Hahaha - most builders hate draw terms, as it requires them to use their LoC or other equity to finance the job.

A high amount of dollars up front may be due to a 'small builder' to lacks cashflow, and therefore wants to use yours.

BEWARE - I had this on my build, but it was less of an issue as we had a substantial percentage down. But it was STILL AN ISSUE, because halfway through the last draw he claimed he had no more available funds, and wanted money now/early!

We had to pay our lawyer to go back and split the last draw in two, revising some contract terms to protect ourselves as well, and we STILL had more issues later...

Do NOT release draw funds for materials onsite - most lien laws allow material to be removed my site in event of nonpayment by subs. Check with your lawyer and applicable state laws before agreeing to that!

You are building outside many builders comfort zone. It will be way more expensive than you think, and now he is finding out it’s more expensive than he thought too. If he did a fixed price, he can see the giant loss before he even starts. He actually wants out of the project and is forcing you to fire him. Oblige him.

But read your contract first about what you owe him should you be the first to blink. Many contracts structure it so that he would receive his full fee should you let him go “without cause”.

Your next builder won’t be so cheap, and he is going to want a cost plus arrangement.

Do you have additional financial reserves that you can bring to the project? Because a new builder will not use an old builders numbers. Everything stars over. And your loan is no longer good. The new numbers will be much higher.

It appears Sophie can take the place of Miss Ruth, Psychic Extraordinaire...

However, your bank is protecting it's investment, and yours. Their terms are pretty reasonable. Your builder apparently either:

1) has no lines of credit or they are all full or

2) need $ to pay for other work already done / someone else's materials or

3) is super shady and is simply planning on taking your money and walking away or

4) did in fact grossly underestimate what it would take to build - but still - the process should not change.

40% is an INSANE amount of up front money. In-freaking-sane.

I'd do some digging online / court filings to see if he's got a bunch of pending litigation, and seriously consider finding someone else.

A builder's payments depends on: 1) The terms and conditions of the construction contract, and; 2) The terms and conditions of your construction loan.

No one should be paying any percentage of the construction sum for work not yet done, unless there is a specific stipulation for an initial advance of funds. Even then an initial advance of 40% of the contract sum, without any work done is ridiculous.

Your project and your builder are not doing you a good service. Is it time to reconsider?

You have not even started and there are these many problems already? I can't begin to tell you how many times i have heard this ..."Oh, I've been doing this all the time and you're not the first one". Hello!! 40% is a lot of monies here. We are not talking about replacing a faucet. In my past experiences, contractors only do this when they have a cash flow problem.

I say find a new builder and fire this guy. But you cannot fire the builder so easily, at least here in California. You need to have a just cause and an expert witness to testify in the court of law if it gets into litigation. Our state mandates a 10% of the total contract amount OR a $1,000 deposit(whichever is less) before they sign the contract and start the work. It is illegal for contractor to deviate from this. Why can you not contact the State License Board(if something like that applies) and make an official complaint or contact the bond company that he is bonded with? Both scenarios can put him out of his license or at least send him a warning that what he is trying to do is illegal.

This is the bait and switch strategy contractors typically use. They low ball and want you to fire them and expect you to buy them out of the contract. It's good you saw this waaay early, so i consider you to be lucky actually. RUN away from this builder and hire an attorney to know the best way to get rid of him.

I hope you find a resolution soon to this minor bump you're having with your build. Good luck!

If you pay 40% down before any work started, he will probably be filing bankruptcy the very next month. The 40% is totally unreasonable, and it is more than his profit after completing your house. Your goal is not to tempt the builder to commit acts of bad faith.

Your bank is protecting themselves and therefore also protecting you.

40% to start?! That's outrageous even if it was all laid out in your contract, which I never would have signed.

My build was 5% down, 45% at about the half way point in the build, 40% near the end, and 10% after completion along with any changes I made.

My builder only did: foundation concrete, interior and exterior framing, metal siding and roof, window install (I purchased the windows), exterior door install (I purchased the doors), a small deck.

I agree that 10% in advance is a reasonable sum. But, before you fire him arrange a face-to-face meeting between someone at the lender, yourself and the builder. Go over the lender's suggested draw schedule. Your builder may have a good reason. You won't know until you explore the problem. The draw arrangement may need some modification.

