If he is willing to build the house to the required specifications, I would be OK with it. You have to get your attorney to protect certain inspection rights and make sure you avoid allowances.

Having an architect on your team is paramount.

Having an architect on your team is paramount.

And preferably in the quarterback position, not on the practice squad.

And having a good construction attorney is also paramount. Make sure the contract protects you.

Definitely hire your own architect to design something that works for you versus changing one of the builder's plans.

Thanks everyone. What are some things that you'd have in a contract? I'm assuming inspections (at the end, and/or throughout?), a warranty (2/10?), clearly stated allowances for finishes and appliances that are realistic, anything else? The sale price for the house is $799K, but if the bank appraisal does not come back for $799K, how should I suggest we resolve this? In doing the math for my own tear down and custom build in this neighborhood, a house of this size comes out to about $130/sf which is one of the lower bids I've received from builders. They all range from $130 to $200 in this area for a custom build, 3000 sf house w/ finished basement.

Because the neighborhood is slowly turning from 1950s ranches to newer homes, great comps are very hard to come by. They range from $690K in worse areas, to $1M in a nicer area near a park. I think there's a decent chance the appraisal could come back around $750K at the low end from the bank - but I'd have even more of a gap if I went with my own tear-down/construction loan/build. Do I just need to agree to a certain amount of $ that I'd be willing to cover w/ cash in a custom build like this?

Stay away from allowances. That area is ripe for abuse by the builder. Be as specific as you can with each and every element. This is why you want an architect and an excellent real estate attorney accustomed to writing construction contracts. Allowances are the way builders present you with a lower figure and then charge you mega bucks for the extra amount during construction. The best way to avoid change orders is to have each and every item specified in the contract.

Whenever you have an appraisal shortfall, one of the options is to have you make up the difference in cash since the bank will loan on the appraised value or the purchase price in the contract, whichever is lower.

"...He said that we could enter a contract with him, hire an architect to adjust the plans he has or even bring our own plans, and purchase the house for a price that I think would be difficult to beat if we went out and purchased our own tear-down lot, hired an architect and builder, and did our own custom house..."

He said...he said...he said...

I think...I think...I think...

This is one of the very best recipes you will ever find for a design-build-real estate disaster. There are no drawings. No specifications. No site plan. No written estimate for cost of construction. No selection of the type of construction contract. Allowances are left wide open. No conditions for change orders. No schedule. No approval from the local jurisdiction. No comments from a lender.

No one knows what the other person is talking about. Just sign a contract and we'll get started...

What could possible go wrong? Where to begin...

What to do? 1) Talk to several lenders; 2) Commission an architect (not a drafter or someone the builder goes fishing with) to work with you to prepare a custom design to fit the desired property, ie construction drawings and specifications; 3) Get legal assistance on how best to put a deposit down which will hold the desired property; 4) Check with your local jurisdiction to see what is required for approvals, and the schedule, for obtaining necessary approvals; 5) Get assistance to understand and select the type of construction contract in YOUR best interest; 6) Do not have any allowances in the construction contract--NONE; design and specify everything; 7) Get assistance so that the terms and conditions for change orders are in your best interest; 8) If schedule is very, very important, get assistance so that you have terms and conditions for liquidated damages which are in your best interest.

Once you done all these things, you may be ready to proceed. Any hiccups and dejar rapidamente

Thanks Virgil for the details on how you would proceed. The builder already has permits from the county (so he says) based on a home that’s similar to the one he’s already built in the neighborhood. I’m assuming he will need new permits if we change the plans right? The home he has plans for is the right size and general layout, but it’d be nice to be able to adjust them, I’m not sure we need a fully new home from scratch, we like the house he already built in many ways.

Also a reminder, he owns the property and has a construction loan out to build a house already, so financially I don’t have any of my own money on the line yet. My thought is that I would use a lawyer to draw up a contract and put earnest money down, and held in escrow.

i have a call with the builder’s realtor agent/partner tomorrow to get some questions answered. It sounds like my next step after that will be to meet w a lawyer and architect.

The builder's agent/partner represents the builder 100%. Don't sign anything with them. Meet with your attorney, not the builder's attorney. The builder has a contract that he will try to have you sign. The contract is not buyer friendly, none of the builder contracts are buyer friendly. Yes, you will need new permits if the house changes to one you want to have drawn up by an architect.

