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Author: jakeburns100 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127815  
Subject: Signed purchase agreement, need more advice Date: 4/4/2002 11:30 PM
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Okay, we've signed a purchase agreement to buy a new house in a new development. Went to see the lawyer last night (a day after signing...sigh...stupid is as stupid does) and I'm glad I did...yes, it would have been helpful to have seen him before signing. Maybe by the fifth or sixth house, I'll get this right.

Anyway, the lawyer suggested a couple of things that I'd like to get feedback on from the smarter fools out there--if you can read this message, you qualify!

1) He suggested that we can actually close on the house sooner, rather than later, say, within a month or so. Big surprise to me as the house has to be built and we are told this will take 4-6 months. In his scenario, the lender pays the builder as the house gets built. As for us, we don't start paying mortgage until we take occupancy. The rationale for wanting to do this is to get a good interest rate--everything I read leads me to believe the rates are headed up and by next October/November, we could be looking at rates that are higer by half a point or more than those we could get today.

2) While our house is an "upscale" tract house with lots of extras (that we are paying for--just folded into the price), we will likely want some "upgrades". For example, built in shelves, a built in dual desk in the kids' study area, crown molding in the office, that sort of thing. Our lawyer suggested that we might be able to get a better price if we contracted out for these extras ourselves, rather than going with the builder to provide them. In addition to realizing a savings (potentially) of 20-30% (his estimate), we could still fold the cost of these items into the mortgage and have them done as the house is being built. This was a surprise to me--can this really be done? Does the builder have to let us do this if we wish? What about the refrigerator, can we buy one ourselves and fold it into the mortgage?

3) I want to get a home inspector to go to the site and inspect things with me as the house gets built. We'll pay him, but since I know a little less about construction techniques that about buying the house, I'm pretty sure this is a good idea. I also want to hire a landscape architect/engineer (??) to go to the lot now and make sure that it will drain properly and that the conservation area adjacent to my lot won't be home to amorous bugs, stagnant water, etc. Having singed a contract, how do I go about telling the builder that I want this, do I write in pen these things over the copy of the contract I have, send them a registered letter or what?

Fially, for those feeling especially helpful, feel free to make other suggestions about how to approach these next 4-9 (yup, this I learned already!) as foolishly as possible.--Jake
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Author: johnmoni Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40813 of 127815
Subject: Re: Signed purchase agreement, need more advice Date: 4/5/2002 12:57 AM
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"can this really be done? Does the builder have to let us do this if we wish?"

Not really the builders call - once you own, you can get whomever you want to do whatever you want.

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Author: johnmoni Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40814 of 127815
Subject: Re: Signed purchase agreement, need more advice Date: 4/5/2002 12:59 AM
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"While our house is an "upscale" tract house with lots of extras (that we are paying for--just folded into the price), we will likely want some "upgrades"."

Where are you buying? Just curious as to prices in your area for a tract house you describe.
johnmoni

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Author: DontBeCruel Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40816 of 127815
Subject: Re: Signed purchase agreement, need more advice Date: 4/5/2002 3:51 AM
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If you are buying a tract house from companies like US Homes, Ryland, Richmond, etc. you will not be able to close before the house is done, they don't operate that way.
They will not allow you to hire someone to do upgrades on your home. If you want them while the house is being built, you will have to pay the builder their inflated fees to do it. Unless you want to take out a second on the house, there is no way to add the price of the upgrades you do after you purchase your home to the mortgage.
I believe the building inspector for the city your home is located inpects the drainage of your home, but you may want to check with them and find out. Ask the builder what they do for drainage, ask to be shown on houses they are currently starting to build. It's your house and your money, so certainly ask!

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Author: jakeburns100 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40818 of 127815
Subject: Re: Signed purchase agreement, need more advice Date: 4/5/2002 5:36 AM
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We are buying in the Orlando area...@ 3,000 square feet, 4 BR, 3 BA, 70'+ lot with a cost @ $300,000.

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Author: CatherineCoy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40820 of 127815
Subject: Re: Signed purchase agreement, need more advice Date: 4/5/2002 6:10 AM
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He suggested that we can actually close on the house sooner, rather than later, say, within a month or so. Big surprise to me as the house has to be built and we are told this will take 4-6 months. In his scenario, the lender pays the builder as the house gets built. As for us, we don't start paying mortgage until we take occupancy.

I believe the builder is referring to a "construction-to-perm" loan.

http://www.mtgprofessor.com/A%20-%20Building%20a%20House/pitfalls_in_construction_financing.htm

Catherine Coy
Mortgage Broker

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40825 of 127815
Subject: Re: Signed purchase agreement, need more advice Date: 4/5/2002 10:57 AM
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1) He suggested that we can actually close on the house sooner, rather than later, say, within a month or so. Big surprise to me as the house has to be built and we are told this will take 4-6 months. In his scenario, the lender pays the builder as the house gets built. As for us, we don't start paying mortgage until we take occupancy. The rationale for wanting to do this is to get a good interest rate--everything I read leads me to believe the rates are headed up and by next October/November, we could be looking at rates that are higer by half a point or more than those we could get today.


If you do this, then you will own the property from now, and although you will not owe mortgage payments, you will owe interest-only payments on the amount of money withdrawn from the construction loan. Also, if you do this, you want to take out a construction loan that is larger than you think you need to allow for contingencies. If you don't need all of it, and you shouldn't if you manage every penny, then when you roll it over to a mortgage, you only roll over the amount that you actually used.

