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I found a community that I really like. The builder has some great lots left and I found a model that I like. I will be paying cash. A couple of questions,
1) how is the cash paid on new construction, in payments as things are completed? when is the final amount due?
2) what kind of leverage does this give me for negotiating upgrades?
3) do I still need an appraisal?
From what I understand, this varies from area to area.
In my location, the builder owns the lot, handles the financing of the construction, and then sells you a finished product. But in other areas, the buyer buys the lot and takes out their own loan (or not, in your case) and pays as the house is built.
I wouldn't want to do it such that the builder owns the lot and you are paying for the house being built. What happens if the house doesn't get finished, or something? You would have all the money invested, but none of the rights.
However you end up doing it, if you are going to finance as you go, the way the bank does it in our area is to visit the house every 30 days and pay out the % of the costs for the % of completed house. The first payment covers things like plans and permits. Then, if the foundation is in, framing is done, trusses are on, roof is on, they pay for those things. The next month, if the electrical, plumbing, and drywall are in, they pay for those (I've left a lot of things out on these lists, but you get the idea). The final would cover all the final things, like paint, carpet, cabinets, countertops, etc. For you as the buyer, the final would also cover the builder's profit and any commissions. That would be due upon closing or issuance of the certificate of occupancy, depending on whether you already own the lot or not.
What you are wanting to do isn't all that simple, and it would be easy to be taken advantage of. For example, are you going to pay the builder or pay the subcontractors directly? If you pay the builder, and he doesn't pay the subcontractors, they can lien your property, and you'll end up paying twice. However, if you pay them directly, you'll be responsible to give them a 1099 at the end of the year (I think, I'm not a tax attorney, so not sure if individuals have to do this or not). If you don't have an agent representing you, I would suggest you have a real estate attorney review everything.
Paying cash does give you more negotiating for upgrades. Builders typically won't negotiate the price much, especially if they build the same model often, because it lowers their comps for future sales, but they will often throw in extras as a negotiating point.
I would have a "plans and specs" appraisal done, at least, to make sure that what you are intending to build is worth what you are going to pay for it. A final appraisal probably isn't necessary.
As Lacerta said, you want to pay as construction is going along. Contact your realtor (if you used one) or an attorney and set up the plan to pay on a completion basis. You will essentially be taking out a loan, or putting all of your money in escrow to protect it while the construction process is moving along.
A final appraisal isn't necessary, but a final inspection to make sure everything is up to code for the community, city or municipality would be a good idea before making your final payment. Even then, I would recommend holding some in escrow for down the road repairs that might occur in the first year. Sort of like an Buyer's or Builders Warranty, so that they'll come back and make minor repairs (cracks, nail pops, settling issues if necessary) within so many months of you moving in.
You pay a deposit, usually 10% of contracted price.
Then you pay upon completion of phases. Before closing, you should have paid 90% of contract price.
Last 10% due at closing.
I've built several homes cash. I open an escrow account and deposit 110% of the contract price. I'm pretty good about not going crazy with change orders. What's left after closing I spend on plants and window coverings.
Do have an attorney review your contract. They are often written in favor of the builder.
You will be given allowances for things like flooring, cabinets, tile, etc etc etc. If the builder has a design center you can pick your upgrades from there and incorporate them into the original contract. Change orders are a PITA.
Thank you all - the lot is in a subdivision in Myrtle Beach, SC. The builder has exclusive rights to build in the subdivision and offers a series of models to choose from. I will be signing with a buyers Realtor when I visit next month, and I'm sure he will have the answers to these questions, but I want to be prepared. If you can think of anything specific I should be looking for or looking to avoid I would appreciate it.
I'm buying in a subdivision. Other than a 10K deposit, I am not paying anything until closing. I went to the builder's design center and picked all the finishes, and I am visiting the house frequently and having them correct things that are not to my standards. But for now, it's still the builder's house. They are contractually bound to sell to me, and for me to buy it (subject on both sides to specific contract provisions). I have not paid up front for anything, conversely, I cannot install any of my own things in the house until closing - so they will not put in my lighting, etc. even when the things I wanted were not available through the design center.
At least in my case, I think it's pretty invisible to the builder whether I'm paying cash or financing, as they will still get paid in full the day of closing.
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