The realtor’s husband is the builder here? That’s way too much conflict of interest. You need someone on YOUR side. Someone who isn’t trying to sell you a pig in a poke.

Yeh, we’re definitely not signing anything tomorrow. Just trying to get questions answered like, is how much is he willing to change the existing plans.

While you are asking, get a copy of the spec sheet. It will not be detailed - I can almost guarantee that and they will have a list of allowances. This is why you need someone on your side. Most builder contracts have so many holes in them for the builder to increase the price to you....not for you to avoid increases.

The questions really become what is the builder's goal and what is your goal, followed by are they similar. I strongly suspect that you two are not really on the same page.

Production builders don't make their money the same way custom builders do and not many production builders are going to carry the additional risk of a production build business model while building a custom home. Some of the things you are describing sound like a square peg and a round hole scenario.

If you are looking at taking his plans and modifying them, then great, do that. If you are trying to use a production builder business model to design a custom home with architect and all, I think you are running hard and fast into trouble. I can't believe that any production builder is going to let you walk into the deal with a contract from your attorney, and I am not sure it will be worth it even if he does. Having a contract and enforcing a contract are two very different things.

A final word of warning, make sure you plan how the walls are constructed as well as where they are going.

ETA: I realize this may seem in contrast to my earlier post, I didn't realize he was carrying the loan.

Yeh honestly I’m not looking for 100% custom. I just want to be able to tweak the layout a bit and pick finishes. The spec house he has is actually really nice, classic, simple craftsman style, not a mc mansion.

i think what he gets out of this deal is to be able to show the bank he had a contract for a house at the price he wants. Comps in this neighborhood are still lacking. He’s got other projects in this area that this comp will help him with. His ad on Redfin also says, bring your own architect and design. I think he recognizes he doesn’t have an architect on his team.

I’ll report back after my call tomorrow.

A couple of thoughts.

Most inexperienced builders can't build multiple spec homes at a time. Land is pricey and hard to get loans for and then banks still remember 2007 when builders just went bankrupt - with no recourse from the banks. At least in my neck of the woods. "one of his homes"

We have areas like what you describe and appraisals are easy. I haven't heard any concerns about getting appraisals on new tear downs. You said comps are lacking and then you listed comps. You don't need 10 comps.

Bringing your own Realtor will cost money - that person has to get paid. Just keep that in mind. $19k in my area.

In my area, the spec builders command a significant premium by being land banks. They buy up the potential tear downs and incorporate a significant profit from that. By being the lot owners, they have you captive. So you do better (IMO) by buying up the land before they do. They also take significant risk building spec houses and in a rational market - risk gets rewarded. The reward being more profit.

What you have is not a production builder. Just clarifying since someone has mentioned that. You have a spec house builder - we call that a custom spec builder around here. They build what will sell - more show than bones. Not horrible but zero incentive for him to do things better than code.

In my area, I am fairly comfortable that I can save money by doing custom (with a builder - not owner build) or at the very least, get a much better built house. It is a complicated game of course and we have been trying to get permits for months (which is common around here). But at least the land is paid for in cash so interest isn't racking up yet. Most people don't have the stomach or patience for it all - and I totally get that.

In this scenario, you are doing 1/2 custom, 1/2 spec. and I don't think there is anything wrong with that. Done all the time. Those of us who frequent an internet forum would be much more likely to buy the lot ourselves and control the construction loan.

When people do what you describe, money is not held in escrow (well at least typically in my market). The builder wants/needs it to keep going. He wants to be able to buy another lot that comes up and I would think escrow would limit his abilities. Enough so that I don't think it would be worth the headache of having a buyer lined up.

In the many builder contracts I have seen, the builder inserts a written waiver of escrow for the buyers deposit. It may be different in your area, but if it is, I would be completely surprised. This is why you want your own attorney Steve, so you don't have that clause, among other clauses, in your contract.

As to the Realtor fee, its in the price already. Remember, the partner to the builder is a Realtor. Any fee agreement for the sale of lots/homes would have been worked out between those partners well in advance.

So the one house this builder has finished was listed at $769K, tho he just increased the price to $799K. I had thought maybe we could just settle and move into this house, and have them change some things like fixtures. I had contacted him without a realtor (just drove by and saw a sign/number), and he said if we just used an attorney, he'd be OK covering changes to the house (which included putting a bathroom in the basement) if we didn't use a realtor but rather used an attorney. I thought this was fine, but I also said I would hire an appraiser to get an independent valuation of the home. Well the appraisal came back at $692K. He had issues with some of the facts in the appraisal, but it's still a lot lower than $769K or $799K.

