lender’s draw schedule not = builder’s
In the process of building our house, I got a construction loan from a national mortgage lender, and I selected an experienced builder.
The glitch is that the builder’s draw schedule is slightly ahead of the lender’s, by about 1 draw period. In order for the builder to honor his price to me, he needs to be able to secure the cost of building supplies. This means outright purchase of the supplies. But the lender will only pay for what has been done and for supplies on site.
I’ve been assured by the lender that this is their standard operating procedure, no deviations. This is to protect my money. The builder said he has never experienced anything like this. He has always been able to get money he needs to secure the material costs. I don’t have reasons to doubt any party’s position. My contract with the builder is a pay-as-I-go type. We’d agreed on a contract price, but the contingency portion is mine. The lender also had the builder sign a draw schedule that supercedes the schedule on the contract.
What has been everyone’s experience in this area? As builders, how do you deal with this? I’d think this is so common that the industry should’ve settled on some sort of de facto procedure. Learn me.
Replies
Yes that is typical bank procedure - and it $ucks.
If the builder's price to you is contingent on him prepurchasing materials - someone needs to get a short term loan to cover it - either you or your builder.
The bank will make the argument that any builder worth his salt will have credit or funds in place to carry him between draws.
My argument is I am hired to build the house - not finance it too.
Terry
Its like two traders sitting on a bench trying to out do the other .
They both have differerent interrests. Yours are closer to the banker and should be considered the best by you. The builder wants assurance money and to operate from your pocket. Likely as not the material on the ground money is not necesary for that but to pay the ground crews on completion.
Dozer guy shows up for pregrading and hes got his hand out when he loads up his machine but nothing on the draw systen is accomplished. He must be paid.
Footing backhoe guy is the same .
Concrete crew shows up and pours the footings after geting them ironed and staked plus inspected. He needs his money for his pay roll that week.
Block guy shows up and lays the block and needs his money.
Concrete guy comes back and pours the floor with the fill in place plus the wire and vesqueen. Termite guy shows up to spray in the midde of that and the inspector. More money.
You or the builder turns in the draw for the floor and its a couple to three days before its dispersed after their inspector comes to verify that draw. All the above took place before the banker wrote one dime of money. You saved the interrest on that many days and the builder has either wrote it or owes it . It becomes a lopsided situation for the builderat that point from the start to be held behind becuse he has also provivided materials whether he has paid for them or not he needs security. Double edged sword.
Builder wants money up front to cover security of materials and monies spent on the spot , but that also requires you pay him an amount before he actually does anything . He could split and neither you or the bank could continue becsue you two dont have any immediate security.
One answer to the above is that the builder take his contract to the bank and borrow money on said contract as collateral. Then his bank would have the contract as security. They would sue the builder and name you as secondary to the contract held as security. Double edge sword.
Second would be a performance bond that would be an addition document to add the needed security to your bank loan. If builder split the bonding company would be responseble and go directly after builder.
Edit :
"The builder said he has never experienced anything like this."
Unless this is his first house I would consider that statement the first lie. But I wouldnt challenge it . Just act accordingly figgureing windage.
He needs to produce security himself in the event of default. Come on now , banks dont hand out money with out security any dummy knows fully well.
The builder provides security or pays the first set of bills and the deal works off the contract. That puts the builder sueing you if it goes South from his contract but he still needs extra money for the coverage of responsebility.
Tim
Edited 10/19/2005 10:23 am by Mooney
Edited 10/19/2005 10:38 am by Mooney
Edited 10/19/2005 10:46 am by Mooney
You explained things very well .but I wouldn't consider the builder's statement a lie. I let the customers work their banks or advance me out of their own pockets. They write the checks and I do the work. I have only run into the above scenario one time in 35 years of contracting and that job turned out to be a mistake to have taken, not because of the bank, but because of other reasons but it left me feeling that anyone who was on such a short string that they couldn't stay ahead on the job by a small percentage was too tight for me to deal with.Keep in mind that I have not always served the high end market here.
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Yep, I didnt go into the owner only needing less than say 60 percent . I thought about it but its still bad business to advise someone to do. What some of you are saying is the owner put the footing &floor in out of their pocket. Say someone sold their house and had plenty of cash on hand they could certainly do it with out running into a problem with the bank. Still they should require the security just like their bank.
