Side question....the bank has to know what it's buying. They don't lend on a wing and a prayer.

How is it possible even to get mortgage funding if a contract is so vague and no one (least of all the OP) knows what they're getting? The bank owns the property until you pay off the mortgage. They don't have to approve the plan? They don't have to consider you might get half way through and not be able to go further? And then they'd be stuck with an unfinished house?

Similar issue if your house isn't appraisable for your outlay.

If you pay cash this wouldn't matter, but with mortgage......?

My question isn't exactly oblique. Has the OP been consulting with the lender? This would be pretty crucial.

In my case, my lender vetted the entire contract, sent periodic inspectors, released funds in pieces and only after passed inspections, etc. They even skyped-in a structural engineer to examine my foundation. (She had the on-site inspector running around to video specific spots.) There couldn't be ANY surprise bills (except maybe permits). And... no appraisability for the cost of construction, no house.

On the subject of permits..... has the OP included permits in the budget? Nasty surprises are about to blossom all over the project.... And IMO there doesn't seem to be budget clarity on this whole build.

strategery, no, we are fixed price. The allowances are part of the fixed price, which is why I assume the builder already included his upcharges for allowances in his fixed costs.

I said up front I would buy certain items myself, those I knew I would want to select myself and look for deals, such as all the electric hanging fixtures so there weren't any allowances for those. But I expect he probably took that into account in the fixed price.

Which reminds me, before signing the contract, get a complete list of where the builder expects you to go to select items and what the process is. And that you will be given the prices directly, so you can decide whether or not to select lower cost items. This was an issue we had with plumbing at Ferguson's as the prices were only given to the plumbing sub, so we had no way to make trade offs on expensive items. This is why I would prefer to have had an allowance for this, rather than have it included in the plumbing sub's bid, which of course I didn't see.

If you go over on allowance you just pay the diff? That is, ermm, unusual to say the least.

Why do you say this is unusual? We had a fixed contract and this is exactly what happened.

We went over and we paid the difference or we could use the credit from a line item we were under budget on.

We can shop wherever we want to get items for the allowances. We are responsible for any shipping charges though. He does have partnerships with certain places though and we “get a discount“ if we go through them.

@tangerinedoor Great question! We were planning on buying the lot in cash and having him finance the building of the house. We would put 10% down when we sign the contract and the rest would be due at closing. He is charging us a $5,000 interest fee (in addition to the price of the house) to do this. Interestingly enough, there is no mention of any of the financing in the contract.

@HU-248891484 To follow up on what tangerine said, at What point do you start working with a bank for financing? How do you know you’ll be able to get financing to cover the total build cost?

Would the lot be transferred into your name at the beginning, when you pay cash for the lot or at the end when the house is completed? I find it interesting that there is no mention of the actual terms of the financing in the contract. And that is not a good thing. What about title insurance? What does the contract say about releases/lien waivers?

We already have a commitment letter for a mortgage to cover the cost of the lot and house that we gave to the builder.

He is getting the financing for the build. That is why we are paying the $5000 fee to him. He said that will cover his interest fees.

Transfer at the end when the build is finished

Ignore what I said. If they own the land, they get to decide how they do business.

@tangerinedoor Great question! We were planning on buying the lot in cash and having him finance the building of the house. We would put 10% down when we sign the contract and the rest would be due at closing. He is charging us a $5,000 interest fee (in addition to the price of the house) to do this. Interestingly enough, there is no mention of any of the financing in the contract.

You need a construction lawyer NOW!

Transfer at the end when the build is finished

So you pay for the lot now upfront and if he goes belly up or doesn't finish the build, you're out the money for the lot and you have no house. This is not a situation you want to be in. I'm sorry but it sounds like a scam.

And if you have a commitment letter from a bank to cover the mortgage and land, why do you need to go through him and pay him $5,000. And what is the mortgage rate you'll pay at the end?

I'm sorry but this all sounds very, very fishy and not right.

No, do not pay for the lot up front.

If you are going to buy a lot, then do a construction-perm mortgage on it so if this builder goes belly up you still own the lot and can get the house completed. No way is it a good idea to pay for the lot up front and not get it in your name. His objection will be that he can't build on it if he doesn't own it. Not true. The construction perm loan solves that issue entirely.

Edit: I agree with cpartist. It does sound like a scam.

following

I’m not paying for the lot upfront. I am paying 10% upfront. Everything will be transferred at the end when build us finished. When build is finished, we will pay for the lot in cash and take a mortgage out for the rest.

@cpartist He’s hoping to finish the build in six months, but we know that may not happen and that there could be delays. We currently own our home with a small mortgage left. We thought it would be easier and more cost effective for him to finance, since we will not be selling our house until after we move into our new house. Also, the bank that we are getting our mortgage from only offers construction end loans.

