Proceed or walk away from new house build

[merlin3942]

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?

 

[lawman]

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.

 

[Rustic23]

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?

 

[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."

 

[street]

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!

 

[mystang52]

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.

 

[lawman]

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.

 

[Fermion]

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.

 

[Aerides]

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.

 

[Sojourner]

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.

 

[karen1972]

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.

 

[Chuckanut]

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.

 

[l8_apex]

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)

 

[ponyboy]

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.

 

[freedomatlast]

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.

 

[RetiredAndLovingIt]

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%.

 

[REWahoo]

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.

 

[Sunset]

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.

 

[skipro33]

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.

 

[retire48in2018]

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

Lumber is dropping now.

If it’s 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 - it’s labor shortage that’s causing the price increase - not material.

No one but you can decide on this.

 

[skipro33]

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]

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.