So the end point being no matter whose money it is to start the project , the builder should not have an open check book of say 50,000 with out having to answer for it . A professional builder who has never heard of anyone requireing security has worked for some very simple people at best if its true. Even though you have only ran into it one time , you also know the system. A performace bond does nicely in that case.
Tim
A performance bond will cost more than the carrying charges will though. I know there are builders who will run off with the deposit or let it disappear, so due diligence in investigating the builder is appropriate, but my gut feeling it that if I can't trust a builder with twenty grand or so, why do i want him building my house anyway? I'm an all or nothing guy, but I also think I have some decent instincts aboiut people by now. Last year I wrote a deposit/start check to cabinet guy for eight thousand after only meeting him once. Went off flawlessly.
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Youre crackin me up buddy.
I know you do that becuse youve told other things too many times . A handshake and a deal. A given word over the phone . I know fully well you do it but please dont advise others to do it . LOL.
We are certainly different. I watch every single transaction. Its not about trusting , its about security. When I go to a closing I read every word and think about understanding it . If I dont , Im not going any further until some ones gives me an answer that makes sense to me . One time I went to a closing to sell half a partial of land . I knew the dimensions but I didnt see them. I read it again. The second time it looked like the WHOLE partial. I put the pen down and asked if that wasnt the case . The lady didnt know but said Ill call you tomorrow if something is wrong . I laughed very hard , looked at DW and said we are out of here !!! If we sign these documents we will be selling all the partial instead of half and its a done deal if we do it . She said then lets walk. The lady stood up red faced and said Ill go get the boss !!! I told her that would be a smart idea becuse she didnt have any business conducting a closeing . I also told her boss that and what I thought of their integrity that was supposed to deserve my trust. He gave me the closing which I expected and straightened it out . We sold it nicely and kept our half with a free closing .
Ill keep my way. If I have to go to court I want a walk in the park. If I gave some builder 50 grand and he split , he wouldnt have it by the time I caught him. Im not going to chase him . Ill just call in his bond.
Tim
I don't know that I was advising someone else to do it my way. I was proposing the idea that maybe this builder is one who does, and that would account for the reason why he hadn't been up against a difficult bank scedule.But I'll agree that given the stories I hear here, your possibility is the more likely. Appreciated the comments from your inspection job. Reminds me of pulling over drunks..."Yessssuir orficer, I did have one or maybe it was two drinks. But dufonitely no more than that. It was just the bright lights in my eyes that made me swerve like that there...mind if I step behind that bush for a minitte?"
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i made up my mind about 20 years ago that we were not going to be working with our money ..... ever
since then , i make very sure that the Owner knows that his conversations with his lending institution include the information about my payment scedule... not the banks..
the Owner always finds a way...
if they don't we do not sign a contractMike Smith Rhode Island : Design / Build / Repair / Restore
"the Owner always finds a way...
if they don't we do not sign a contract"
I wish I could paste a sign on you two.<G> These two work for millionares. Not fair wise one to throw out advise when you arent on a level playing feild with the others here. Its not you two guys fault your clients are so successful. <G>
And I know the drill that you are both trusted and life is good on the islands.
Let me try to dog a guess and say that 75 percent of the population lays heavy on bank financing and you two dont even know that kind of people as neibors?
That sure ain't fair... most guys on this board couldn't afford to hire themselves!
mooney.. i've never worked for a rich man in my life..
around here the millionaires hire millionaire builders that they play golf with at Newport Country Club..
all my experience has been with working people from widows on fixed incomes to doctors and lawyers..
they all understand that i am not in the finance business.. on new construction i typically get 10 payments.. and i'm ahead on day one and intend to stay there until the final payment..
those that want me .. will find the lending institution that will work with us..
when i give them a head's up ... they always come back to me and say.. yes , the bank figured a way for this to happen
when i started..the guy i was working for was building panelized houses.. he was always working on the three-draw system.. foundation... roof ... and finish
what a stupid way to build a house... we had the shingles on the roof before half the walls were up... and there was never any trim in place..
convinced me ..