If you are taking out a mortgage, then the lender will require the lot to be in the loan. So when you say you are paying for the lot in cash, it really becomes additional down payment on the whole package deal. What you are describing is an end loan. X purchase price with 10% deposit and balance due at closing. Don't pay the builder a separate amount for his lot. That's not how it will be appraised and the lender encumbers both the lot and the house built on it.

@Denita yes, exactly, as I mentioned above your comment, a construction end loan.

For budgeting reasons, I referred to it as paying cash for the lot. Sorry for the confusion!

I didn't see your last comment until after I posted :)

Still, check into the builders references. Completed homes. If you are in a state where you can pull up public records to see what he has done in the last year or two, that would be a good idea to search his recent sales. It will reveal a lot.

What protects your 10% if he goes bankrupt? Please, please listen to your husband and pull out of this deal. Your brain is addled from a lot of little children in a small house! Kidding about that, but your need for more space is clouding your thinking.

Another house like the one that got away will come along. You will sign a normal contract, get a normal mortgage and avoid a lot of headache and risk.

@lindacottonwood,

If you go over on allowance you just pay the diff? That is, ermm, unusual to say the least.

"Why do you say this is unusual? We had a fixed contract and this is exactly what happened. "

I have never heard of such a thing. There was no builder's fee on the overage? No change-order penalty?

@lindacottonwood my builder explained it to me the same way. if we spent less on plumbing fixtures, we could spend more on electrical fixtures (or in another allowance area) without any penalty or overage charge

Your brain is addled from a lot of little children in a small house!

I don't know about the OP, but I forgot where I left mine.

(The brain, not the little children.)

@One Devoted Dame too funny!

Personally having built homes for the past 30 years, I believe these allowance are mid-level to low specially on cabinets and countertops for the size of home. Not sure what finishes you are seeking but in my experience you will run over on these allowance once you see what these get you.

Specially if you plan to live in the home for an extended period of time you will realize what products/finishes you received in exchange.

Strategery

Here is what I am talking about. We came in under budget on line item dedicated for counter tops by $3,000. On our appliance line we went over budget by $3,000. The Fund Control just moved the money. . There was no difference in the amount of labor. There was no Builders fee.

He received a fixed amount as stated in the contract.

After reading additional details, I would have to agree with OP's husband and pull out from the deal. We did what Denita recommended and got the lot in our name plus had insurance to cover us if the build was not finished for some reason. We did buy the lot from the builder. We had allowances and knew exactly what they would cover. Our deal was to sign an addendum contract each time we picked something that exceeded the allowance and pay at that time. With that 10% down, I assume you lose that (and perhaps pay an additional penalty) if for some reason you part ways with the builder. It is so easy to be emotionally attached to your vision of a home, but there is always another home out there.

Our experience in 3 builds is the same as @lindacottonwood

No change orders, no builder's fees, for anything involving purchasing items that fell in the "allowance" category. Any unused amount remaining in one allowance was applied where needed if we went over on another. If, totaled up, we were below the total allowances the final bill would be reduced or, as with almost any build, if we are above the total allowances we would pay the difference. They did send over all supplier quotes, including how much we were over or under that allowance, for review and our signature approval of the amounts before ordering the items.

Unless it was something that was changed from the original spec on the home (like our additional concrete flatwork, additional insulation and drywall, or a change from paint to stain grade on the fireplace mantle), there were no change orders drawn up.

I have no idea whether the builder is scamming the OP are not. What I do know is that she has no clear idea of what the quote, including allowances, will actually get her in terms of build quality (the HVAC issue raises real concerns) or quality of fixtures and finishing, and the contract is no help. She also has no idea of what her out-of-pocket costs above and beyond the builder's price will be to get what she wants. The contract is sloppy and the financing, to me at least, is murky. I'd walk away from this deal, put any building plans on hold until I better understood the process, and the real costs involved in building.

@lindacottonwood my builder explained it to me the same way. if we spent less on plumbing fixtures, we could spend more on electrical fixtures (or in another allowance area) without any penalty or overage charge

And what happens which is likely with your allowances if you go over all of them? Say your total allowance budget is $60,000 and you wind up spending $75,000. Then what?

"@lindacottonwood my builder explained it to me the same way. if we spent less on plumbing fixtures, we could spend more on electrical fixtures (or in another allowance area) without any penalty or overage charge"

Explained or has it spelled out completely exactly that way in writing in the contract? Verbally explained is out the window once the ink has dried.

Nobody has asked. Can we see the potential floor plan for this house??? The five bed thing? Both floors?

