The only way he does this is he makes double digit return on his investment. The only way his GC does it is if he makes 20%.

Cut out the "investor."

What jn said. The investor is in it to make money. From YOU.

I'd love to cut out the investor but unfortunately he owns the lot. I can try to buy the lot from him but he'll obviously want his markup. At that point I guess it's just a question of whether that lot is worth that price to me.

Is the lot unique in some way? Lake front, ocean front, etc....

I would also ask in the buying and selling a home forum as the real estate agents hang out there. Having said that I agree with the others. Buy the lot from him and find your own builder.

I think you have the answer - buy the lot with his mark-up IF you feel it's worth that price then hire your own builder. People are telling you the headaches that are ahead for you from experience in their builds - and they didn't have that added investor layer in the mix. As jannicone said, the GC won't be working for you and that alone should be enough to make you back away.

@Lindsay it's riverfront in a booming area with low inventory.

@cp thanks for the input I'll check over there too

Brian, that makes sense now. Has the "investor" done this sort of thing before?

From what I've gathered this would be his 4th project to get underway with this structure but none of them have finished yet.

Having seen this type of arrangement in our neighborhood, I agree with the advice above. The "investor builds" cut corners on some of the unseen aspects and end up selling for much more than the cost of buying the lot and building yourselves.

If you can't buy the lot, move on to one you can.

I'm a Realtor in Florida and that contract form(s) FAR or FAR/BAR are not designed to work for homes under construction - at all. Those forms are specifically for resale. Even if you go to different builders, their construction contracts vary all over the place.

As the others said, if you do pursue this avenue, have a good real estate attorney put together a contract. Don't use the standard form. I also agree that you would be paying top, top dollar if you go this route as the investor and the builder have to make a profit. As mentioned up thread, if you can, buy the lot directly and get your own construction perm loan and a reputable builder to build your custom home.

Denita was who I wanted to weigh in for you

Thanks Denita. I know those contracts weren't designed for that, which is why there are several addenda tacked on to make it kind of a cross over between a standard residential contract and a construction contract.

it sounds like no matter what I do I'll be paying top dollar if I go for this lot so whatever I can do to cut out the middleman sooner than later is my best bet. I'll go back with an offer for the unimproved lot and see where that gets us. Thanks everyone!

This is one of those deals where the seller (investor) is obviously so far out of his depth that he is tragically exposed and you are probably somewhat insulated from problems. The appraisal clause alone will somewhat insulate you from problems while exposing him to massive losses or price reductions. A real estate attorney will enjoy making this deal work in your favor.

However, I would walk away from the deal, the whole things seems a house of cards to me, and until he has actually completed projects and closed on houses, this whole thing could come crashing down around him. It is entirely possible that these houses are not going to appraise, and he simply may not be able to absorb those losses. Then you have mechanic's liens and all that jazz to deal with if you go through with the purchase.

What they said.

Investor makes 20%. Builder makes 20%. Both from you.

Is the location worth it to you?

Find a more favorable deal (to you).

I can't speak for your locale, but in Virginia, the "investor" would not be considered licensed contractor. It is illegal in Virginia for an unlicensed contractor to enter into a contract to build anything.

bizzle 86, I totally understand about addenda. When purchasing foreclosures, FNMA and Freddie Mac (and any of the banks that have foreclosure inventory) have lengthy addenda to be added to the state contract form. The longest addendum required by the seller takes away all the protections given to the buyer in the state contract, in fact, it is a contract unto itself essentially. I agree with Virgil and bry above, better to find something else that works for you without the complications and additional expense associated with this lot. Construction contracts are completely different from standard resale contracts. Let your attorney protect you in the best way possible.