That's when I thought maybe I'll just buy my own lot, and hire a builder. Well after calling 6 builders, and looking at lot history for the last year, I don't think I could build that house for less than $775K at the very cheapest, likely more like $800K to $825K. That's why I'm back to considering how to make his other cleared lot work.

I do think he likes saving on the realtor commission, and having a contract in hand for the lot he has. He mentioned both of those things as good for him. In exchange he said we could adjust the layout and upgrade some fixtures - describing this as win win.

I understand why people go full custom, but I don't think we really need all that. I've lived in high cost cities for 20 years, in condos that are very small and very expensive, and the idea of getting this house and adjusting the stone, tile, color is really all I'm looking for.

The other option is to buy a house that I renovate, but that seems like just as much hassle for maybe not as good of an outcome...

There are a lot of folks who have done just what you are considering. I would have an attorney on your side to draw up a contract and then go for it. Be wary of allowances, and do your best to spec things up front. Change orders = financial death. ;-) They are a triple whammy of not enough "credit" for what he was thinking, high price on the changes and then usually a 10% "Change order fee" just for fun.

As long as you realize he's a developer and taking most of the risk - he's getting paid for that. However, in a bustling area, as you have found out, it's not always cheaper to go it alone.

Denita - I totally disagree on the Realtor Fee. It is his wife right? They are a team and if you bring a new buyer's agent in, that agent gets $19k out of the transaction that is not accounted for. I have done several of these deals and avoided a Realtor. When my builder has a build budget, he factors in 2.4% or double depending on the situation. It was deleted from mine.

Having worked both sides of these type of transactions - builder side for a couple of decades and buyer side for another couple of decades, it is built into the price of the home. The buyer doesn't see it. The agreements are worked out long before the buyer ever gets to the builder. This is especially so if the Realtor is married to the builder. The fee doesn't go away when the buyer appears without a Realtor. Did they give you a discount, yes. Did they label it Realtor fee? Yes. But you could have negotiated that amount off the price without any label.

I totally disagree on the Realtor Fee. It is his wife right?

I don't see where the OP said this, I guess he might have, but I see partner. I took that to mean business partner which is very common in my area. Builders and realtors often team up on deals like this. In fact, most of the lots in my neighborhood were developed with a realtor and builder partnership.

Yes the realtor is a business partner.

The difference between a spec builder and a tract builder seems a little vague to me. They both carry the same risk and make money the same way.

In the end, this builder has to carry the risk that the house will not appraise and the bank will not approve the loan. In construction loan situations, this risk is borne by the consumer rather than the builder. Given how often custom and and semi-custom houses don't appraise, this is a real concern for the builder. So how is he going to alleviate that concern?

If anything, spec builds have more pressure to cut costs in unseen areas, as they are not given access to the build efficiency of tract builders. In the end, there is significant risk of getting a pig with lipstick. A badly built house is a problem no matter how nice the tile floors are, and how expensive the kitchen cabinets were. This is why I noted that I would want input and oversight of wall construction rather than just worrying about where to put them.

Now if you aren't worried about the house appraising and can alleviate some of that concern then that alleviates some of the risk, but if you put an appraisal requirement on the house I would contact a bank in your area to ask how often custom homes appraise. You might get yourself into the middle of a mess without any realistic way out.

"I don't know what kind of references he has"

Find out. Now.

Denita - we will agree to disagree. I certainly understand that large builders will never claim to give a non realtor discount. But when you are dealing with a custom build, he needs to make a certain amount to be worth his time and overhead. The Realtor fee eats into that - significantly. I have done builds with upfront cost plus fixed fee accounting. The builder made a fixed fee. Any realtor fees would come off my bottom line. Now - that doesn't mean it isn't valuable but if you don't want or need it, it just becomes an additional cost.

Sounds like this builder appreciates that he gets more money if there is no realtor so gives some things for free.

I fully acknowledge that perhaps not every market works this way.

So I made up in my mind about the wife as realtor. The realtor is a partner - he most certainly doesn't get 4.8% if there is no buyer's agent. Who knows what he gets and that part is pretty irrelevant. A rational seller knows that 2.4% for a seller's agent is ridiculous.

