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Proceed or walk away from new house build
Old 05-10-2022, 09:01 AM   #1
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Proceed or walk away from new house build

Need some "perspective" from the collected wisdom of this board in making a decision of how/whether to proceed with a new home-building project. 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%.

Last week, our builder notified us that, due to the unprecedented rise in material and labor costs, the base price of our home has risen by nearly 12%, and of course they want us to pay that difference upfront (construction has not started yet - delays in permitting, engineering, truss design, etc). We were told upfront by the builder this might happen, but we only budgeted for about a 5% increase, which seemed pretty safe at the time.

If we were to cancel the contract and walk away now, we would get back about 60% of our initial deposit from the builder, and the downpayment from the mortgage company (less their processing costs). Lot prices in the area have also risen dramatically over the past year, so we think we could probably sell the empty lot and come close to "breaking even".

We could come up with the extra money, but I'm nervous about having to sell more of our investments right now with the market at its current level. (The additional amount represents about 4.5% of our total retirement portfolio, but we've never come close to withdrawing that much in a single year before - more like 2%). We do have sufficient funds to cover this sitting in a Roth IRA, so at least we wouldn't be hit with additional income taxes on that amount if we pull it from there - just hadn't planned on tapping that account yet (or perhaps ever), and it's invested in about 80% equities.

Looking back now, I can't imagine a scenario where our timing for this project could have been any worse (except we did lock in a relatively low mortgage interest rate just in time). If this were a "normal" economic time, I think we'd probably proceed. I suppose if we do, and worse comes to worse, we could always turn around and sell the new home once it's completed (this is a "vacation home", and was never contingent on having to sell our primary home).

Thoughts?
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Old 05-10-2022, 09:20 AM   #2
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Thought's..............Plan on spending 50% more than you expect to spend..I've built 2 houses in the last 2 1/2 years..It has wounded me pretty deep financially..Also I am quite sure your builder will continue to go up in price after construction begins. Unless you drew up your own contract I'm quite sure his does everything to protect him and nothing to protect you.
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Old 05-10-2022, 09:22 AM   #3
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How bad do you want the house? How long are you willing to wait for things to go down? Building cost may go down, but interest rates are going up.

Your question is not one that anyone here can answer. I would try to work with the builder on “up front” cost. You stated he let you know increases count happen, but did he tell you up front cost might happen? Are there other builders in the area that could do the job?
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Old 05-10-2022, 09:22 AM   #4
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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."
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Old 05-10-2022, 09:23 AM   #5
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Your story is not an exception but one of many I have heard about. For your decision to go forward is something I can't make for you.
If I did proceed with the project, I would have a sit down with contractor and would need to see actual bids from suppliers to make sure there isn't any gouging and to keep everyone honest. Do a comparison and need to obtain more than one bid for supplies.

Good luck!
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Old 05-10-2022, 09:40 AM   #6
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The biggest discomfort level I would have is that you are expected to pay this increase up front, yet still no firm dates on when construction starts.
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Old 05-10-2022, 09:42 AM   #7
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Most if not all contracts fully protect the builder. Costs incurred that are not part of his initial bid will raise the final price of the house. For the most part the contract is not much value to you..You are likely to get treated more fairly if the builder is a very large company. If you are using a builder that only builds a few houses a year you will likely spend much more than you expect.
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Old 05-10-2022, 09:44 AM   #8
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It would be hard for me to give up a locked in 3% loan, but other than that, a 12% increase is being mighty optimistic. I am seeing prices on housebuilding supplies up by a LOT more than that, even wholesale.
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Old 05-10-2022, 09:45 AM   #9
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Have you reviewed the initial contract with a lawyer? If you can redo and have some assurance that this 12% is final...ok, but are you open to hearing the same thing in another 6 months?

Also, where in FL? The zip code matters.
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Old 05-10-2022, 10:29 AM   #10
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Have you reviewed the initial contract with a lawyer? If you can redo and have some assurance that this 12% is final...ok, but are you open to hearing the same thing in another 6 months?
+1

The way I'd look at it would be, a decision to move ahead at this point is essentially locking yourself in to the very end of the building process, including any and all (likely) additional price increases. If you acquiesce now, the builder will know you're very likely to agree to other unexpected cost overruns and will proceed accordingly. It it were me, I'd pull the plug now, find a new builder (when the time is right), and work to make sure the next contract has some protections for you against potentially unlimited price increases.
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Old 05-10-2022, 10:36 AM   #11
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If it is truly a vacation home and one you don't plan on living in in the future, I'd walk away.

