Proceed or walk away from new house build

[skipro33]

Quote:

Originally Posted by Sunset I have to wonder, why the builder wants 12% increase upfront, when nothing has been built. By the time the builder starts building, prices may fall or go up more. I've always bought existing homes, as buying on paper seemed too hard for me.

I agree, I don't think this is even legal to ask for payment in advance by a contractor. Not in California anyway. I think they can only ask 10% up front, then pay as you go. My builder contractor and I worked out where I paid him $50,000 up front, then he'd invoice me every time he needed another $50,000 draw. I'd have the invoice for work done and work to be done. Usually about 30 days, home finished in a year for a cost of around $500,000. (work slowed during winter)
On my home, some costs went up, some down. concrete went down, windows up, etc. In the end, the house was $50,000 or so over planned budget. I took a loan on my 401K, then retired 2 years later, claiming that loan was now a draw.

[daylatedollarshort]

Quote:

Originally Posted by Another Reader I would not proceed, as it is my opinion that real estate prices will be dropping, and I would sell the lot. It's not "different this time."

I would say the probability is high recession may happen, housing prices will drop and contractors' prices will be dropping. If it were me I would sell the lot and sit tight for a couple of years. We're putting off some home improvements we originally planned for this year for those same reasons.

I think it was in The Millionaire Next Door a tidbit about lawyers were the least likely people to build from scratch. Probably because they saw the headaches involved firsthand.

[merlin3942]

Thanks to everyone who has responded to my query! All have been very helpful, and have certainly given me a lot to think about.

For those who asked about the contract, yes, the language definitely protects the builder. To be fair, the builder went through each of those sections of the contract with us line-by-line, and explained exactly what they meant, so we knew before we signed that something like this was possible. At the time, we just never imagined how much of an increase that might be, and there is no "cap". And yes, there is no guarantee that it won't happen again before construction begins (which could start in July). The biggest reason for the delay was the time to obtain state and local permitting for the lot, since the lot requires the construction of a seawall (it's on a canal). Also, all the companies in the area that build seawalls are backed up 8 months or more.

I did get an itemized list of expenditures so far from the builder, which total about 40% of the deposit we gave him. He did say if we have to cancel the contract at this point, he will return the remaining 60% to us. Most of what he spent went towards the architectural and truss engineering drawings (which we have seen and have been given copies of). Normally, once he had exhausted our deposit, he would start requesting "draws" from the mortgage bank, but construction has to be underway for that.

This has been our "dream home" for quite some time, and at our age, if we have to walk away now, I don't think we'll try building ourselves again. Best case is we would try and buy an existing home in the same area (Cape Coral, FL, for those who were asking). Currently, inventory there is pretty limited (at least in our price range).

[merlin3942]

re: cutting costs - yes, DW and I have gone through everything to cut back where we could on "optional" items, and have gotten back about 1/3 of the cost increase doing that so far. There are other things we could do to reduce even more, and plan to re-do some of those things later if/when costs come down (or the market goes back up), but DW says she doesn't want to pay that much for a "fixer-upper" that she really wouldn't be happy with in the meantime, and I agree.

[Fermion]

Hmm, canal lot. I would love to have that...is it boatable out to open water and can you moor at your lot to the seawall?

I would pay 12% increase for that especially with a 3% loan.

[ivinsfan]

After reading post 23 I say just hold your nose and do it.



It's not an impulse and something you have wanted for a long time..life is short.

[Franklin]

Quote:

Originally Posted by Fermion Hmm, canal lot. I would love to have that...is it boatable out to open water and can you moor at your lot to the seawall? I would pay 12% increase for that especially with a 3% loan.

agree with Fermion. Life is too short so if this is your dream home bite the bullet and be thankful. You made it up with that great mortgage rate.

[merlin3942]

Quote:

Originally Posted by Fermion Hmm, canal lot. I would love to have that...is it boatable out to open water and can you moor at your lot to the seawall? I would pay 12% increase for that especially with a 3% loan.

Yes, it is a Gulf access lot, and the current plans include a dock with boat lift (although the dock is one of the things we are considering removing for now).

If we decide to walk away and sell the lot, I'll let you know!

As others have pointed out, there's no guarantee that there won't be more than a 12% increase in the future. Our builder says it was really more of a 22% increase from his various suppliers and sub-contractors, and he's "eating" the difference. Of course, I have no way to verify that, but don't have any reason to doubt it, either. He's a custom builder, has been in business for 20+ years in that area, and has been averaging about 20 new homes a year.

[Paulz]

Quote:

Originally Posted by merlin3942 We contracted with a builder for our "Florida dream home" last year in August. We've purchased a lot, designed the home, and went through the "color selection" process (flooring, countertops, lighting, etc, etc) and received a grand total price. Secured a mortgage (construction loan that will automatically convert to a 30-year fixed once the home is completed) at just under 3%. Thoughts?

We have done something similar except we purchased our lot in March 2022 and construction began in May, scheduled to be completed in October. For us, once the contract was signed all increase in costs are no longer our problem.

There is absolutely no reason for construction to be paused for 11 months. Even in an environment where we didn't have the inflation we have now, costs would go up for that span of time. Something isn't right with your builder....

[ivinsfan]

Quote:

Originally Posted by merlin3942 Yes, it is a Gulf access lot, and the current plans include a dock with boat lift (although the dock is one of the things we are considering removing for now). If we decide to walk away and sell the lot, I'll let you know! As others have pointed out, there's no guarantee that there won't be more than a 12% increase in the future. Our builder says it was really more of a 22% increase from his various suppliers and sub-contractors, and he's "eating" the difference. Of course, I have no way to verify that, but don't have any reason to doubt it, either. He's a custom builder, has been in business for 20+ years in that area, and has been averaging about 20 new homes a year.