Steve - why do you think he is able to sell at lower cost than you would be able to do if you bought a lot and all that? Just curious, either way builder has to make money. Honestly, in a rational market, you should be paying more for a quicker turnover and less hassle.

Spec custom builders don't have much issue with appraisal in my area. When you build as cheaply as possible except for the bling, you play right into the appraiser's hand. They don't value quality behind the scenes and that is what true custom people do which is why they get in trouble. Other times custom builds appraise low because they are too custom.

OK we met w/ the realtor/builder at one of his houses that are on the market. He's going to send us references, he says they've built about 40 homes in the area so there will be plenty of people to talk to.

He's got the construction loan, and is OK with using an escrow to hold the property. He's sending a budget and spec sheet for the house they have permitted. Any changes in materials or upgrades will have to paid for with cash at the time of order. I know this isn't the best arrangement for a custom build, but for a house that's more of a spec build, where I'm not carrying the loan, this seems reasonable to me assuming the budget they send isn't ridiculously unreasonable (i.e. $2000 for all kitchen appliances). This spec house they have has bosch appliances, marble baths, granite counters, etc, it's decent. I'm going to hire a lawyer this week to help me put together a contract based on this info.

The other new construction communities here operate in the same way. Put $15K/$20K down in escrow to hold the property, then pay for upgrades w/ cash. I realize this is where I'm going to get screwed - but I also don't want to carry a construction loan for 10 months or take that risk. I also don't want to buy a house that I'd need to then redo a kitchen or bath b/c I don't like the layout or materials used.

Hey David. I think they're making money bc they purchased the lot for less than I can purchase it now. He said that his costs are about $100 sq ft to build. They have projects lined up and they’re looking to finish each one and move on, not wait for larger profits to come through.

The house feels very well built. Solid doors, very solid floors with zero noises or movement, spray insulation in the attic, double pain windows, zero street noise coming into the house when the doors are closed, nice woodwork/crown molding. He didn't flinch when I asked for references, he said he'll send me several homeowners I can speak w/ directly. Warranty is 2/10.

$100 a foot to build sounds very low to me. Make sure to examine those specs for what the contain and for what is missing....

What’s interesting is the appraiser who said the house they just built is only worth $692k said that builders should be able to build for $85 a foot, including profit. That’s according to some national building manual that appraisers use.

yes, I’ll be interested to see the budget, I’ll try to post it here when I get it. We do have $24k in commission fees saved that I’m going to see if we can use to cover upgrades.

IIRC, most appraisers use Marshall Swift for their construction costs as they have to have a third party independent source for costs.

http://www.sfrep.com/marshallswift/

Check the appraisersforum.com too. They have a section to ask questions by consumers. Be careful, they are fairly brutal over there :)

The more important items are not the bling of Bosch appliances but what windows? What insulation? Is the construction 2 x 4 or 2 x 6? What is the HVAC system? Is the AC the minimum 13 seer or is it better? Single Speed or variable? What's the hot water system? How is the foundation built?

Forget the bling. Make sure the unseen items are top notch.

CP, will those things be apparent in the spec and plans? Is there a list somewhere of what you’d ask about apart from those you just mentioned?

Yes Denita, it was Marshall Swift that the appraiser mentioned. He said using that manual costs should be $85 per foot.

As a retired appraiser, I will tell you that valuations will lag in a rising market. We are in a rising market. Building and sales are hot. Inventory is low. Right now it is especially hard to do new construction valuation due to the lag in data.

This doesn't sound like a bad deal if you take steps to protect yourself. If the changes to the plan are minor, they can be done on the back of a napkin. If they are major, you need an architect. Your builder will need to advise you as to how he wants to handle the changes. Moving a doorway or moving plumbing fixtures is much easier before you break ground. Be sure everything, and I mean, everything is specified in the contract you sign. Show some restraint in the add on items. They add up fast. Get an attorney who is proficient in real estate contracts. It's better to pay up front for a lawyer now than later when you are committed.

Thanks home chef. That’s reassuring. We’ve talked about the changes we want to make and they are pretty modest. I thought I’d get an architect just for peace of mind, and so the builder knows exactly what we want.

"...builders should be able to build for $85 a foot..."

How many houses in your area have you seen built for $85/SF in the past 1-2 years? How many existing homes are on the market for $85/SF?