As an appraiser, when I would certify construction draws we usually had five draws and a completion certificate. Occasionally there would be an extra draw or two, but five usually does the trick. Once ground is broken and foundation is in, the builder is going to need a big draw for the framing package and quickly. Those sorts of items can be COD.

My point is, get everyone together. This may be easily resolved. If not, you move on.

Have him bring referrals from other lending institutions he has worked with in the past when he sits down with your bank.

If he's got such a great reputation, it should show with his suppliers and subs willingness to extend him credit.

Having a great reputation allows some to be able to name their price. If his bank of choice gives him 40% down, then why would he want to deal with less desirable terms from an unknown bank?

I find that hard to believe that he will ask for so much money upfront without even putting a shovel in the ground. A reputed builder like that will have multiple lines of credit at all suppliers and they usually have 45 days to pay that back. Not to be a pessimist here but will you be happy if that gave all that hard earned money away and he walks? People say things and make promises they have no intention of keeping on a daily basis, especially contractors. I hope you don't learn it the hard way.

A smart builder that has an impeccable reputation spanning 2 decades doesn't need to finance a clients new house.

People say things and make promises they have no intention of keeping on a daily basis, especially homeowners.

You all need to have a kumbaya moment together - you, builder, and bank. Our lender was acquired during our build and we had to have a good heart-to-heart regarding our unique lending arrangement with the construction manager at the new bank in order to maintain the terms. The old bank's method was a bit loose and the new bank was understandably uncomfortable. Once we met and they understood that we all shared the same goal of just getting this project complete as close to budget as possible, they agreed to work with us and things are going fine. Communicate!

What Joseph said. If he's got a great reputation, he has a line of credit. If he doesn't, then that screams something is wrong.

dbrad, it's one thing to communicate. It's quite another to fork over 40% of the price of the build before a shovel hits the ground.

Maybe, and it is certainly not something that would make me comfortable. But all this advice to run the other way is much too early. There's likely some middle ground where all parties can agree to a path forward.

Good luck, and please update as your project proceeds.

Just because someone needs to say it...

There are legitimate reasons that a builder might want a large percentage upfront, and it doesn't necessarily mean he can't get credit.

Businesses charge for lines of credit, it isn't free, it is just hidden. Typical credit terms in the industry are 2/15, n30, and many are 2/30, n30. So it is entirely possible that he negotiated better terms with earlier payments. Some customers in some industries negotiate an additional 1.5% off, for guaranteed 48 hour turnaround on all invoices. That 1.5% discount is the equivalent of a 20% return on investment.

Those discounts typically start from date of delivery, so it is, again, entirely possible that a builder could negotiate very steep discounts for cash on order. If a builder runs his business by essentially covering all material costs for subs upon signing the contract, he is going to get better pricing and better subs.

The problems being, this is the exact same behavior that a builder in trouble would want out of the bank and it still isn't necessarily a good thing.

The warning bells should be going off, this behavior is the exact behavior that someone who was scamming you would use. That doesn't mean he is scamming you, but it does mean you should move from benefit of the doubt, to healthy skepticism. It is time to see if lumber yards would recommend him as a builder, and do some basic detective work before going any further. Such as asking him to explain in detail how the money gets used, and then verifying with those people if that is indeed how he uses the money.

Additionally, while this isn't necessarily a bad business plan, it isn't good to move all of the risk on to the bank and consumer. Essentially, no matter what his intentions are, you are shouldering a lot more risk than is normal in the industry, and more than is even necessary. Even without malice involved things do happen, and when they do you are a lot more exposed when paying 40% down.

I agree with the others here that 40% up front is insane.

My builder is a small contractor that only builds 3-4 new houses a year. He let me know what the draw terms very early in the process, way before the house was even designed.

He has a 7 draw schedule. The first (at contract signing) and last (at CO) were both 5%. The remaining 5 ranged between 13% and 21% depending on the scope of work for that draw. He would request the draw from the banker who would in turn send out an inspector to confirm the work for that draw was actually completed. The banker would then notify me and I would do an ACH transfer to my account at the bank. He then draws a check on my account in the amount of the draw and deposits it into my builder's account.

