Whichever one gives you more control over the release of funds, so that work is completed to your satisfaction, and your house isn't held hostage. :-) (Which I believe is Option 2; I'm sure someone will correct me if I'm mistaken, lol.)

Edited to add: I assume you own the land, not the builder.

Do you own the land now? It’s a lot easier to walk away (from bad construction) if the construction loan isn’t in your name.

Yes, we own the land and it's paid for

Pro: You get all this money just for a bunch of signatures.

Con: You have to pay it back.

I would never give anyone "ownership" of a structure that was being built on property that I own. Is he also asking to put the lot in his name during construction and then sell you the house/lot back? We've seen that one here before!

We carried the note on our build. We didn't own the land yet but since it was a custom home the builder didn't want to carry it and that was fine with us. When he was ready to pay out for work done he brought me a sheet with who was being paid and how much. I had to sign it and then the bank paid the subs directly.

While this was nice it also meant that we had to be approved for the mortgage loan before starting construction. We were not in the position to carry 2 mortgages so we sold our house and moved into a rental for a year.

My BIL did option 1 and moved into my FIL home for 2 months between selling and the new home being competed and then assuming the loan. 2 months stretched into 5. So this might not get you out of needing a rental either.

Since you already own the land the very best option for you is a construction perm loan. You and the bank control the draws. If the builder can't complete the build you can bring someone else in to finish. The con is that you have to pay interest on the amount drawn over the course of the construction period. That is a small price to pay in comparison with the alternative.
In order for the builder to get a construction loan on your land, you would have to deed the property over to the builder. Risky in the best of circumstances. When he is completely finished with the build and obtains the c/o then you would close on your end loan to buy him out and get the property back with the house. You can see where this is inherently risky. Also, you lose all your leverage with the builder when you close on an end loan. He has the money once you close and if you have issues with the construction it could be difficult getting him back to the site to rectify.

ps...if he goes out of business or has financial difficulties during construction when he owns the land, you are up a creek.

Best answer - Denita!

Financing construction of a project on land the builder doesn't own is a risk to the builder and his/her lender.

That said, in either case, you'll end up paying interest expense on the loan either directly or indirectly. I recommend you consult with your tax professional about which option--if any--allows you to deduct the interest for income tax purposes.

Best wishes for a successful project.

my advice - look for independent loans NOT through your builder. Look for lenders who specialize in construction and remodeling

I doubt the builder could get a loan for a house on land he doesn’t own. We owned our land. We carried the loan. We did a “hard money“ loan that converted to a mortgage at the end. We also self financed much so the loan only covered a bit of build. so we paid our cash first then took draws at the end to minimize interest.

look for lenders. Our lender was a huge help in finding a builder And other contract questions and issues that came up

Ps. You said “potential builder”. If not settled on this builder ask a specialist lender for builder recommendations and also ask him/her what they have heard about this builder.

Lenders have a vested interest in properties being finished in a reasonable timeframe and quality! Huge resource for us.

our lender recommended our builder and we got the best builder ever. I also think our builder was more willing to talk to us as we were referred through a lender. We had builders not taking our project seriously and unwilling to call us back before so lender got us in the door. I think we came off as lower income than we are on paper, probably because we both come from lower income backgrounds. So not speaking the language or something. Or maybe builders just get jerked around a lot by the unserious. So having a lender sort of vouch that we could afford to do something like this might have been useful

I think we came off as lower income than we are on paper, probably because we both come from lower income backgrounds.

This reminds me....

When we were building our current tract home, my husband showed up to a planned meeting with the superintendent, and there were several other subcontractors present. He said he didn't think anyone took him seriously (his casual dress is a bit more formal than most). I suggested he wear his work uniform the next time he went in (polo, steel toed boots; he has a blue collar job that requires a college degree, and comes with a white collar salary). Bam, instant street cred, lol.

Sometimes, ya gotta dress the part, especially if you don't already carry an air of strong extroverted confidence (natural or fake-but-convincing). Break your own stereotype to fit into another one, all depending on who you're interacting with. Lenders? It doesn't matter, because they see your $$$. Builders, they see too many tire-kickers who can't afford what they want to do. Once the job is started? Relate to the folks who are working on your home.