BTW......... Cooks World has it exactly right. She let out ONE thing. You will be far less taxed with turning yourself into a book keeper while caring for a family. The good stuff you want will already be in it. Less STRESS.

Times have changed. Three of us grew up in an 1840 aq foot center entrance colonial with ONE 6 x 9 bath. A tv room we all crammed into nightly......9 x 11 at best. Nobody died. We were too stupid to even be miserable : ) ! We moved into it and thought it was a palace, given we left behind a house half the size.

MY advice is save more money and keep looking.

Yep, for the sake of discussion, a floor plan would be helpful.

Is the architect a buddy of the builder, by the way? My hinky meter is going full on.

Has your mortgage financing company agreed in writing to your concept of paying for the lot separately with cash and a bunch down and the $5k and then at the end it will cough up 100% of the construction cost of the house? I can't imagine they'd even do that. Why would they?

Did you check the FEMA flood hazard maps, by the way? You won't get a mortgage without flood insurance (extra $$$$$, and it will reduce the amount of mortgage you'd qualify for) if it's in the hazard area. If insurance is even available at your new house location. But you also might not be able to get a mortgage, period: we have global warming, exponentially more serious weather events, and the risks on your build seem unnecessarily high. Banks care about this stuff.

The builder bails and the OP is out 10%? Of the whole project price? As in $60k or so? Yowza. There goes the possibility of buying another house if this one doesn't work out. I sure wouldn't want to risk that. And you get to pay $5k for the opportunity of shouldering the risk, too?

Did you budget for builders' risk insurance? You'll need that, too.

You budgeted for appraisers? Inspectors? Sewer use fees? Hookup fees, e.g. water? Driveway permits and town-required design (sometimes an engineer has to design and certify these)? A certified site-plan for the bank? Taxes that are unknowable because the house hasn't been built yet?

@cpartist then we pay $15,000 out of our pockets

We had a fixed contract for a couple of reasons. 1) We were retiring and wanted as low a monthly payment as possible. 2) We felt we could control our budget knowing ahead of time exactly what we could spend.

We had the land paid for in advance. We had a construction loan rolled into permanent financing.

We met with our banker and he went over all the allowances and for our size house let us know what was in line with our choices.

We made sure we had enough cash reserves to cover any unforeseen occurrences.

There will be things out of your control.

I don't blame you for wanting to build your own home. It is exciting and the thought that you can have things unique to your situation is appealing. We sit at home at still marvel over what we put together.

That being said we were prepared. I come from a Construction family .We did not know the builder before hand but we were familiar with the process. My Son who is a General Contractor

interviewed him for us.

I shopped , compared and went over every detail for so long I thought I would never feel rested again. Make sure you are up to the task. I hired a Designer who had done construction before

to give me her input. We took her suggestions to heart and they were invaluable. My mistake was not hiring her for the whole project. We were on such a tight budget I thought I could do the majority myself saving the money. I have done design work so I felt confident. What I needed was a professional for the small details you forget at the beginning stages that are costly to add later. Don't make that mistake.

Where did you get the plans for this house? All of this seems a bit off.

If I’m understanding correctly you had plans drawn up by a professional architect. You’ve hired builder #2 . It seems he hasn’t been specific in listing exactly what your itemiZed finishes and cost will be. You are questioning amounts but because you’re “green” , in the smallest of terms , “ignorant to the scope of work and selections “ building a custom home entails. If you walk now you lose $15k? Do yourself the biggest favor and hire a Designer who specializes in new construction. Someone who will walk side by side with you from beginning to end. You have four kids. This is going to end up being a series of errors, that In the end will cost you more than bringing someone in that knows what they are doing. That said what your builder has said they are including , 1 hvac unit , the allowances, $5 a sq foot for wood floors etc. And his lack of specificall laying out your selections is preposterous.

Hang in there OP. We finished a custom build last summer. We had the builder finance our build with $7500 fee instead of taking out a mortgage loan. That fee would be pocketed or used to change our fixtures and finish items if we walked away from it. We had our real estate agent write up a contract, stating the terms including the sale price.

We qualified for a loan in the amount we wanted to spend. We put down earnest money.

What doesn't stop a builder from walking with it? Their reputation.

What doesn't stop us from walking away from it? Our reputation.

Could the house had not appraised correctly in the end? Yes, so then we need to make up the difference or requalify for a higher loan amount.

We sat down and walked through a layout we liked on paper and then talked about finishes. They quoted us allowances and after more discussion we omitted and added as desired to get to a purchase price we wanted. If we went over allowances in anything under our control, i.e. we upgraded the flooring to tile in the kids bath, picked nicer plumbing fixtures etc, we made up the difference. If they made a mistake, placed the first roof strut wrong and needed to shift it, painted something other than the color specified etc, they had to take that out of their income line item..