We did a construction-to-permanent loan when we built our house, but ours was a custom home and we were our own General Contractors which is a bit different than what you have. Typically, the builders like the buyer to do it like this because you then take all the financial risk. I.e. what happens if the builder just doesn't finish? If you have already closed, you get to find yourself another builder. On the other hand, if you don't like his work, you can fire him and find another builder. With the builder holding the loan til the house is complete, he is taking the financial risk, and there is always the possibility that you can walk away if there are problems and the deal is negotiated appropriately.

2) While our house is an "upscale" tract house with lots of extras (that we are paying for--just folded into the price), we will likely want some "upgrades". For example, built in shelves, a built in dual desk in the kids' study area, crown molding in the office, that sort of thing. Our lawyer suggested that we might be able to get a better price if we contracted out for these extras ourselves, rather than going with the builder to provide them. In addition to realizing a savings (potentially) of 20-30% (his estimate), we could still fold the cost of these items into the mortgage and have them done as the house is being built. This was a surprise to me--can this really be done? Does the builder have to let us do this if we wish? What about the refrigerator, can we buy one ourselves and fold it into the mortgage?

If you do the closing now and you own the property, you can most certainly have your own subs on the job doing what you want. However, this means you are partially doing the General Contracting and if any of your subs cause a delay in the job, you can fully expect the builder to hit you with penalty charges. If you own it, then the builder is working for you on your property and he has no choice, but you have to make sure that you don't delay him in any way or it will cost you.

And yes, you can roll the cost of the entire house including landscaping and appliances into the mortgage. Again, if you have the closing first, it's already yours. If you choose to delay the closing, then you will have to use the builder's allowance for appliances and possibly go to his vendor of choice, and you will be reponsible for any amount over the allowances. All of that can be rolled into the mortgage because the builder will include it in the fees passed along to you.

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40826 of 127815
Subject: Re: Signed purchase agreement, need more advice Date: 4/5/2002 11:08 AM
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2gifts

"...On the other hand, if you don't like his work, you can fire him and find another builder..."

Just to add to this, if you have a construction/perm loan, the lender may not allow you to change builders in mid-stream. The buyer is not the only one with a vested interest in successful completion of construction and the lender needs to be consulted prior to any major move like firing the builder.

If someone wants to go into the construction loan with an idea that they will change builders if they don't like what's happening, they need to ask the lender before the loan is iniated if the lender has a problem with that. This keeps everyone on the same page throughout the process.

PosFCF

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40828 of 127815
Subject: Re: Signed purchase agreement, need more advice Date: 4/5/2002 11:34 AM
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Hi Jake,

As 2gifts & PosFCF have excellently pointed out there is quite a bit more variability in the considerations, and given you've inked a contract I wonder what kind of wiggle & re-negotiating room you have.

A tract builder is something like a Denny's cook. You can place a SOMEWHAT specialized order, but once the order is in you can't make too many changes (or he'll spit in your burger ;~( You also can't show up with your own eggs and ask them to cook them at lower prices, nor bring your own waitresses to sub-contract.

A custom-home builder is like a private chef. You can give him the order of daily menu, AND tell him the type & quality of ingredients, AND direct him where to go to buy them if you wish. You might pay more than at Denny's but the quality & customization is no comparison.

Regarding financing, the money provided for the construction phase comes at different rates & terms than the money after the construction is complete. As pointed out, if YOU want to be on the bottom line for the construction-phase financing it is MUCH more entailed than just taking it after completion.

The tract builders have already arranged their construction-phase financing, and have usually done so with large scale agreements with lenders... and they then turn around and mark up the price of the deal to whatever the market will bear (of course,) so you end up paying the same or more than if you'd done it yourself... but rarely much more if at all, as the margins in the financing are just extremely competitive.

I think the major considerations you should be weighing are the hassle and the involvement factors. How much do you WANT to be involved in the process? If you were operating with cash-out-of-pocket, you could theoretically show up, put on a hardhat, point your fingers at the blueprints, and bark orders... but when you bring the lenders into the picture now you're stuck in a 3-ring circus where everyone's trying to cover their butts and NOTHING happens simply.

Avoiding the circus (hopefully, crossing ones' fingers) is the major advantage to using a development builder. They deal with the lenders through the construction phase, build it into the final pricing of the home, and you just get a regular mortgage like any other shmoe when you take the keys at the end.

I'm REALLY glad you did chat with an attorney, though... and hopefully he'll help you navigate whatever wiggle room is available to get your desired outcomes!

Dave Donhoff
Foolish Mortgage Broker

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40830 of 127815
Subject: Re: Signed purchase agreement, need more advice Date: 4/5/2002 12:21 PM
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If someone wants to go into the construction loan with an idea that they will change builders if they don't like what's happening, they need to ask the lender before the loan is iniated if the lender has a problem with that. This keeps everyone on the same page throughout the process.


I was not aware of this, but that's because we were the General Contractor for our custom house and the bank let us do as we pleased relative to the subs. However, DH has been a commercial Construction Project Manager for some time, and we showed up at the bank when we applied for the loan very well prepared. We had a full set of plans, a complete budget down to the light switches, and all our financial records. The bank figured out we had realistic expectations when my estimated house value came within $8k of their appraiser's value because I had calculated using comps and square footage.

We only had one instance where it appeared the bank was nervous. Because we had funds saved for the house, I was using the construction loan to backfill my funds so that I didn't have to wait for the bank inspection and check before being able to pay the subs. I ended up only doing 2 draws, so the bank sent the inspector out about 6 weeks after the first draw to check on the progress. He happened to pick the day that we had practically everyone on-site, and it was obvious we were making substantial progress. After that, they just waited for me to call.

Perhaps it would be helpful if someone who did a construction loan and had a GC and builder do all the work would comment because their experience would most likely be the norm where mine may be the exception.

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