The 22% might be true and the builder is playing arbitrage since he doesn't know what the material will actually cost come delivery date. If it continues to rise you might need to pony up. But it's in the builders best interest to keep his business open and his employees on the payroll so he might be willing to take a little less profit to make that happen.

[ivinsfan]

Quote:

Originally Posted by Paulz We have done something similar except we purchased our lot in March 2022 and construction began in May, scheduled to be completed in October. For us, once the contract was signed all increase in costs are no longer our problem. There is absolutely no reason for construction to be paused for 11 months. Even in an environment where we didn't have the inflation we have now, costs would go up for that span of time. Something isn't right with your builder....

That's not true did you read about the construction and permitting for the necessary seawall? Water property is different and it's not nice to slam the builder with real information.



Get back to us in October and let us know what you actually paid for the exact build you ordered.

[merlin3942]

Also for those who asked, our builder says the cost increase is from concrete/cement, steel, drywall, and glass. Not much lumber is used in Florida coastal construction. They actually are having to "ration" a lot of those materials among the builders at this point because of "supply chain issues". And of course, on top of that, there is the labor shortage and increased costs for that.

[aja8888]

My best friend is trying to replace the windows in his 40 year old home here in Texas. He signed a contract about a year ago and no windows yet. Best NEW date is June.

[lawman]

Quote:

Originally Posted by aja8888 My best friend is trying to replace the windows in his 40 year old home here in Texas. He signed a contract about a year ago and no windows yet. Best NEW date is June.

My neighbor is in the middle of a build and cannot get windows..He has been waiting months. Construction has stopped...

[OldShooter]

@merlin3942, SGOTI is a great source if ideas and opinions on something like this, but you have a serious problem involving serious money and SGOTI knows little or nothing about your state and local laws, many of which govern your relationship with your contractor. Find an experienced real estate lawyer to review your situation, get some competent legal advice, and then make your decision.

We are also building a house and from our experience and from the fact that you seem to have a fairly open and honest builder this SGOTI would be inclined to recommend continuing. Your lawyer, however, may be able to help you negotiate some kind of fireproofing against future cost and schedule problems. You also need a holdback provision to protect you from hidden defects after occupancy. It the contract doesn't include this, your lawyer can try to get it added. In situations like this, the builder's offer is not take-it-or-leave it. There is always room for some negotiation.

[bigcmagor]

If you proceed, you'll love the Cape. We've owned a home there for 14 years. House and lot values have gone bonkers, so I wouldn't be surprised if you found a nice equity bump right out of the gate.

[SnowballCamper]

Proceed, but make the builder open his books on the cost increases, and count on at least a couple more increases. I'm sure the contract is cost plus, as this protects the builder best. We dealt with a lumber increase when our house was built back in 2015 or so. I know the frustration is worse nowadays with bigger and more cost increases. If you really have the APR locked in, you'll regret missing out on that if you try to build later. Inflation isn't going away anytime soon... IMHO. Good Luck!

[Letj]

Quote:

Originally Posted by merlin3942 Also for those who asked, our builder says the cost increase is from concrete/cement, steel, drywall, and glass. Not much lumber is used in Florida coastal construction. They actually are having to "ration" a lot of those materials among the builders at this point because of "supply chain issues". And of course, on top of that, there is the labor shortage and increased costs for that.

I can assure you, as someone who renovates, sells and regularly upgrades rentals, that this increase isn’t unreasonable. I am paying almost 50% more from what I paid two years ago to get anything done. The pricing on HVAC installation is most shocking to me but one of the problems I am running into is how slammed these contractors are with work and their pricing reflects it. If I want to get my installations done quickly, then I have to pay much more vs waiting for months to get on their schedule.

[Time2]

Don't have your answer, for us we would probably walk away, but we don't want for any more than we have.
I recently helped one of my kids buy a home. The made an offer on a HUD repo home in January 21, it dragged on and on through no problem of theirs, just so many hoops to jump through*, I ended up making a margin loan on the mutual funds I have at Interactive Brokers and bought the house and gave them a mortgage on July 30th. 2021. The IBKR interest rate was 1.25%. It has probably went up, but still very reasonable.

They ended up needing at second appraisal and it came in $40,000 higher than the first one. So, if your want to avoid a taxable sale, you might move some money to IBKR and do a margin loan to get the extra 12%. and pay it back when you get the 3% loan. The kid and hubby have refinanced the loan, got a 3.25% 15 year loan, they closed this week and I'm just waiting for the check to hit my mailbox. The home was a fixer upper and as incentive to get the home fixed up, I gave them a two year mortgage 4% first year and 6% the second year, they got it done and remortgaged in less than one year,

BTW, their property is just off the Manatee river and a short trip to the Gulf Of Mexico, they are avid boaters and fishermen.



* I saw trouble on the horizon and moved my taxable money into IBKR, just in case I needed to do the margin loan. And I did! Thanks to Pete at MMM for the idea. Checks in the Mail... so I think it all worked out.

[Bamaman]

It's been 7 months and nothing's been done? Why hasn't the contractor cleared the hurdles sooner? Where was his plan of action last Fall?
You don't mention the projected original cost and the deposit paid to the builder. I've built large projects without any deposit--and paid in stages of completion--as stipulated in an attorney prepared contract.
And with interest rates up 2% approx., can the mortgage company still offer an under 3% mortgage for permanent financing that may not happen for another 6 months or longer?

You were awfully brave to go into a building project with the wood prices going up--and components like windows and appliances being unavailable for 6 months+. If you can bail out of the project, no one would blame you.

(I bought a large like new house 2 years ago for 1/2 what it would cost to build it today.)