If this is a vacation home now but the home you plan to make permanent thus that 3% loan matters longer term, then I'd have to look around at the market in that area. I don't know the Florida market so not sure if you are in an overheated area as that would determine if I proceeded or not.

Where I am in NC they are expecting another 750,000 people to migrate here in the next 10 years which just means continued housing shortages so I don't see a scenario where housing gets cheaper so I'd keep building, but I know thats only true in very select areas.
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Old 05-10-2022, 10:39 AM   #12
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I would look at what the extra 12% would cost me and what the cost of pulling out of the deal would be. Also, the 3% loan has a value since it can't be reproduced these days.

So... I have no idea what you should do. But, I would want some guarantee that future costs won't escalate out of control. Good luck getting that.

Building one's own home from scratch seems like a headache that should be avoided by all but the super-rich who can easily afford to pay somebody else to deal with the headaches.
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Old 05-10-2022, 10:49 AM   #13
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If you choose not to move forward, what would it cost to get the same home, starting from scratch now? (prices are up and interest rates are almost double, so seems like the 12% material cost difference would be trivial from this perspective)
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Old 05-10-2022, 10:49 AM   #14
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If you think its going to stop at just a 12% increase then I have a bridge to sell you. I would walk away. When the pandemic started everything came to a halt. These builders/companies are still trying to recover from the downtime they endured. Its hunting season for them...they're the predators and we're the prey. Good luck.
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Old 05-10-2022, 11:13 AM   #15
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Why hasn't the builder done anything since last August? When was the home scheduled to be completed? What's the completion date in the contract? If it's the builder's fault that the project has been delayed and wasn't built with materials last year, at last years prices, tell him to pound sand and walk away. If it's not the builders fault for the delay and the project is on schedule, and his schedule now permits him to build with a contracted completion date in the near future, with no further chance of price increases, I'd be inclined to move forward.
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Old 05-10-2022, 11:35 AM   #16
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I would definitely have a lawyer review your contract and if the builder hasn't done any work I would ask for a full refund less any actual costs that he can substantiate. Let him know that you still plan to build and use his company but right now you just can't go forward until the economy gets back to normal. I would not be surprised if you have a hard time getting any kind of refund back from him, the deposit may have already been spent on his other projects. Normally a builder estimates more than 5% for cost overruns, I'm surprised it wasn't at least 10%.
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Old 05-10-2022, 11:39 AM   #17
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I'm risk averse, especially when the risk involves something like a vacation home. No way would I fork over an additional 12% up front and possibly be held hostage for future increases - but that's just me.

Would you sleep better if you walked away and no longer had to worry about when construction might be completed and how much it will eventually cost? The answer to that question should make the decision for you.
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Old 05-10-2022, 12:37 PM   #18
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Why hasn't the builder done anything since last August? When was the home scheduled to be completed? What's the completion date in the contract? If it's the builder's fault that the project has been delayed and wasn't built with materials last year, at last years prices, tell him to pound sand and walk away. If it's not the builders fault for the delay and the project is on schedule, and his schedule now permits him to build with a contracted completion date in the near future, with no further chance of price increases, I'd be inclined to move forward.
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.
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Old 05-10-2022, 01:06 PM   #19
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Reduce the cost of the home by 12%. What could you cut that would reduce the cost by 12% and then do it. Things you could likely finish at a later date. A deck or concrete patio perhaps? A finished laundry room? Built in book cases, cabinetry? Anything a sub-contractor or even yourself could do at a later date. Even things like garage door, openers, light fixtures. Does the bid include appliances?
How about your budget for landscaping, a pool or other projects that would be done in conjunction or following the final on the house. Fencing, etc. Use that part of the budget to cover the 12% rise in the home construction materials cost.
What if you had him put 12% of the cost on your credit card used for materials? Where he presents all material cost invoices and you pay those yourself, through his license of course to get his contractor discount. I did that on some, not all materials. I not only saved a bunch, I got the credit card points/dollars rebates. You could then use one of those checks the CC sends out to transfer a balance, or even to write a check that is zero interest for up to two years.
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Proceed or walk away from new house build
Old 05-10-2022, 01:07 PM   #20
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Proceed or walk away from new house build

Do you have a material schedule of costs? To validate what has gone up - to total of 12%?

Lumber is dropping now.

If itís not material, or not a documented material schedule - then it is fair to be more assertive in this negotiation.

In other areas of the country - itís labor shortage thatís causing the price increase - not material.

No one but you can decide on this.
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