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Old 03-09-2015, 02:16 PM
 
Location: It's in the name!
7,083 posts, read 9,571,027 times
Reputation: 3780

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Quote:
Originally Posted by North Beach Person View Post
When does the house get built? Banks won't release funding to the borrower until closing and, if they're stupid or unlucky, they can lose that funding up until then.

The builder goes by what he sees, a loan commitment and starts construction. Then, at the end, no buyer money.

I'm by no means a defender of builders or developers but I see the business end of this.
But no one has said that a builder had to start building before funding is secured. What compels a builder to build on the promise of funding as opposed to actual funding? Again, what's the rush?

Why can't it play out like this (timeframes aren't realistic, just for reference):

Jan 1: Seller tells builder they have a buyer lined up.
Jan 2: Builder says great, let me know when funding has been secured
Jan 10: Seller gives builder 30% of DP with the rest in escrow if funding is approved.
Jan 10: Builder puts construction on schedule and dumps no more than 30% of the DP into pre-construction work.

Feb 15: seller says buyer couldn't secure funding.
Feb 15: Builder hasn't lost anything. Seller takes a 3% fee. builder keeps 30% for the trouble. Buyer gets the remaining 67% to perhaps come back later in the year or the next with funding as opposed to being broke and being placed out of the market for years.


As opposed to it playing out like this:

Jan 1: Seller tells builder they have a buyer lined up.
Jan 2: Builder says great, I'll start building now.
Jan 10: Seller give builder the entire DP to start construction.
Jan 10: Builder puts job on the schedule and orders everything to start building.
Feb 15: Seller says buyer can't secure funding.
Feb 15: Builder: " Well, at least I got the DP " Buyer: " "
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Old 03-09-2015, 02:36 PM
 
Location: On the Chesapeake
45,380 posts, read 60,575,206 times
Reputation: 60996
You're mixing sellers, builders and buyers up.

I'm a builder and you come to me to build you a house in a development I'm building. You have an approval letter from a bank with a loan commitment.

We sign a contract for me to build you a house to be completed in 9 months (yes, that long). The house is $750K, you give me $50K as a deposit.

I start construction: $30K for site prep, $20K for water and sewer taps, $10K to BGE/Pepco to bury lines. I take out a construction loan secured by your contract to buy.

I build your house, total cost likely @ $650K to $675K, final inspection is done, closing is scheduled next week. Your loan underwriter runs your credit one last time and discovers you dropped $25K for furniture on your Master Card. You no longer qualify for your $750K mortgage.

Meanwhile I, the builder, have been carrying a construction loan secured, if you remember, by your original loan commitment for which you no longer qualify.

I have no buyer, I have at least $650K in sunk cost for a house for which I have no buyer, and I'm making loan payments for a house I built for which there is now no buyer. What I do have is your $50K deposit which didn't even buy one nail for your house.
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Old 03-09-2015, 02:54 PM
 
23,838 posts, read 23,123,773 times
Reputation: 9409
Quote:
Originally Posted by North Beach Person View Post
You're mixing sellers, builders and buyers up.

I'm a builder and you come to me to build you a house in a development I'm building. You have an approval letter from a bank with a loan commitment.

We sign a contract for me to build you a house to be completed in 9 months (yes, that long). The house is $750K, you give me $50K as a deposit.

I start construction: $30K for site prep, $20K for water and sewer taps, $10K to BGE/Pepco to bury lines. I take out a construction loan secured by your contract to buy.

I build your house, total cost likely @ $650K to $675K, final inspection is done, closing is scheduled next week. Your loan underwriter runs your credit one last time and discovers you dropped $25K for furniture on your Master Card. You no longer qualify for your $750K mortgage.

Meanwhile I, the builder, have been carrying a construction loan secured, if you remember, by your original loan commitment for which you no longer qualify.

I have no buyer, I have at least $650K in sunk cost for a house for which I have no buyer, and I'm making loan payments for a house I built for which there is now no buyer. What I do have is your $50K deposit which didn't even buy one nail for your house.
Yep. Nailed it again. That's exactly how it works.
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Old 03-09-2015, 03:05 PM
 
Location: It's in the name!
7,083 posts, read 9,571,027 times
Reputation: 3780
Quote:
Originally Posted by North Beach Person View Post
You're mixing sellers, builders and buyers up.

I'm a builder and you come to me to build you a house in a development I'm building. You have an approval letter from a bank with a loan commitment.

We sign a contract for me to build you a house to be completed in 9 months (yes, that long). The house is $750K, you give me $50K as a deposit.

I start construction: $30K for site prep, $20K for water and sewer taps, $10K to BGE/Pepco to bury lines. I take out a construction loan secured by your contract to buy.

I build your house, total cost likely @ $650K to $675K, final inspection is done, closing is scheduled next week. Your loan underwriter runs your credit one last time and discovers you dropped $25K for furniture on your Master Card. You no longer qualify for your $750K mortgage.

Meanwhile I, the builder, have been carrying a construction loan secured, if you remember, by your original loan commitment for which you no longer qualify.

I have no buyer, I have at least $650K in sunk cost for a house for which I have no buyer, and I'm making loan payments for a house I built for which there is now no buyer. What I do have is your $50K deposit which didn't even buy one nail for your house.