when i went on my own .. i got caught a couple times into thinking .... well, that's just the way things are done.. until i got smart and started writing my own payment schedules.. and they are almost never " completion" schedules.. they are "start " schedules.. <when we obtain the permit>
<when we start work> <when we pour the foundation>
<when we are ready for rough-in>
as for <performance bonds>.... hah.. i can blow those out of the water real fast.. i just ask the owner if he wants an additional 6% added to the cost of construction
performance bonds are almost never used in residential construction in Rhode Island
course.. you think it's because we are dealing with the very wealthy.. i think it's because we have enough experience to speak with authority.. and we have a track record to back it upMike Smith Rhode Island : Design / Build / Repair / Restore
What security to you provide when they hand you 50 grand and havent turned a tap?
Tim
Edited 10/20/2005 7:56 am by Mooney
I agree with Mike, I've told all of my clients, and their bankers that "Banks don't build buildings, and I don't lend money". I was burned to the tune of $37000 early on in my business on credit when a customer didn't pay. As a result, I never run credit for customers. I explain to them that when they see product on their jobsite, it's an asset because it has been paid for, up front. Same story to the bankers, and I've always been able to work with them. I know most of the local bankers, and have a track record of not taking off with the money. It always works out somehow. Deposits from 5000 to 100000 dollars, but I never start with my money. The bank usually agrees anyway, because that's one draw period (earlier) in their mind(s) that they can charge interest for. I'm not the bank.NateThe only thing I practice in moderation is my excess.
Ever heard the phrase, "My word is my bond"?There are stil bankers who believe that one too - after they have a track record of knowing you.Story?
When I moved here, I brought with me a letter from my previous banker in last location. That banker had also known a real estate agent that I'd done a lot of work for out there and had helped sell houses. Needless to say, they thought highly of me and the letter said so.The first loan I went in for here was to help bail out a friend of the family back in CO to the tune of about 1200bucks. This person happened to be a single girl who was more acquainted with my wife than i.But something got lost in the translation when I explained things to the young loan officer I was facing. He leaned forward, and asked, "Let me get this straight. you want to borrow 1200 to send to a single girl out in CO, and you *?don't want your wife to know about it????*"I had to laugh as I could see what he was imagining and cleared things up - that is was more my wife's idea, etc. and he wrote the loan wjhich I repaid in six months easy. We did more businmess over the next couple of years, then he took a job with another bank upstate for a few years, then came back here where I saw him again a couple times, and he has now been promoted all the way up to president. He's always made money on my loans and has taken my recommendations on a couple items, and we can still get a chuckle out of that first miscue, but I could start building a house tomorrow and do the paperwork on the way based on a telephone call with him. My clients have also learend that if they go to his bank and state that I am their builder, there is suddenly no hesitency in loaning the money on whatever scedule they need.Like Mike said, it is track record, reputation, and confidence.
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I understand you and Mike both. I think its good that you two are able to operate the way you do for your benifit. I never had any problems with it except If Im the third party.
Story;
I did a business deal one time with my parents . She was a step mother and she did the business end for my fatrher was disabled. They needed out of the business which was a store. I wanted to help them out so I wanted to purchase it . That was many years ago before I was established my self. The store had no records good enough to take to the banker and he refused . I tried another banker and he refused. DW advised against it but I wanted to help. My step mother told me what the business made and I also paid some blue sky with out arguement. They financed the business after I gave them a double lot "on the water" which was valued at a lot of money. They sold it and got every penny I said it was worth even after a realator.
My store had out dated stock . [I didnt know and took her word] Health food .
I worked for nearly two years and didnt take a dime from the store but hired people to work in it. I ran a full time business besides it and donated every dime I made to the store . That store ate up every dime I put in it . When tax time came DW wrote it out of her account becuse there wasnt enough money to cover it . My mother had grossly lied and I had loads of proof. No wonder there wasnt a set of books! I lost 45000 in that endevor beside losing two years labor. I had my azz whipped like it has never been done before . If Ive got any thing to say about it , no one will ever get the oportunity again.