Good and Interesting comments/thoughts to consider..funny on the "dress the part" comments...and the extroverted confidence..lol....we have admitted that we are "green" at this and was always reluctant to say that so that we would not be taken advantage of..but we have done a TON of research so we know "stuff" we need to know...obviously not everything, but we have gotten good at faking it ;)

It sounded like the option for HIM to carry the note would be ideal for someone who didn't have a lot to put down or maybe needed his credit? That is not us on either front..we will end up paying most of this build in cash and only financing a small amount. We are also renting our current house when the time comes, so we will have a home until it's 100% completed. So I guess I have the answer...There were a few aspects of it that maybe were appealing, if that's the right word...one is that if cost of materials go up during the build, we start and finish with a set price, no changes..The only changes would be if we upgrade along the way. The other was that if there are building delays due to weather or whatever, he pays the interest. I am really not even sure how much interest on this will be and it will obviously be lower if we use our cash first (like roccouple mentioned)

Besides the strictly financial reasons that others have discussed - if you get an outside banker you trust and can work closely with, they can be a great source of information and outside opinion.

My banker was the BIGGEST help as I went through the process of designing the house, selecting builders, etc.

Yes, like anyone, you have to keep their perspective in mind, and remember they want what's best for their own business - but they also have seen this a lot, and can give you warnings like "hmmm, I haven't seen that before" or "are you really getting what you want there?"

My banker steered me in a better direction several times (including preventing me from making at least one major mistake) through his little hints and suggestions.

Maybe not everyone has that relationship with their banker, but any time you bring another opinion in it helps put a different perspective on what you're doing and gives you more information to use to make your decisions.

OP, I haven't seen your bid (naturally) or proposed contract, but the sentence you said above:

.."The only changes would be if we upgrade along the way" strikes me as inaccurate.

NOT that you are providing an inaccurate summary, but that you were told exactly that there would be no changes (or change order fees). I think this is unlikely. Especially if your contract (proposed agreement) shows any allowances. It is common for allowances to be low relative to the actual cost of the item. I see this in my area especially regarding lot prep and other not fun items. Even the fun items such as kitchen cabinets, flooring etc come in the contract with unrealistic allowances. You will want to spec out your materials and make sure the allowances reflect reality or keep a large enough contingency fund to pay for the shortfall - there is almost always a shortfall on every allowance or on several of the allowances.

It is extremely common for the builder to appear more reasonable in his bid/contract by showing low allowances and most buyers have no idea until they are in the thick of it - as in, now they have this extra bill from the builder. We have even seen builders wait until the end (here) to present the buyer with a huge outstanding amount over the contract price for these overages.

Edit: An allowance is a placeholder figure and rarely accurate. Do your due diligence like you are doing now and get independent cost estimates for each allowance item where possible.

document, document, document.

If you have allowances, or ask repeatedly in writing - on the work to date, are we on budget? contract that overages above $X need to be agreed to in writing - and a host of other things you should do to protect you.

Best is to hire a construction attorney to review your construction agreement, AND if there are allowances, start getting specific BEFORE you sign - like "can you specify what cabinet brand and finish that allowance will support?" or appliances, etc.

I would carry the loan - but.... realize that you will not be able to increase the amount easily during construction (builders usually can just tap into their line of credit), and you'll pay for overages out of pocket.

Interestingly in our first build - it was a custom neighborhood, and we bought the lot from the builder in order to carry the loan ourselves.

Method of financing should not be tied to type of contract. Just because the builder is providing funds should not create a lump sum project contract. Nor should the fact that your bank is project financing automatically turn it into a cost plus contract. The contract types are entirely separate from the financing.

Unless he’s managing to make enough money off of the financing fee that he is willing to absorb market fluctuations? Which would be odd. The construction market is too violative at the moment to have any but a mini cost plus inside even a fixed price contract. This is really construction lawyer territory to iron out.

Denita: "you were told exactly that there would be no changes (or change order fees). " yes, he actually did specify verbally that he does not charge for changes (UNLESS it gets excessive...(note: we have not agreed to use him yet, so we have not seen an actual contract of his budgeted line items for the build, that's next as we wait for a bid).

@rjinga, I 100% believe you. I wasn't very clear in my post.

I would bet dollars to donuts that he told you exactly what you posted. What I was trying to convey in my own way is that when it comes to the actual contract and the execution of that contract - change orders are normal and customary and most builders charge for them. They charge large amounts to discourage change orders and every build has some amount of change orders and upgrades.

This part of your bid process is the honeymoon part. Anything verbal doesn't over ride what is written in the contract. In most construction agreements you will even see a disclaimer about verbal statements not over riding the written agreement (said in official legalize). As soon as the contracts are signed and money changes hands - the honeymoon is over. I encourage you to get your prices on the items that have allowances so you aren't caught by surprise. I also encourage you to speak to a construction attorney that represents consumers before you sign anything. Have him/her review the builders contract. The time to get a good construction attorney is before you sign when you can still make changes to the agreement to reflect your understanding.