Okay. Thanks for taking the time to explain. That makes sense. I learned something new today.
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Old 03-09-2015, 03:24 PM
 
Location: On the Chesapeake
45,380 posts, read 60,575,206 times
Reputation: 60996
Quote:
Originally Posted by adelphi_sky View Post
Okay. Thanks for taking the time to explain. That makes sense. I learned something new today.

You're welcome. Sometimes the retired teacher still has it.

More common is that the interest rate goes up. It's amazing how many people really stretch when buying a house (and the way real estate is in this area it's really common for a number of reasons) and the carnage caused by a rate increase of 1/4% or 1/2%.
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Old 03-09-2015, 04:09 PM
 
Location: Metro Washington DC
15,431 posts, read 25,814,526 times
Reputation: 10450
Quote:
Originally Posted by North Beach Person View Post
You're mixing sellers, builders and buyers up.

I'm a builder and you come to me to build you a house in a development I'm building. You have an approval letter from a bank with a loan commitment.

We sign a contract for me to build you a house to be completed in 9 months (yes, that long). The house is $750K, you give me $50K as a deposit.

I start construction: $30K for site prep, $20K for water and sewer taps, $10K to BGE/Pepco to bury lines. I take out a construction loan secured by your contract to buy.

I build your house, total cost likely @ $650K to $675K, final inspection is done, closing is scheduled next week. Your loan underwriter runs your credit one last time and discovers you dropped $25K for furniture on your Master Card. You no longer qualify for your $750K mortgage.

Meanwhile I, the builder, have been carrying a construction loan secured, if you remember, by your original loan commitment for which you no longer qualify.

I have no buyer, I have at least $650K in sunk cost for a house for which I have no buyer, and I'm making loan payments for a house I built for which there is now no buyer. What I do have is your $50K deposit which didn't even buy one nail for your house.
When you do find a buyer, won't you make that $50K back again? How long is that house going to sit there waiting for a buyer in this market?
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Old 03-09-2015, 04:21 PM
 
Location: On the Chesapeake
45,380 posts, read 60,575,206 times
Reputation: 60996
Quote:
Originally Posted by dkf747 View Post
When you do find a buyer, won't you make that $50K back again? How long is that house going to sit there waiting for a buyer in this market?
Yes, but you've been carrying it for how long? Who knows? The house may sell tomorrow, next week, next month or next year.

What's the buyer's penalty? You've made me carry a $600K loan (remember, commercial loans have higher interest rates than home loans) for 9 months and now you can't complete the contract.

As I've said, I hold no brief for developers or builders (in fact a developer filed a SLAPP suit against me a number of years ago, but they're businessmen. This house wasn't a spec house, they expect them to maybe sit on the market (and the spec industry is almost dead right now) but a house for which there was a pre-build contract.

The market for new construction right now isn't real good. Too many foreclosures still out there dragging prices down.
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Old 03-10-2015, 08:28 AM
 
Location: Metro Washington DC
15,431 posts, read 25,814,526 times
Reputation: 10450
Quote:
Originally Posted by North Beach Person View Post
Yes, but you've been carrying it for how long? Who knows? The house may sell tomorrow, next week, next month or next year.

What's the buyer's penalty? You've made me carry a $600K loan (remember, commercial loans have higher interest rates than home loans) for 9 months and now you can't complete the contract.

As I've said, I hold no brief for developers or builders (in fact a developer filed a SLAPP suit against me a number of years ago, but they're businessmen. This house wasn't a spec house, they expect them to maybe sit on the market (and the spec industry is almost dead right now) but a house for which there was a pre-build contract.

The market for new construction right now isn't real good. Too many foreclosures still out there dragging prices down.
I think I understand, but I'm having a hard time being sympathetic when comparing you carrying a loan for a few months to someone losing their life savings. Something isn't fair about that. I get that they should have read the contract and all, but something seems wrong with the way this works.
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Old 03-10-2015, 08:46 AM
 
Location: On the Chesapeake
45,380 posts, read 60,575,206 times
Reputation: 60996
I'm not without sympathy for the buyers, far from it, but I also see the business aspect of it from the builder's side. Many have deep pockets to absorb this, most don't.

If you figure a commercial loan is at a higher interest rate than a mortgage loan, and the builder is carrying that for the entire time of construction, it won't take long to eat up that $50K deposit, especially when it went out the front end for site prep and utilities to the property.

The water and sewer taps were likely paid for when the site plan was approved so the builder has been carrying that for years in some cases.

We have a builder in town here just finishing up a 130 unit townhouse development. He had to pay for all those sewer and water taps when the site plan was approved and he started to pull permits (they were less back then, $13K). That was 12 years ago.
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Old 03-10-2015, 08:28 PM
 
Location: DMV
10,125 posts, read 13,986,059 times
Reputation: 3222
One thing I want to run back that was said earlier. The excuse that a buyer in this instance doesn't have $500 for a lawyer to look over the document is complete hogwash. If you were able to save $50k for a home, then what is another $500 to you? You are basically using that money as insurance to get exactly what you want without loopholes. Putting a down payment on a house requires a lot of money. You won't find many home buyers who don't already have a significant savings so is it really unreasonable to expect people to get some help? I'm just talking about this from a buyer perspective.

From a business standpoint, I think it's unreasonable to take that much more from someone based on a contingency, but you can also lose your earnest money deposit buying an existing home too. It just really important to be knowledgeable or at least get someone that is, to protect yourself.
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