From then on after I sold the business I vowed I would only go by the numbers and trust no one . Never again. I told my banker the story and vowed his interrest would also be my own. I would be happy if he ever turned a loan to me down for he was seeing somthing I wasnt. My banker and I are on the same side and he has advised me many times. For that reason I only do deals signed sealed and delivered. Also so if I ever go to court I hope my lawyer will be proud of the case Ive given him with plenty of evidence. Ive never been turned down since and knock on wood have never lost a dime since but Im very frugal and careful.
I dont build houses for other people because of this very same reason. I own them when I build . They pay me my price for the house or they dont get it , not even a key till Im paid in full. Burned once but not twice. The rental business is also more attractive to me because of control.
Ive had plenty of people I trust to hand me cash money and Ive stopped them from walking away to watch me count it again after they dealt it to me counting it . Just the way Ive become I guess.
If I were the owner of a house I would front the money and solve the problem , but not with out securities . I guess you and Mike would not work for me . <G>
Tim
"The rental business is also more attractive to me because of control."ouch, Now you are talking about where I got burned and stay awayTo each his own
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"ouch, Now you are talking about where I got burned and stay away"
DanT and I have talked about that . Ive heard many stories where people got burned on one rental or a few. Mostly its no more than three. If they are bought right and nothing was over looked 8 rentals will more than carry small losses. In other words you can take a hit on one and the "house wins" , like in a casino. So many people lose their deposits that actually you can have 115 percent occupancy. At 15 percent of 12 houses per month I can take a sizeable hit such as ruined carpet in a whole house . Thats about the biggest threat other than a condensor unit . Holes in drywall and busted windows are nothing . One time a man went through a shower unit but it was covered by warranty. [ I keep all papers] People move early sometimes and I gain rent often getting double rent of a week. I try to just chip away here and there making gains all the while they are paying the principle and Im not plus making now about 300 per peice profit. Every year inflation causes them to be worth more which is kinda like blue sky. I evict in 5 days after rent is due and state it openly. Ive evicted under a hand full as they normally pay or move on their own. I dont listen to any stories and frankly dont care to hear any of them. I just want my money and I want it now or get out. After all Im not a bank. That usually does it.
Tim
eight plus units means diversification and I understand the blue sky which is the only good around here. Costs are high and taxes worse. Renters rights trump landlords here. I've here stories of 60 days plus for an eviction. It was in Colorado that I did a couple mobile homes for rent. My worst problem is that I wasn't enough of a business man back then - too much good guy with soft heart. my thanks was to get people who thought their purpose in life was to trash places just before moving out.
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Piffen - I read both your "story" and Mooney's. I have a bunch of units going as rentals in VA, trying to get 2 family ready in NY too.
Question - Do you ever try to "help somebody out" anymore, or are those days just gone and done forever? Not to be religious, but I believe I have a little more than many, and I have a responsibility to help others. (Yes, I have been burned before, but that is not the point.)
Don K.
My helping I do on individual cases out of profit and not in such ####way as to jeopardize the business
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I was really gonna mention that and decided not to. But since ya started it <G>
Youre too nice a guy . And My Word Is My Bond would just dig you a deeper hole in this case but would be wonderful to have in a doctor or builder. I cant say enough good things about you but you aint cut out to be a landlord. <G>
Im going to tell you somthing Im not proud of ;
My tennants may respect me but several out of fearing . Not because Im a nice guy which to them I normally dont end up being . I notice that they are on guard when I drive up or they open the door. I wish it wasnt that way and Ive tried to work on it but then I end up busting them over trash , uncut yard or somthing . Seems they all have had a dose of me they dont like at some time or another. So I remain the trooper that would give his mother a ticket to them. I dont have any listening skills around them and pretty much do the talking which is somthing I want from them and then Im gone. Ends up being a business visit and I dont chat . I dont want them close to me at all. If I were to guess I would say they would pay me and slip anyone else . Ive told them they are better off paying me first unless they are of course in the process of moving then I will track them down. What ever it takes I guess but Im sure not in a popularity contest . I would lose big time . I walk the inside of the house every 30 days whether they are there or not and its in the contract. I pick up on abuse right off and send them a certified letter of quit to rent , which is a dear John letter and its time to move out from my findings.
I dont think you are like that is all.
