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A "deposit" that large is not reasonable. However, progress payments are reasonable. Talk to a banker about what they would release from a construction loan. If the builder is the owner, they have already had substantial expenses in the lot, architect, SDCs, etc. They may be pushing it a bit, but not as much as you think.
Builders normally work on a construction loan that is paid off when the house is completed or sold. At that point the house is mortgageable. A bank will not write a mortgage on an uncompleted house. To compensate for the higher risk, a construction loan carries a short term and a higher interest rate. As the end buyer, you are unlikely to have set up a construction loan with a bank. What the builder is asking you to do is to obtain a construction loan (or act as a bank) like you might have done if you contracted to have a custom home built. In that case, all the up front costs would have come out of your pocket instead of the builder's pocket.
If you aren't going to tell them to take a hike, you need both a banker and an attorney in your corner. You need a financial statement from the builder before you consiser handing them a quarter of a million bucks, and you need a construction budget and a proposed schedule of payments. A bank will not release payments from a construction loan for work that has not been done or moneys that have not been spent. An experienced loan officer can give you good advice about how construction payments are normally scheduled.
You do not have a construction contract with the builder like you would have had if you had initiated the project. Your attorney needs to guide you through setting one up, which includes the contractor selection process that you skipped. That's what the financial statement and project budget is for. You also need to inspect half a dozen of the contractor's completed projects and talk to their previous clients for references. It's not clear to me if the contractor and builder are the same company, or if the builder is just a developer.
What the builder is asking you to do is change horses in mid-stream. For a good enough deal, you can do that. Just don't hand over a quarter of a million bucks without knowing where the money is going. I think you would get title to the property as part of the deal. That way if the builder defaults you can hire someone else to complete it. If you own it, you are responsible for paying for all materials and subcontractors, so don't loan money to the builder, just reimburse them for expenditures. Once again, your attorney and banker can tell you how things are done.
A "deposit" that large is not reasonable. YES THEY AREHowever, progress payments are reasonable. The OP IS NOT FINANCING THE BUILDTalk to a banker about what they would release from a construction loan.You clearly have not read the thread! This home is underconstrution for a Parade of Homes marketing event, there is no reason for the OP/buyer to get involved with the builders lender! If the builder is the owner, they have already had substantial expenses in the lot, architect, SDCs, etc. They may be pushing it a bit, but not as much as you think. Pushing WHAT?
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ER MI GERD!
What nonsense! Hand over title? That is utter fantasy. Clearly some one that has NEVER EVER been involved in either a new construction deal or even the sale of existing homes. Hello? Closing? Lein holders?
Changing horses midstream? Handing over money? Hello ESCROW!
Last edited by chet everett; 01-09-2015 at 08:14 AM..
Following any of the advice laid out will likely kill this faster than a nuclear bomb. Builders don't want to deal with people that clearly do not understand how deals for new construcntion work and any threats to interfere with their lenders are a huge red flag that this "buyer" would be so unsophisticated as to really not capable of consummating this deal.
A "deposit" that large is not reasonable. However, progress payments are reasonable. Talk to a banker about what they would release from a construction loan. If the builder is the owner, they have already had substantial expenses in the lot, architect, SDCs, etc. They may be pushing it a bit, but not as much as you think.
Builders normally work on a construction loan that is paid off when the house is completed or sold. At that point the house is mortgageable. A bank will not write a mortgage on an uncompleted house. To compensate for the higher risk, a construction loan carries a short term and a higher interest rate. As the end buyer, you are unlikely to have set up a construction loan with a bank. What the builder is asking you to do is to obtain a construction loan (or act as a bank) like you might have done if you contracted to have a custom home built. In that case, all the up front costs would have come out of your pocket instead of the builder's pocket.
If you aren't going to tell them to take a hike, you need both a banker and an attorney in your corner. You need a financial statement from the builder before you consiser handing them a quarter of a million bucks, and you need a construction budget and a proposed schedule of payments. A bank will not release payments from a construction loan for work that has not been done or moneys that have not been spent. An experienced loan officer can give you good advice about how construction payments are normally scheduled.
