You will own the house as you build it, not upon receipt of the CO.

Our relatively small construction loan is under 5%. We financed much of the build ourselves. Good credit scores, owning the land outright, which itself appraised for more than the loan, and our substantial cash investment guaranteed us a very good rate. Perhaps you should talk to some more sources.

If you have enough cash on hand to build the house, I don't see a risk. If you are doing it on a razor thing budget, with no room for overruns, you risk ending up with an unfinished house that you can't (legally) move into.

If you can't work for some reason, will you have enough cash on hand to finish? If your business tanks or the economy takes a real dive, will you have the cash to finish? Only you can answer those questions.

Thanks.

Perhaps I was a bit unclear. I want to finance the construction myself, and then take a mortgage out upon completion and receipt of the CO. I would use the proceeds from the mortgage to replenish my cash reserves. I like to keep cash around. You never know when you might need it.

I'd really like to know what some of the risks to not getting some cash back out are... Obviously one risk is running out of money and not obtaining the CO. That is a risk, but I think I have enough room in my budget for that not to be an issue. What I'd like to know is:

Are there intangibles that the construction loan is providing me? Auditing of the builders financial statements? Scheduling of the draws? Inspection of the construction? What other unforeseen things might stop me from getting a CO?

Are there intangibles that the construction loan is providing me? Auditing of the builders financial statements? Scheduling of the draws? Inspection of the construction?

Some of those, probably. Our lender ran the financials on the builder, check his references, and approves the draws based on a monthly visit by an appraiser. They do not inspect the construction beyond what the appraiser does, although one of their officers claimed that they did when we were talking to them about getting a construction loan. I now know otherwise.

Just wondering, have you talked to a lender about what kind of rate you would get when you mortgage a completed home?

The rates are actually not bad - you pay about a quarter of a point higher rate for a stated income loan (as I'm still planning to keep a large amount of equity in the house). The issue is that most banks I've spoken with don't do stated income for construction loans. For those banks, I'm a square peg in a round hole. For the banks that will do a stated income or asset based construction loan, the rates are high.

The conclusion I'm coming to is that I'm better off doing it on my own. I just need to make sure I'm being more diligent than a bank would be with their own capital. Hopefully it is as easy as hiring good lawyer to draft the contract with my builder and keeping close tabs on him while the construction is on going.

One of things the title company does during the construction process is collect lien waivers from all the subs. You may want to look into that. You don't want to end up with a lien on your house by a plumber who claims you didn't pay him.

One of things the title company does during the construction process is collect lien waivers from all the subs.

That's what I expected. It turns out our lender does not do that. Tennessee law prohibits subs from liening residential property as long as there is a prime (general) contractor. Only the prime contractor can lien the property for non payment.

The law does not apply to owner/builders. In that case, the subs can lien the property.

Our lender's title insurance did not collect lien wavers from subs so I suspect that is region dependent.

Our lender did quite little and it wasn't a real construction loan. There really weren't inspections. Let's just say there was a decent amount of trust with the builder. The builder had a schedule of draws. In the end, the lender just gave me the cash and I sent the draws to the builder. I also did the draws in the beginning instead of borrowing at first.

So in the end, I basically did things without a bank. If you trust your builder I don't see a real issue. Our bank certainly didn't check the builder's finances. The bank inspections are just a way of preventing fraud and I think the average owner could make sure that things are progressing on the build. Our draw schedule was based on a standard outline. I'm sure that is available online.

But the benefit of using your own cash is that sometimes you can get a discount for paying cash.

Not only items mentioned above, but when we went to get a mortgage after the CO (had used home equity loan from old house as construction loan since we were building modular), we were told that we could not get a mortgage since we weren't either converting construction loan *or* buying the house from builder/owner. We had to get a home equity line on the new house instead, *and* had to wait until after we had sold the old house and paid off the loans on that. Was tight for about a month - thank goodness we had a buyer by the time we had a CO. Even then, we borrowed from family and postponed work (like the master bath) b/c we didn't want to max out the total owed on the old house to more than what the offer was for and then have to bring cash we didn't have to closing. It was easier to borrow money from my parents to pay electrician and then wait til we had cash to put countertop on the kitchen island, etc. (and the bathroom is still unfinished!).

Contrary to ajsmama - we had no problem getting a mortgage once we had our CO. They did call it a refinance but no problem.

From our experience; a)the builder did not get lien releases from his subs, for work done to date b) since no bank was involved there was no accounting for money we paid was used for materials delivered/used for our build.
About two months into our build the subs informed us that they had not been paid, although the builder had already been paid 3 draws.
We paid subsequent subs directly. The subs we did not know about, foundation etc put liens on our home. We could not get a C.O for several months after the build was complete, without the plumber signing off on paperwork (he was owed money and had placed a lien).
We filed criminal charges with the D.A.'s office for mis-appropriation of funds. He was arrested several months ago in Shreveport. He has since paid the 20K to remove the liens. The criminal case is still ongoing, plus we have filed a Civil suit for the monies we paid the subsequent subs, which should have been partially paid out of the initial 3 draws!
With no one checking on the builder, there is great opportunity to defraud the consumer if they are so inclined.

archson,
If you own the land and have the cash, why not just educate yourself on the GC process and build it yourself with your own selected subs? You'll also save about 30% by being the GC yourself. If you're the owner-builder you're most likely allowed to do this legally. I can't see borrowing money and paying around 250% of the value of a home over the life of a loan when you got the cash.

twize-

That's a great idea, and I've considered it. The only problem is that the land is about 100 miles from where I currently live.

twize - you are doing a disservice to people by stating that you will save 30% on build cost if you GC yourself. That is a gross overstatement of the savings.