Tim
I'm sure you are right there, but to temper that a little...I did repair and service work for two sisters in my town in CO. Unigue situation where two sisters had married tow brothers. The brothers were partners and had done well in economic boom times following WW2 and thereafter so they ended up owning a lot of the town. After they retired, they divied up the properties and then died soon after. The widows then had the property to rent out. One was a sweet old gal who would talk my ear off every time I saw her. She took care of her renters and sent them birthday cards and made sure their kids were healthy anmd all that stuff. She charged too little for rent, and I told her so. For the most part, her renters were loyal, respected her, and took care of their places well.The other sister was a crone to put it politely. Mean cheap b!tch to put it anopther way. She charged much more, constantly tried to bargain me down in price, and wanted me to do the minimum on the properties. Landlady out of a Charles Dickens novel. It was my opinion that her reters were always in a hurry to get out short term and never did a thing to takle care of things, so her maintainence cost were higher and her vacancy rates worse. All this is my subjective observation. Maybe not accurate, but the crone lived in a fine large house alone with a fence and gate, and the sweetie lived in a small cottage with her cats, dog, and freinds nearby. Anyways, I am a bit the same way with help on the job. I'm fair and reasonable, but there are plenty who would not want to work fifteen minutes around me. I can recognize them by the same furtive attitude your renters show you, and they don't last. The business attitude is learned and has it's place, but it is not the real me. I'm more the coffee house schoolteacaher type, personality wise.
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You are probably reading too much into that thing about millionaire clients. Most of them still let bankers carry paper on their homes for many reasons that I know you know about, and I still did business that waya before I got to serving that level of client.
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I'm with you on this one Mike. That philosophy fits me perfectly. I've had enough problems financing the builders for all these years and I'm not about to start financing homeowner/builders.
The bank can have all the terms that they want. They are a business and they need to do whatever makes sense for them. I'm also a business and need to do whatever makes sense for me. It's up to the homeowner to balance the two differing requirements. Essentially, they are a third consideration and have to do whatever makes sense for them.
Like you, I'd rather walk than put my money into their control.
blue
Why is it that you and I can both run nice profitable businesses by doing it our way and not the HOs way or the banks way, yet every time this subject gets discussed, all the responces tell us that it can't be done that way?I think it is all about where to draw the line and put your foot down. If the HO wants what I can provide, he finds the way to do it. If he can't, there is somebody else waiting in line.
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The builder signed the bank's paper. Probably a big mistake if he doesn't have either (a) the money to float the job or (b) a secondary arrangement with you to pay him some of the money directly. What does his contract with you (if any) say about payments? Did you sign anything indicating that you would pay from his invoices, or from a payment schedule other than the bank's? If so, maybe you should bring some cash to the table to close the gap.
Last time I looked at a bank loan deal there was not even a contract between the owner and the contractor... just the bank's paperwork.
"national mortgage lender" says a lot. You should have gotten a loan from a local source. That shortens the time from work finished to check cut.
Perhaps you should have gotten an extra $20k loan so you could pay ahead.
I am a custom home builder with projects form $350,000.00 to $1,000,000.00 +
We have been scrutinized by several banks as to our financial standing, credit rating and business dealings with vendors and sub-contractors. We pass with flying colors in all catagories, including a miniimum of 10% capitol (cash) reserve avaliable per project. In additiona, we have a credit line within our business checking of $50,000.00 for interupted cash flow.
Depending on cash flow, we generally take a 0% - 3% downpayment, dispersed by the bank. This is usually from the Homeowners funds, as banks rarely fund 100%. There is no interest as it is Homeowners cash funds. The 3% covers permits, soil test, engineering, site prep, etc., which we call builder mobilization.
Except for this mobilization funding, we do not receive additional funds until we completed a percentage of the work, ie. foundation, framing, roof, etc. Sometimes the draw items can be drawn on a percentage. For example, on some of our larger homes, the frame labor and materials draw may be $85,000.00 - $140,000.00. We can usually draw percentages of this amount. For example, in the first frame draw we may draw first floor walls complete, floor joist and sub-floor complete, second floor walls and ceiling joist complete or abut 35 - 40 % of the total frame draw. Draws are usually limited to one per month.
Our clients are personally responsible for purchasing allowance items like light fixtures, plumbing fixtures etc. They do not get reimbursed until our mechanics install the items and the bank inspects the installatiion.
