will go. In a few situations banks seem flexible and will go more than 5 draws, but that seems rare.
It's easy to say that you just make a payment schedule and hold the clients to it, but in reality they probably don't have the cash on hand to do anything but what the bank will do, so prepare yourself for that.
One thing that was discussed recently was the concept of having the owner "pre-sign" all of the draws. Ordinarily they would have to sign each draw after the inspector approves the completion of work, and then the bank would cut your check. However, it is apparently possible to have them pre-sign all the draws so that your check is cut automatically once the inspector approves, so that the owner does not need to be brought into the process each time. That way they cannot hang up your payment, either deliberately or by mistake.
Bottom line seems to be this: if you are doing a construction-loan house, be prepared to build it bang-bang-bang... all business, no foolin' around.
Also not mentioned, additional draws can be made according to what the bank charges for their inspector to inspect for a draw. Allow yourself the flexibility to pay for the inspection if needed. Waiting for 50,000.00 over 50.00 isn't worth the stress.
First of all the owner carries the construction loan thru his loaning institution. They will require :
1. That you have a GC lic.
2 A complet bid sch. , which includes all the subs. and adresses, and bids, all other costs including your profit . In other words all cost that make up the complete bid. This is to protect the bank, ie: should you die , he die, or both of you go broke, leave town etc.. So that they could step in and finish house, to protect thier investment.
3. They will provide you and owner with a draw sch., usually a 5 or 6 draw sch. My experience is generally 5. When you reach the point of progress that is required in the draw, you or owner call it in for the banks inspection, then they will issue a check per sch., made out to owner and you, owner signs and gives to you, to pay of subs. By the time you call for next draw, You will have to have supplied bank a complete release of liens from subs and suppliers for the previous draws scope of work, in order to get check. The scope of work that is covered by each draw is spelled out in a standard form, they may make some slight changes, but it is generally standard. The draws are also not all an even amount of funds ie: the percentages are 1. 15%, 2. 20% 3. 25% 4. 20% 5. 20%-- or something similar. At no time will they pay for more than is completed --They know what they're doing. By the time you get last draw ( which is mainly your profit) you ill need to supply a complete set of release of liens, or no coin.
If this is your fist contact with the loaning inst. or bank and you are new in bussiness, they will probably watch over the job like sink on sh--. They treat it all like strickly a bussiness decision. They will also probably want references and may want to do credit checks on you and your bussiness.
When you make up your bid, be shure to cover everything up to and including the bush by the front door, a contract for a given price and spec. is a binding thing.
Any extras or changes require paperwork and cash payment from owner, any major change will require owner to rework out construction loan with bank ( major-- major PITA ). Any change that even is a no cost and will change appearence or sizing of a room or such , will require a letter of acceptance from bank etc.
HTH
Roger