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Downside to Builder Carrying Interim Financing

1,427 Views | 8 Replies | Last: 7 yr ago by MousepadMarauder
MousepadMarauder
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AG

One of the builders we are speaking with on a custom home said that he required 10% of the pre-construction appraised value down and then he would carry the interim financing. We would then close to a conventional mortgage once construction/punch list was complete.

I am trying to figure out if there are any downsides to him carrying the interim note. Any thoughts?
SteveBott
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AG
That is a good deal. Take it.
StringerBell
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AG
Seems like a great deal
jja79
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Let's assume it's a one year build job.

1. What will your rate be in one year?
2. You'll need an appraisal of the house when complete. Is there a chance it might not appraise for full value - change in oil prices, raising rate market, etc.
3. Are you certain what your income will be in one year? If your income decreased might your debt to income ratio exceed the allowable?

3 or 4 months ago I closed a new build (Frontier Homes) in Houston. In the budget the builder charged the interest to the buyer. The interim interest budget line item was roughly twice what he would have paid by financing the construction himself.

I assume you've reviewed not only the contract but also the specifications and the budget by line item.
Deats99
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Hell of a deal. You do lose some leverage as you are no longer holding the purse strings. There is the qualification(in six months) question to worry about, but if you can't get qualified then do you really want to be on the hook for a mortgage?

-Value is always an issue.
-What recourse do you have if the builder walks?
-Is your money going into an escrow? What if the guy goes belly up?
--Is there an exit strategy if needed?
A good plan violently executed now is better than a perfect plan executed next week.
-George S Patton
MousepadMarauder
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AG
I appreciate the thoughts. We are meeting with the builder on Tuesday and I will have more information at that point. I just wanted some initial thoughts before our meeting.

I am not concerned about the financing or a drop in home values. Our area is very stable. The builder is reputable and has been building in our town for 20 years.

I have the same questions regarding where the money goes. If it goes into his pocket and then I still have to come up my down payment and closing costs I don't know that it is as great of a deal. At that point I'm still in 18%-20% up front at a minimum (10% to him, 5% minimum down, 3% closing costs), so I might as well just carry my own financing. If it goes into Escrow and I could theoretically use all of that to pay minimum down and closing costs, then I think it is a great deal.

Thanks again.
Deats99
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Good reputable builders are great, but **** happens!
A good plan violently executed now is better than a perfect plan executed next week.
-George S Patton
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jja79
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I'm trying to figure out, based solely on the original post, how anyone can determine from that information whether or not this is a good deal or not.
MousepadMarauder
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Totally agree that I have not provided (and don't have) enough information to qualify it as a "good deal" or a "bad deal". I just wanted, and received, some thoughts on potential downsides. I am meeting with the builder next week to go over all of these things. I appreciate the input. You guys have provided some thinking and talking points.

To answer Sasappis - The builder owns the lot. He would finance the build essentially as he would a spec house. The points regarding lack of control are all valid.

I looked at a house this builder built last year for a couple. The husband got transferred 3/4 way through the build so they listed the house for sale. He allowed them several weeks after completion to try to find someone who would take an assignment of their contract with him.


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