All that said, I have learned that the builder must put out his own credit or cash in order to build the house. As has been said, a good builder will have capitol reserve, good credit and accounts with material suppliers. Vendor credit is usually extended for 30 days, and some sub-contractors will not expect payment for 30 days. Other sub-contractors will need to be paid weekly.
In your case, the builder signed off on a draw schedule that supercedes his contract, and he must adhere to it. If he is worth his salt, he will find a way. If he is unable to carry the burden, I would suggest you have a meeting with him and your banker to find a peaceful solution. If he walks, or you fire him, cost can greatly increase, far beyond the cost of a last resort supplemental loan.
I also suspect that the bank being the one to blink first is a long shot. Especially with "national" which makes me think not your local Joe.
While that is the "book answer" to how things are usually done, it's also the basis for my argument for builders and bankers to become good working partners. They can alleviate each others headaches. While the bank might say we won't allow a draw for anything we can't see as complete, in reality, if there's a good working relationship and they know the guy isn't going to abscond with it, getting money for work to be done can happen. All in the relationship.
Or maybe just an argument for how stubborn I am. I won't fund it, period.
"If you pick up a starving dog and make him prosperous, he will not bite you. This is the principal difference between a dog and a man." - Mark Twain
Been there done that.
Owner usually needs to finance the foundation on his own to get to the first draw from the bank. After that it should work out.
Eric
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Tell me why 'should' that be? I don't care and can do it either way, but if I am going to finance somebody elses custom house, I am going to add the interest rate and a profit for risk on top of the cost of the house. in this case, it sounds like the builder did not figure that in, and will now run 2% or more behind all the way through. This will huirt him unless he already has a generous profit percetage built in to his price. other wise, it could shouw in attitude, quality of work, or schedule.In the current building climate, I think advance to secure materials pricing is toitally reasonable, since things are escallating so much.
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A good supplier should have a 10-30 credit set up for the homebuilder...buy your materials have them dumped on site then get your draw after 20 days or so
So you wanna get three top six months worth of materials delivered so rain and thieves can have their way with them? That is fine reasoning for a small job that turns over in a month.I can handle the amt needed to start a half million dollar house, but if I am the banker, I am going to make the money for carrying it.
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Heres Txlandlord`s way of handling it ,
"Depending on cash flow, we generally take a 0% - 3% downpayment, dispersed by the bank. This is usually from the Homeowners funds, as banks rarely fund 100%. There is no interest as it is Homeowners cash funds. The 3% covers permits, soil test, engineering, site prep, etc., which we call builder mobilization."
Do it any way you like , the bank aint writing 100 percent and money up front.
I dont buy it that the builder in this case never heard of giving security if hes been around the block but I guess we can disagree.
Side bar ; you would naturally hold up for other builders becuse you are the way you are and cant help it . <G> You said in the other post you didnt do any thing special for Imerc. Thats simply the way you look at it not the way I do or him for that matter . I on the other hand came under fire as an inspector when builder after builder argued their case. I dont have a clue what it is with that . Buy a dagum code book , read it and weep for all I care . I cant count the times I heard , " Ive never heard of that one ". BS!!!!! Tell me a lisensed builder never heard of code compliance . All the dummy had to do was look it up . I wasnt speaking spanish to him. After that happened repeatedly I caught on. They were lieing to me in hopes of testing me that I might not be sure and say ah go ahead. Thus saving them money. Same thing as trying to talk your self out of a ticket. You can say, I wasnt going that fast , which is a lie if he correctly clocked you. You dadgum sure was if he did it right .
Piffin a lot of people lie including every trade. Should I have told him that builder told one ? Probably not but I would bet money on it if we could proove it . I guess to that an inspector gets hard after so much lieing and having to go to the truck and having to lay out code on the hood as wasted time . I have often thought it should cost 50 bucks in cash to question an inspector and get it back if its reversed. Be a lot less lieing .