No way would I ever consider giving a 40% payment prior to work commencement.

They might have been good, great references, but you happen to be contracting with them while the owner is in the middle of a divorce, or their kid has gotten very ill. We had this happen once. How do you know? You don't.

But you don't give 40% up front.

And, terrible to say, what if the contractor dies? I asked mine this question and he had no plan in place other than to say he thought the guys who worked for him would take over the company. But meanwhile he would have had a huge chunk of my money.

Gargamel-

But I'm sure the money would have been promptly transferred over to the new hypothetical company... ;-)

We've had that dilemma here a couple of times. GC dies. Rough. Better if you haven't paid a whole mess of money up front.

"And, terrible to say, what if the contractor dies? I asked mine this question and he had no plan in place other than to say he thought the guys who worked for him would take over the company. But meanwhile he would have had a huge chunk of my money."

Mine died, and so did his company since he was the sole proprietor. Material suppliers came after me with liens on the house. Nightmare!

^Another good reason to not put up 40%. I've never seen that high of a deposit/initial draw and I've been working with builders and developers and general real estate for over 35 years. Very few, if any, small builders have a transition plan in place IMO.

Strawbale infill?? 40% upfront is outrageous. As someone else said......RUN! Where are you?

ours was $1000 at signing...5% upon commencement, approx. 20% at 1st walkthough after roof, windows, doors complete, another 20% after drywall completed and the remainder upon closing

Ahhhh I had to google strawbale infill = The original "Nebraska" straw-bale building technique was one in which walls of straw-bales actually provided the support for the roof-structure above. The bales has to slowly degrade right? Wow, didn't know straw was so expensive, Are you in Ky with throughbreed horse farms ;-)

If you have conversations with your skilled trades, you will discover that after the housing bust they don't give credit to contractors. They got burned by someone and they want money up front.

While I think this can all be solved with a three party meeting, I do think it would be good advice to request the contact information of two or three of the skilled trades such as electrician, plumber or lumber supplier. Find out if this guy has a reputation for paying his bills. Did he screw someone over in the housing bust? Talk to his chief lumber supplier. They'll know. While you are at it, ask them about their financing terms. This will help clue you in to what your GC is facing when he tries to juggle a bunch of balls in the air at the same time.

You need to go down to the courthouse and ask the clerk to help you research if the GC has any outstanding liens. They will show you how. Understand that most builders get sued by somebody. If there are a bunch of them or a bankruptcy, it may be a trend. You may need some explanations.

Building a custom home involves a fair partitioning of risk between homeowner and builder. We typically ask for a 10% downpayment and request construction draws (i.e., progress payments of 10% ) at specific construction milestones. 40% seems excessive to me.

I didn't read through most of the comments and may have missed something.

I would not be too quick to diss your builder. You want to build a quite unconventional home. There are very few builders with the expertise and willingness to do that and even fewer who will do a good job of it.

What you are building is much more difficult and risky for your builder and for your bank. This is not a typical house and the typical experience of others with conventional homes does not apply. Your bank and builder are both acting exactly as they should. There is no reason to criticize either one. You will very likely need to put down more of your own money up front (as the other bank requested) so that you take on some of the risk of what you want to do.

Sorry opaone, there is no reason that the OP should have to put down 40% upfront. Even if it is a special design, the builder should still be able to cover the cost of materials with the normal 10% down.

40% down is basically giving the house away before even a shovel of dirt is moved.

Absolutely there is. This is a much higher risk project, for the bank and the builder, than a typical build. They both need to protect themselves.

We know nothing about the OP or their credit worthiness. Even with excellent credit a bank is not going to risk too much exposure on a project like this. Same for the builder. Neither of them want to be stuck with an unsalable asset (or liability) if the buyer disappears (I so much wanted to say 'bales'). A typical house build has collateral value, a hale bale + SIP house not so much.

Perhaps another option for the OP is to setup an escrow account with the 40% down payment that the builder can draw from. This might provide all 3 parties with the protection that they need.

Isn't this a construction perm loan? The buyer is bearing the risk. The buyer has too much exposure with 40% down....what's to keep the builder from getting the 40% and disappearing? It is far more likely that the builder disappears rather than the buyer when the buyer is on the hook for the construction loan and owns the land.