You do not have a construction contract with the builder like you would have had if you had initiated the project. Your attorney needs to guide you through setting one up, which includes the contractor selection process that you skipped. That's what the financial statement and project budget is for. You also need to inspect half a dozen of the contractor's completed projects and talk to their previous clients for references. It's not clear to me if the contractor and builder are the same company, or if the builder is just a developer.
What the builder is asking you to do is change horses in mid-stream. For a good enough deal, you can do that. Just don't hand over a quarter of a million bucks without knowing where the money is going. I think you would get title to the property as part of the deal. That way if the builder defaults you can hire someone else to complete it. If you own it, you are responsible for paying for all materials and subcontractors, so don't loan money to the builder, just reimburse them for expenditures. Once again, your attorney and banker can tell you how things are done.
The builder is financing the build so the OP doesn't need to worry about construction loan payments and setting it up. When builders carry the cost of a custom build non-refundable deposits are the norm. The issue is that this is a custom build that wasn't initiated by the OP so it changes the dynamics of the situation a bit.
Non-refundable deposits are generally held in escrow. They aren't released to the builder until the house is completed, unless you are crazy and specify that they are released early.
The builder isn't asking the OP to change horses mid-stream and there won't be any changing financing midstream. The builder won't have time to complete the home for the Parade of Homes if that happens. The building is likely following common practice for a custom build for the area, but this really isn't a true custom build so the deposit needs to be negotiated. It might be that the builder agreed to come down on price with the term of the deposit. If the OP is willing to pay more than maybe the builder will forgo the deposit. It's a negotiation.
What nonsense! Hand over title? That is utter fantasy. Clearly some one that has NEVER EVER been involved in either a new construction deal or even the sale of existing homes. Hello? Closing? Lein holders?
Changing horses midstream? Handing over money? Hello ESCROW!
Shrug. I was a contractor for 25 years, but never got into building spec homes, so you may be right. Any time I got into multi-million dollar projects, the owner was always on the hook for progress payments with retention for oversights and corrections. The OP didn't say the builder wanted money in escrow, he said they wanted a quarter of a million non-refundable. The whole point of escrow is that you can get the money back if the builder defaults. You also can't even spell lien, so I have my doubts how much you know about it.
Shrug. I was a contractor for 25 years, but never got into building spec homes, so you may be right. Any time I got into multi-million dollar projects, the owner was always on the hook for progress payments with retention for oversights and corrections.
Spec homes are a different animal, Larry. With a spec home, the developer carries all the burden of cost until such time as the home is complete and the buyer purchases the house from the developer. Along the way, things may be renegotiated a bit for example if the buyer wants the house to deviate in some way from what was originally agreed upon. However, the builder would still carry the cost of making the change and would not be paid until the closing.
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Originally Posted by Larry Caldwell
The OP didn't say the builder wanted money in escrow, he said they wanted a quarter of a million non-refundable. The whole point of escrow is that you can get the money back if the builder defaults. You also can't even spell lien, so I have my doubts how much you know about it.
It's fairly safe to assume that the deposit would be held in escrow. The majority of real estate contract forms stipulate that from state to state. Also, I would disagree with you that the point of an escrow account is "that you can get the money back if the builder defaults." The point of an escrow account is to have a neutral party in control of the deposit funds in case there is disagreement as to what is to be done with them. Legally, an escrow agent cannot release the funds unless both parties instruct them to do so or they are ordered by the court.
Regardless, as I said in an earlier post, I would personally insist that the contract state if the builder is the party who defaults on the contract that the deposit would be refunded to the buyer. This would protect them should the builder go belly up.
Ah ok - so the $250k deposit is due to the fact that the home will be off the market during the 1 week POH period, which is usually the prime time they sell the property due to the amount of traffic they get - am I understanding that correctly?
The prime time to sell homes in the Parade Of Homes, is from the day the ground is broken until the end of the Parade Of Homes. It always brings a lot of look-lous as they are known in the business that like to look at homes they will never be able to afford to buy. On the other hand, it brings a concentrated group of potential and able buyers, that would never be possible to attract any other way. It is the Black Friday that stores look forward to all year, in the real estate world. After the end of the Parade Of Homes, it may take a year or more to sell an upper quality homes, and builders cannot afford to let their homes sit on the market that long, as it prevents their borrowing to build the next home, and gives them a big debt to service while waiting for the home to sell.