Tim
I admit - I am the way I am, and I can understand your viewpoint, but just ain't ready to catagorically call the guy a liar.I'm the kind of gut that when I go to the bank for the loan review, the bank officer says, "Wow, nobody ever has all the details right like this the first time!"And when I go to the doctor,they say, "You have a perfectly classic text book case of X"and don't forget, I have exactly 2.47 children;)
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Right, banks do not fund 100%. The homeowner usually funds 10-30%. The bank usually requires these Homeowner funds be deposited and avaliable for construction draws, as the bank will be the real owner of the home until the mortgage is paid off. They want to make sure the 10-30% is built into the house, so they control these funds through the draw schedule.
The Homeowner benefits as his cash contribution reduces his mortgage payments, and, when the Homeowners funds are dispersed via the construction loan before the bank loan funds, the Homeowner does not pay any interest on his construction loan until the builder starts drawing on the actual bank loan funds.
For example, we recently built a home with build cost of $355,000.00. The Homeowner was required to fund $70,000.00, with his money on deposiit and made avaliable for construction draws through the bank. The bank construction loan was actually $285,000.00 of the $355,000.00. We drew our mobilization funds of 3% from the bank. The 3% came from the Homeowners $70,000.00. We continued to draw from the Homeowners $70,000.00 on deposit at the bank until the Homeowners contruibution of $70,000.00 was exhausted. At that point the bank loan funds of $285,000.00 were avaliable. The Homeowner paid no interest on the construction loan until his $70,000.00 was used and built into the home, and funds were used from the bank loan amount.
My explanation of our scenario is from 35 years of experience, multiple custom home projects per year, and relationships with 20 - 30 banks, local and national.
The local banks here do not require the HO funds to be controlled by them. They do require a show me the money evidence of the fact they do exist, but HO conmtrols disbursment
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In my experience, it is good for the banks to control HO money, as it protects you. The bankls makes sure the money goes into the home through the builder.
How would it protect me? I choose not to work with the kind of flaky customer who will spend my money on their own christmass vacation.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
Just black and white business...leaving nothing to chance. whil;e I may like to think I could sort out the good folks who will keep their word and have the funds when I am ready to draw......I have made errors in personal judgement in the past. I have found what works for me, the building business has enough risk. It is not my intention to debate the issue, just share from my experience so that others may benefit.
If has worked for me such that I do not need to post about the problem, and ask for advice and perhaps a soultion. Selah. Selah is a Hebrew word for "pause and think about that".
Not only have I been around the block, but I built most of the houses on the block.
Some before you were born.
Sorry guys, I thought I was under attack, perhaps some left over paranoia from my past.....but some of the statement here is probably true.
Edited 10/19/2005 8:51 pm ET by txlandlord
hahaha , why thanks.
How old did you think I was anyway?
Im not Gunner , Im the other one .
BTW, I have no idea why Im getting the feed back you are giving me tonite in both threads , but hey I can roll with the flow.
Tim
Perhaps I misunderstood your post when I replied about having been around the block.
I did not mean to cause trouble, or offend you. Aside from that I am new to breaktime, use dial up (high speed satililite is ordered), and busirer than a one armed wall paper hanger.
I do have a lot of experience, and my intentions are to provide information from my experience. Perhaps things are done different in other places, and / or perhaps there is some degree of information I can provide from my real and actual experience where others can benefit. I have been in this long enough to have found effective ways to deal with banks and homeowners.
I am not sure what you are referring to about my reply in other post.
Either I'm confused, you misread/understood my post or me yours.
In a later posting you stated:
I don't argue against the banker's position. That is perffectly reasonable. bUt how cana bank loan 100% on a custom construction anyway? The answer is that they don't. The owner has to be coming up with a portion, which is surely enough to get the ball roling.
Which pretty much sums up the way I have done builds for clients.
They have enough cash to get me going long enough to get the first draw which I think is usually at completion of foundation.
Once that payment comes in it rolls pretty smoothly.
If I could finance someone elses project I would be building spec myself and not for them.
EricIt's Never Too Late To Become
What You Might Have Been
[email protected]
It took a while for me to sort this out. I see why I confused you. I misunderstood one of your comments, maybe mixing it's meaning with someone elses comments along there. I haven't intended to be adversarial here, just examining the whole deal and offering an opinion. Minbe doesn't have to be anybody el;ses.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
I haven't intended to be adversarial here,
LOL. That's fine, I didn't take it that way at all.
Just wanted to be clear. The thread is a bit muddled to my thinking, or perhaps I'm just trying to speed read through it.
