New Home Prepayment Option

[Packman]

I recently contracted to purchase a new-build home with a very large national builder. They have a prepayment option that allows me to pay from $50,000 up to about 95% of the final home cost. If I make that prepayment 120 days or more prior to closing, the builder gives me a credit of 1.5% of the amount paid. This is an APR of roughly 6% and it's not taxable. If I paid the largest amount allowable my credit would be about $6,500. I currently hold those funds in a S/T Treasury bond fund (which has been losing money) and a savings account (which pays .5% APR).

So the question regards the risk/reward of participating in this program. The reward is an obvious $6,500 tax free. The risks are, 1. the funds are not insured, i.e., if the builder goes bankrupt (which I'm not too concerned about), and 2. I lose leverage at/around closing should there be problems, since they already have my money. Regarding the latter, it is concerning since the new home build process is a difficult situation currently, with lack of quality construction labor and the unusually high volume of homes the builder is selling - double the pre-pandemic rate. Contractually, the builder can charge me $250/day if I don't close on the date they schedule, so I'm not sure I could refuse to close based on construction issues.

Any opinions are welcome. Thanks.

 

[pb4uski]

I think the value of owing the builder money to get construction problems addressed trump the financial benefit... especially today with materials shortages and labor constraints I think construction quality is not likely to get better soon.

I would think that the contractor needs to complete the house... including the punch list... prior to closing... but check your contract or consult your lawyer.

 

[Packman]

Unfortunately, the builder's contract is full of clauses limiting the builder's liability. It states that every effort will be made to correct issues prior to closing, however the issues may not change the closing date.

 

[Mark1]

......... Contractually, the builder can charge me $250/day if I don't close on the date they schedule, so I'm not sure I could refuse to close based on construction issues.
.....

If this is true then what is in it for the builder? Maybe cash flow?
Seems odd to me.

 

[ducky911]

"every effort"
Means to me: Large crew working day and night. And renting a private jet to get parts.

Contractors meaning: His crews are busy on other jobs and will get to it in turn. Waiting for ups delivery.

 

[finnski1]

"every effort"
Means to me: Large crew working day and night. And renting a private jet to get parts.

Contractors meaning: His crews are busy on other jobs and will get to it in turn. Waiting for ups delivery.

That sounds about right.

 

[Packman]

Sure, the builder is doing this mostly for cash flow. It's also another way for the builder to ensure the buyer isn't going to flake out of the contract near closing. Of course they say it's for the benefit of the cash buyer.