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If this is the case (and only difference), then one has to assume that the builder is "risking" that $250k by having the home tied up during a high traffic period - and by having that in a non-refundable deposit, he is therefore negating his risk. So that perceived value of selling and not selling a home during the POH is roughly $250k in this case.
The 20% down figure normally used in building high end homes, is so the buyer cannot back out at the last minute, and leave the builder stuck with a home that can take a long time to find a buyer. A 20% down type deposit, is not something that a flaky buyer (one that will never close) will put up if they are not going to close. If they back out at the last minute, it is money that construction lenders will see as making it possible to pay loan payments and costs to hold an unsold home for a long period of time, which will allow the builder to get construction money for the next home.
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I'm not disagreeing - just trying to understand where the builder's head is at. And that makes a lot more sense to me than how I viewed it previously.
There is not a big demand for homes in that price range in Utah. There are only 20 homes between $1,200,000 and $1,400,000 for sale in the whole metro Salt Lake City area which is an indication this is not a big market in that area. If a home is not sold by the end of Parade Of Homes, then it can be expected to sit on t he market a year or so. The builder has to get a big enough deposit placed in escrow, for it to make sense to take the home off of the market.
10% or so would be sufficient in a low to middle class neighborhood with lots of potential buyers. But high priced homes with a limited market requires 25% deposit (or fairly near rounded out), for it to make sense to a builder taking a home off the market before the Parade Of Homes really starts.
What nonsense! Hand over title? That is utter fantasy. Clearly some one that has NEVER EVER been involved in either a new construction deal or even the sale of existing homes. Hello? Closing? Lein holders?
Changing horses midstream? Handing over money? Hello ESCROW!
Quote:
Originally Posted by Larry Caldwell
Shrug. I was a contractor for 25 years, but never got into building spec homes, so you may be right. Any time I got into multi-million dollar projects, the owner was always on the hook for progress payments with retention for oversights and corrections. The OP didn't say the builder wanted money in escrow, he said they wanted a quarter of a million non-refundable. The whole point of escrow is that you can get the money back if the builder defaults. You also can't even spell lien, so I have my doubts how much you know about it.
My take on the situation exactly.
When I see a post with random words capitalized, I take it all with a grain of salt.
In this case, the builder wants a nonrefundable deposit of a quarter of a million to purchase a yet-to-be-constructed home at some point in the future.
You don't ask, you don't get.
But with that kind of money involved, I'd think having a bank involved would be a wise move.
When I see a post with random words capitalized, I take it all with a grain of salt.
In this case, the builder wants a nonrefundable deposit of a quarter of a million to purchase a yet-to-be-constructed home at some point in the future.
You don't ask, you don't get.
But with that kind of money involved, I'd think having a bank involved would be a wise move.
The OP made it clear that the builder has agreed to use an escrow account, is perfectly fine using the standard sales contracts of the state, has no objections to the OP's attorney reviewing all documents and is behaving in a manner that is consistent with other high-end custom builders. It makes perfect sense that any builder participating in a Parade of Homes would have experince selling high-end custom homes.
While the size of the deposit may seem unusual to some, it is actually common at this price level. Custom builders use escrow accounts becuase it compels the buyer to complete the sale. The builder is also compelled to complete the home as will be specificed in the sellers covenants. If the builder does not live up to terms of the covenant the buyers receives their funds back out of escrow, that is not considered a "refund". A refund would be the buyer changes their mind and wants out of the deal. That would not be fair to the builder that will be showing the home at the POH as "sold". The POH is a marketing event.
When folks start talking about transfering title outside of closing I get out a giant salt lick and realize such folks have not participated in any significant number of closings.
I'm amazed at all the folks on this thread who have experience buying and selling multi-million dollar homes. Wow!
I have a couple long time friends who might be in that category. Cannot imagine them spending their time on C-D. But maybe.
Also, cannot imagine them putting a quarter of a million dollars in a nonrefundable deposit escrow on house that isn't even built yet.
They fly around in private jets and I cannot imagine that they would tie up a quarter of a million dollars based on hoping they will get some freebies because it's a Parade of Homes house. But maybe.
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Wrong wrong wrong...