A mortgage is payment for a home loan. If you do a cash build, you will have no loan, and thus no mortgage. If you want to pull cash out after the build, you will have to do a home equity loan. Big difference in the banking world in the documentation and rates for the two types of loans.

If you have the cash plus a VERY healthy reserve to be able to do a cash build, I would still explore getting a construction loan or a home equity on your present home anyway. Even if it's for less than 50% of the build. Yes, the interest rates will be high for you for a construction loan. But it could be the difference between you actually completing the home and not being able to complete the home if something happened and you weren't able to work for an extended period. Which is precisely why lenders charge a high % rate for your type of situation. It's much riskier for them.

archson,
If you wanted to keep some cash around and borrow money for your project, I agree with live wire oak, that's probably your best solution. Borrow some against your current equity and cash finance the rest. Very little financial paperwork involved in getting a home equity. That's how I bought my three acres, then paid it off with profit when I sold my primary residence.

David Cary,
Not that it matters because he's 100 miles away anyway, but to clarify something. If you GC your own project it is not a gross overstatement to say that you could save up to 30% because you're not charging yourself for a myriad of business operating expenses(including all kind of insurances required by law), hourly earnings for yourself, markup on materials, and wages for other laborers. Yeah, you have to carry some insurance to protect yourself but not as extensive as an actual business. A GC doesn't directly charge 30% for services rendered, but by filling those GC shoes on your own(if you have time and patience), and getting a builder discount you can save a substantial amount.

twize - I wholeheartedly disagree. I don't think there is a rational discussion here so I'll end it there.

David Cary, could you continue the discussion, if only one post to explain what you disagree with and why? It is always educational to hear both sides of the argument!

I actually find it hard to believe the mark-up from the GC is anywhere close to 30%. A friend of mine is currently doing a cost-plus build in the same town for less than 10%.

If there is a 30% mark-up from the GC, I'm going to quit my job and become a professional GC.

In my market, a typical cost plus is 15% and there are no padded markups. Our super (who did not charge for his time beyond the 15%) did many hours of hands on labor. He cut trim, installed bath hardware, helped me rerun wires that got cut, cleaned, installed cabinet hardware, fix stuff that one sub did (too many to count) in prep for another sub. Either way he probably spent 150 hours uncharged for doing actual hands on stuff rather than just supervisory work.

I don't really see how someone could think that 30% of a $500k build goes to the GC - that is just ridiculous. And I too would quit my job. I considered OBing but it just didn't make sense from a time/$$ ratio.

Does anyone who OBs really think they always get the best prices and best responsiveness from the subs. Acceptable I'm sure but as good as an experienced GC - I doubt it.

A GC doesn't markup 30%. The markup contributes to the overall cost of hiring a GC. Maybe in your market, or your particular GC doesn't markup, but it is not an uncommon practice for a GC to markup materials he purchases for you. In some areas the economy may drive the GC to bend over backwards(uncharged manhours, no markups) to get a contract just to have an income, or in a stronger economy the GC will have the latitude to charge more. An OB may not get the best price from a sub all the time but an OB can save thousands by snagging great deals(craigs list, ebay, liquidation sales) as they come along and not forced to purchase materials on a rigid schedule. Bottom line, any given person may not be able to save quite 30%(there, I said it), but you can't deny they'll save a whole lotta money and have more vested interest in the quality/workmanship of their house being built than a good number of GCs. But hey, it's not for everybody. Some people are comfortable watching the game from the bleachers, some like to coach. Me, I like to play.

Another risk is that you may not be able to deduct interest from the mortgage you get post construction. I'd suggest talking to an accountant - I'm not one. I think I recall that you have a certain amount of time to pull money out of the house post construction while maintaining its deductibility (acquisition debt). It may take longer than anticipated to secure financing once construction is complete.

My understanding is that you can take out a mortgage up to the amount you spend to build or improve the property in 24 months prior to receipt of the mortgage and still maintain the tax deductible status. But I will double check with my accountant.

The reason to not finance the project yourself is that you will might not be protected from unforeseen financial emergencies unless you have other adequate funds set aside for that purpose.

One of Hemingway's characters, when asked how he went broke, said, "slowly, then all at once." It's the "all at once" part you need to watch out for.

Saving money by being your own GC usually only works if you have nothing else to do with your time (ie your time costs you nothing), and there is no time limit IMHO.

That old quote from Hemingway is so often misquoted I found it in The Sun Also Rises:

"How did you go bankrupt?" Bill asked.â¨â¨

"Two ways," Mike said. "Gradually and then suddenly."