What is important is that before you proceed that you know what monies are allocated where so there are no surprises.

" You are questioning amounts but because you’re “green” , in the smallest of terms , “ignorant to the scope of work and selections “ building a custom home entails. If you walk now you lose $15k?"

"You have four kids. This is going to end up being a series of errors, that In the end will cost you more than bringing someone in that knows what they are doing. "

It is also important that the OP understand building a custom home (really building any home) is often a full-time job on top of all the other commitments you have. You will be needing to make decisions often, sometimes daily. You are going to want to visit the site at least once each day that something happens to check the progress and ask questions of the project manager. You are going to want to comb through the construction on "off" days to really look at things closely. You are NOT going to be well-served bringing the children to a construction site if they are young and/or rambunctious since there are a lot of hazards at a construction site (and the builder may have rules about this, anyway) so you'll likely need a sitter very, very often if they are young. On our two fully-custom (not customized canned floorplan/option menu) homes, we did site visits every morning and every evening for a full year on the first and for 10 months on the second, plus the occasional mid-day request by the project manager to come out and look at something, plus all day almost every weekend.

Just be aware it's not just sign and go. There is a lot of hands' on time with the project.

@pinkpeony I went to two big box stores and two other flooring stores today and found a red oak hardwood that we liked for between $4.29 and $5.29 a square foot. The allowance is just a materials charge. Do you think it is too low?

So, at $5 per sq ft, your flooring would be $17.5k minus the square footage for the bathrooms? Will that work with your allowances? Does it fit in the budget?

The exact location of the hardwood floors is listed in the contract. It is the whole first floor, except for the bathroom which will be tile, and the second-floor hallway. The allowance for these areas is $5 a square foot.

You can find nice flooring for $5 Sq Ft. It won't be hardwood but I found nice flooring for that.

For my small reno/addition (not a build) I submitted about 8 pages of selections including brands, descriptons, pics, web links, store names. etc. right down to the paint and doorknobs. Then the builder based his estimate off that. Yes, I made several changes during construction. Some cost me nothing (and possibly saved builder some money) and some changes cost me additional money. But there were no surprises and I knew what I was getting. Do your shopping up front.

Hang in there OP. We finished a custom build last summer. We had the builder finance our build with $7500 fee instead of taking out a mortgage loan. That fee would be pocketed or used to change our fixtures and finish items if we walked away from it. We had our real estate agent write up a contract, stating the terms including the sale price.

We qualified for a loan in the amount we wanted to spend. We put down earnest money.

What doesn't stop a builder from walking with it? Their reputation.

What doesn't stop us from walking away from it? Our reputation.

You took a huge chance. Reputations mean squat if things go south. Luckily for you it didn't but I would never recommend your suggestion.

Plus you said you had your RE agent write up a contract? Someone with a vested interest in the outcome and not a construction lawyer who would have your best interest?

It is also important that the OP understand building a custom home (really building any home) is often a full-time job on top of all the other commitments you have. You will be needing to make decisions often, sometimes daily. You are going to want to visit the site at least once each day that something happens to check the progress and ask questions of the project manager. You are going to want to comb through the construction on "off" days to really look at things closely.

The OP technically won't own the site until the construction is finished so I'm guessing this builder won't let the OP on site either.

You will be needing to make decisions often, sometimes daily.

They won't be easy decisions, either. And some might depend on others.

What doesn't stop a builder from walking with it? Their reputation.

What doesn't stop us from walking away from it? Our reputation.

Sorry to say, reputation is not at all the same as an obligation, and in the blink of an eye it could be irrelevant.

Could the house had not appraised correctly in the end? Yes, so then we need to make up the difference or requalify for a higher loan amount.

Ummmm... NO. Qualifying for a higher loan amount doesn't get you a property above the appraised value. The appraised value is the amount the bank deems the property to be worth and reflects the risk they're willing to take with their money.

IMO you were taking a huge risk in expecting the appraised value to cover your costs. With new construction, it very often doesn't. You could have missed your target by tens of thousands.

I shopped , compared and went over every detail for so long I thought I would never feel rested again. Make sure you are up to the task.

Yeppers, this 1000 times over. Choosing sinks, and then re-choosing because you forgot about your MIL who won't be able to reach the faucets. Deciding on refrigerators and whether you'd like more fridge and less cabinet or vice versa. You decide on the larger model, but then all of a sudden you have a cabinet with an impractical skinny width. Then, the siding gets hung up because of trade tariffs, and you have to choose a different color and company, and the new shades are not at all what you started with.

It goes on and on and on.. I got so burned out, I refused to make any more decisions. At one point, the builder offered to take me out to lunch and a personal visit to the supplier of the vinyl tile (my choice was discontinued).