Denita, I understand and thank you for the sound advice!! I have another question if I may..how would you feel about an "old school" builder who isn't computerized, writes bids etc on paper with pen etc. would that concern you in this modern age of technology? some of the builders have websites where you can track and follow every job and details as it's done etc. I'm wondering how challenging it may be without a way (other than through paper and pen) to keep up with the details

I would think the old school builder would have an administrative assistant to handle the computer work for him. Doesn't he have a team?

Builders don’t necessarily have assistants in my experience. this may depend on your locality.

you want to go to the job site yourself to see what’s going on. It’s your land and you should be able to visit anytime (as safety allows).

I think with a pen and paper builder I’d want them to be very available by phone. I’d worry most about sending th information. Can you email it ? You may want to have things in writing and would you need to mail letters? That could be a hassle.

He'd better be able to know where everything is and neat and a darn good builder. Not looking over his glasses searching for what is needed.

How do you feel about a computer programmer whose been programming for over 20 years, who writes all of their monthly bills (balance, due date, extra payments made, etc), using pen and paper.

Yes, I have 3 laptops, 1 desktop and smartphones and still enjoy using pen and paper for my monthly bills.

A builder who doesn’t use Builder Trend, or at least shared Calendars and Google Docs at a MINIMUM is going to have communications issues with subs and with clients. It’s a huge amount of information, even inside the software. Because that’s become industry norm for builders and subs. Text and phone communications happen too. That’s not as easily documentable. All of your choices are documented, and the specs, and everything is available on the jobsite as a document t to be printed as needed. Receipts, payments, change orders. Instantaneously.

It just is not that hard to do any of that. If it’s not getting done, by somebody, expect miscommunications. Expect to make being site supervisor YOUR second job.

I had a somewhat different experience. There was a good deal of email and looking on the web for supplies. But not a lot of google calendars and docs. subs were less tech savvy than the builder. Would not be surprised if they did things on paper. The builder would have had to work with both types.

the people I know in the trades around here are less tech savvy than average even setting the builder aside. Friends, and other people we hired through the years for other things. few would do much beyond email. Some not even that much. If calendars were used would be whatever came with whoever’s phone or home pc.

I think some of this is geographical and depends on if you are in a major metro

i wouldn’t spend time on that tech savvvy issue now though. I’d get in touch with lenders and look for referrals. a good reputation, a personal referral, lenders who are eager to lend you money to work with the builder, that’s what you want

roccouple, this particular builder has nothing but good reviews everywhere we have inquired. He has a vast and varied resume...has built several local 13-15k sq ft "mansions" and our (new house location) soon to be next door neighbors outbuilding/garage. He appears to be very well respected and even though he says he's "old school" surprisingly he's not that old like late 40's early 50's maybe? I can't really imagine doing that amount of detailed work without something other than pen/paper.. So many great and easy to use programs out there, and like mentioned even google docs would be a huge improvement.

Is that the same builder who is offering to carry the loan? Or is this a new one?

the one who offers the 2 choices he carries or you do, is completely computerized, he has a very developed website with all the bells and whistles showing every detail of when work is scheduled, prices/invoices, when paid, pics of the progress etc. the pen/paper guy is a different one we are considering.

ok. I personally would prefer pen and paper guy over the other, as the loan thing sounds strange. But I might also look around a little more. I personally would not rule anyone out for something like lack of computer savvy. tge important question is can you trust them to build your house and do they communicate well with you. I’d still talk to a lender if you haven’t already... just my opinion good luck!!

All this talk of using various computer programs makes me laugh. My builder is Amish, and therefore uses no electricity at all - certainly no computers. Even my bid from him, and then my contract, was handwritten on a notepad.

But he's one of the most respected builders in the area and has been for a long time.

In the end it's really not about what tools they use, but about how well they get the job done. My builder has a reputation for getting the job done, in budget, on time, and excellent quality.

The only issue I've run into was when I wanted a custom pantry door, and the company that makes it only takes online orders - they wouldn't take the order over the phone when he called. So I had to place the order. That wasn't a big deal, though, as I was planning to pay for it out of pocket anyway.

Well I do think the Amish are obviously an understood exception..it's kinda like how you'd view a person of medium age lol who doesn't do FB..or any social media..it would appear odd to many..someone 70 or older wouldn't seem that odd for them not to be on FB.