The ground is turning to quicksand...

This week has been a big learning experience. The appraiser swore up and down you could build for $85 a foot. No one else believes this to be true, none of the builders here and none of you either. When I brought this up with the appraiser he said that the “market isn’t healthy” and consumers are getting taken advantage of. But looking at sample spec sheets from builders I can’t see how they can make $85 work.

You need a new appraiser. I haven't seen $85 s.f. since the mid 90's including homes in N.C., S.C. Michigan, Texas and Utah.

When I brought this up with the appraiser he said that the “market isn’t healthy” and consumers are getting taken advantage of.

By chance is your appraiser named Robin?

Whatever that appraiser is smoking - I want some. We're at full employment. Wages in the construction industry are rising rapidly. If you are good, you are getting good wages. Less immigrant labor is playing into it as well. The old rules about materials / labor ration no longer work. (and that's even with the rise also in materials!!!)

Why does the Marshall Swift manual not reflect this reality for building costs? That manual he said was updated every quarter...

"That manual he said was updated every quarter..."

Maybe he meant quarter century?

There's a very good lesson here...should be a sticky for all consumers...

If it seems too good to be true...mebbe, just mebbe it ain't.

Bob agrees.

PS: If an "appraiser" says a house can be built for $85/SF, ask her/him if they will build and finance it for that...

CP, will those things be apparent in the spec and plans? Is there a list somewhere of what you’d ask about apart from those you just mentioned?

Yes it all needs to be specified. For example let him specific brand, series, etc of whatever product he's using.

You said he uses Bosch products. Is it the 500 series, or the Benchmark series?

Then once he specifies, you do your research. For example, we found out our builder used a Carrier AC and made a big deal about it. However it was only a 14 SEER and a single speed. Not the best in hot FL.

As for a list, figure out every single thing that makes the house hum. What type of insulation? How much? The only way to understand all of it, is to do lots and lots of research. Read all the forums here and learn.

TANSTAAFL

You’re dealing with more than one idjut here. $85 a square was builder grade before the crash. Not semi custom with some lipstick on the pig. $200 a square is more like it. As a start.

You're gonna find out really quick here that the pig is more important than the lipstick shade. What good is a level 14 granite counter if your upstairs is always hot in summer and you have a $700 a month cooling bill? Or ”wood” floors with 3/32” veneer topping? Or a fancy handmade subway tile shower with no waterproofing?

The only person quoting $85 is the appraiser. Also Sophie, this isn't a custom house, it's a spec house that hasn't been built yet, so we're going customize it a bit. I'll check the specs I get for more details on framing, drywall, house wrap, insulation, HVAC systems, etc.

Appraiser works for the bank, not the buyer. Keep that in mind. The more you have to pay above appraisal, the better the bank is protected against future default.

Edit: I'm not saying you are going to default. I'm saying that is how the bank looks at the deal, worst case, you default and they still get their money if they have to sell it. If you have a lower LTV, their risk is reduced since they loan on the lower of the appraisal value vs purchase price.

Like new houses on the market are your best comparables. I can see how the "book" lags. When I was in the car business, our favorite sayings were along the lines of "how many cars has that Kelley Blue Book purchased?". Same thing here.

The appraisers are VERY risk averse these days - with the regulation in place to separate the bank from the appraiser to reduce fraud (because that DID happen!), the aversion to being sued for over valued properties, the lag in a market in the upswing (only having closed sales from which to refer) - and it sounds like you have a cranky old guy for an appraisal that seems to be living in the past and have the thought that everyone is getting screwed. (apologies for more 'current' cranky old guys out there)

To tell the truth, I never thought that Marshall & Swift was correct. We had to use it as a third party source, but the valuations were stupid wrong. No one really relies on the Cost Approach. The Sales Comparison Approach is given the greatest weight in residential appraisal. So, get the price per square foot out of your head. It means nothing. You won't know the price per square foot until the project is completed. It's going to be a lot higher than $85.

The appraiser works for the lender. End of subject. The appraisal is not to protect you, it's to protect the lender. You pay for the appraisal. It's not yours.

Get everything in writing. Get a real estate lawyer to draw up the contract. Be disciplined about your upgrades and change orders. It's good advice to spend your money on insulation, windows and HVAC. It's the stuff you can't see that makes the difference to how good a house you get.