Absolutely there is not... There is no legitimate risk for the builder that is alleviated by a large down payment. There are reasonable reasons for the down payment to be large, but those don't have anything to do with risk.

None of your example works... The OP's credit is irrelevant to this discussion of bank risk as it doesn't vary between the alternatives. The only relevant risk the bank faces in this discussion is the risk of the contractor doing something nefarious with the money.

The only risk the contractor faces is the risk of being undercapitalized.

opaone-

If the builder is so lacking in confidence of his ability to complete this home and the risk he perceives from an unconventional build that he wants 40% upfront, then he is demonstrating he is the wrong contractor for the project. If I were the OP, I'd read the writing on the wall and get another contractor before getting pulled into a mess. It's unfortunate, but this insistence on 40% upfront has trouble written all over it.

It has nothing to do with the builder's confidence in their own ability. This is effectively a non-collateralized project. That is a huge risk for the bank and builder. There is not a strong enough market for this type of house for the builder or bank to recoup their costs if the buyer defaults.

With a standard house the house itself becomes collateral. If the buyer defaults then the house can be sold as-is or completed and sold. It will usually have to be sold for a discount which is one reason for a 10% down payment (the other reason is earnest money so that the buyer has enough skin in the game to likely see the project through).

With a straw bale house, if the buyer defaults then the house will likely have to be sold for a massively greater discount than a standard house as there are not that many people who understand straw bale construction nor who are interested in buying one. This even if the construction quality is exceptional in every way.

opaone-

I don't want to argue. However, you are making a lot of speculations that may or may not be true to rationalize this situation. I and a lot of other posters are making only one speculation: 40% upfront is so far outside the norm that it indicates a major problem.

This is effectively a non-collateralized project. That is a huge risk for the bank and builder. There is not a strong enough market for this type of house for the builder or bank to recoup their costs if the buyer defaults.

Before I even start addressing this, which I am going to momentarily, this doesn't matter. The project isn't more or less collateralized if the bank makes 10 equal payments or 1 lump sum payment! The risk of non-payment and the loan amount are things that are outside the two alternatives. So even if you establish the bank has more risk, that doesn't mean you establish that the bank CAN IN ANY WAY DIMINISH THAT RISK by paying more money up front.

Furthermore, the builder isn't on the loan and isn't exposed to shortfalls any more in this arrangement than he would be in any other arrangement. It isn't his loan, he isn't acting as guarantor of the loan and unless you are privy to information that we are not, hasn't given an appraisal guarantee. Now even were all those things true, once again, his exposure doesn't change because he has the money upfront. How does having 40% upfront protect him from an asset impairment problem? In the end, he still has to build the house, which means he still has to spend the money. The only protection gained by the builder from having 40% upfront are solvency problems, which are definitely not the OP's problem.

Finally, you have not a clue what the actual equity position of the house is. You are leaving out their down payment and the value of the attached property, protection for lack of collateral is done by the bank prior to funding the loan. I have significant acreage where land is $15,000 an acre, I could borrow money on a construction loan to build a good sized house out of tin cans and wouldn't be under-collatoralized.

With a standard house the house itself becomes collateral.

Not really true, the land all attachments becomes collateral, this is why homes that are removable from the property always go down in value.

@kudzo9 said: "40% upfront is so far outside the norm"

Yes it is. But so is a straw bale house.

Whatever one's view on this well-known building technique, I don't see how it is relevant to the builder expecting 40% upfront.

No Opaone, it is NOT a straw bale house. It's a strawbale infill. Big difference.

You said that one bank which would work under his terms required an additional $40k upfront. What is that in percentage terms? It sounds like they are basically offloading the risk of a huge upfront to the builder by passing it along to the homeowner. Which makes sense, and should give you further insight into the safety (or lack thereof) of giving such a large upfront payment.

I was reading our local police blotter this morning...

Apropos of nothing, some poor sod called in and said a builder had fled with his $50k deposit. It does happen.

We did a 5% to get started, applicable to the first draw. Self financed build.

anisaer-

Sounds like a wise move. I hope/presume that your new builder is much more reasonable on payments and advances. Good luck on your build.