You're probably the last person in here I would get in an argument with..........and nice thread from Ireland. I have a bit of catching up to do but it is very nice to read. Thanks.
EricIt's Never Too Late To Become
What You Might Have Been
[email protected]
In my experience, which is limited, the bank's practice is standard and the builder's request for money up front is less common.
You want a house but don't have the money. The bank has the money. To get the bank's money you are offering the home as collateral. The bank is not going to lend out money ahead of the value of the home, so they'll pay for work as it is finished. They are being reasonable already by paying all through the job instead of waiting until the entire home is finished.
The bank's position is reasonable. As a depositor, I don't want the bank to be taking risk with my money, so I'm happy they don't loan out money that is unsecured.
Another reason to not give the builder money too far ahead is that it lessens the incentive to stay on the job with diligence.
Builders do have lines of credit and generally don't owe until 30 days after billed, which on materials ordered early in the month can get nearly 60 days to pay (almost 30 before billed, then 30 days more to pay). So with many suppliers it costs the builder nothing to wait till progress payments are made. True, some builders don't have the financial strength to deal with the few suppliers that he doesn't have credit with, but payment terms and schedules is one of the many things you consider when choosing a builder in the first place.
The other thing to remember is that your money is supposed to go into the house, too. Banks typically only loan on 80% of the value of the home. The 20% is yours, and that's how you pay the builder up front if you can't find one who will accept payment after the work is done.
I don't argue against the banker's position. That is perffectly reasonable. bUt how cana bank loan 100% on a custom construction anyway? The answer is that they don't. The owner has to be coming up with a portion, which is surely enough to get the ball roling.As far as builder's credit, my suppliers always bill on the first and expect to be paid on the tenth,or forfeit your discounts. Ten days is a lot different than sixty. There is another supplier that I seldom use that can sometimes be similar to what you describe, up to 50 or sixty days depending where in the cycle you fall, but their prices are much higher and they don't do discounts either, so we come back to the point that money costs money. Since it is the owners dream, let him pay for it one way or another.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
When I do the documents, I make sure the AIA contract is modified so that the builders schedule for building and payment is the same as the bank's. I attach the bank's as an exhibit.
Regards,
Scooter
"I may be drunk, but you're crazy, and I'll be sober tomorrow." WC Fields, "Its a Gift" 1934
We had a timber-framed custom house built last year - a few items for thought:
As far as prepaying for materials, your builder should have a line of credit at several suppliers (lumber, bath/plumbing, flooring, etc) & should have a network of reputable subs lined up. Payment to vendors typically require 30 days w/o addt'l fees.
At each draw, we would approve and indicate payment directly to the builder - check gets deposited same day in most cases. Positive and timely cash flow is your builders concern.
Hope this helps
Dave Im glad it worked out.
But you got lucky.
"As far as prepaying for materials, your builder should have a line of credit at several suppliers (lumber, bath/plumbing, flooring, etc) & should have a network of reputable subs lined up. Payment to vendors typically require 30 days w/o addt'l fees."
Thats not normally a free service just becuse its so. Remember whether he has all the credit in the world , he still owes for those materials and services before he gets a dime in your senario. Shall I say your builder got lucky becuse you the good client paid him which he didnt know for dead sure?
Story;
Down my street a big enough builder as you describe had the credit big time. Building for a rich man that owns three motels clear. No loan , but said cash on delivery of product in draws. Had a contract. Owner out of town working at motels in music city.
Builder gets footing in and framer shows . Builder asks for draw but owner cant get away. Builder tells framer to go ahead and its framed complete. All this in less than 30 days . This builder can get it on and has the biggest subs around. Builder has the good sense to stop and wait . Pulls off the job . Owner shows up and says hes not paying one red dime . Doesnt like it and doesnt want builder back on the property. Owner has corporate lawyers in music city. Some how O is alowed to finish the house complete and move in. then a year passes . Then several months. Case comes up and O gets it put off with house full of lawyers. Another year passes and builder goes bankrupt and his lawyer splits . Takes case to court by himself . Judge rules for half the money to be paid in segments for some reason. I dunno why. Other court locks that money and builder is somewhere South working for some one else running a crew.
Tim