construction deposit and bank terms

5 years ago

last modified: 5 years ago

I am hoping to get some thoughts here. I am an architect and have been working on designing my own home for a while. I found a builder I liked about a year and a half ago. They engaged with me extremely well, had a good interface to track expenses, they were prompt whenever I needed help and in general, I liked them enough to move forward with the build.. the last few months were spent ironing out the design, securing financing, etc and things were getting exciting. we even agreed to a 10% deposit in light of COVID and the fact that I had a few specialty items in my design that needed to be ordered.

One of the terms that my bank laid out was that they were not going to pay for materials till they got to the site. Our GC (with whom we signed the contract) has a big issue with this. Apparently, the banks that they have worked with gets them paid upon seeing the invoice(proof of ordering). Our bank insisted that these materials need to be on the site to be considered part of the property and told us that these policies were in place for our protection as much as theirs.

The builder's concern is that things (in COVID time) are taking too long to come in and their money would be stuck. I helped out with finding vendors that did not require deposits etc.

Now for the real issue - The builder tells me that there may be a situation where he 'runs -out of my deposit (120k) without being reimbursed by the bank. He said that it takes a lot to keep the job site running and order materials. My question is - should'nt the running of the job site be done via the builder's line of credit and not my deposit? shouldn't the regular construction materials (siding, door hardware, smoke alarms, etc ) be purchased via the builder's line of credit?

Should I be nervous that the builder does not have a strong line of credit and is depending on my deposit to make these purchases and run the job site?

I spoke to a lot of people who told me that I did have reason to worry. I like these guys but is this a red flag? this is a big investment for me and I am a bundle of nerves now. Just want to do the right thing.

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PRO

Charles Ross Homes

5 years ago

A 10% deposit is pretty standard for custom homes in our area (coastal VA) at least pre-pandemic. If a project takes 9 months to complete and spending is linear (i.e., 10% per month) then a 10% deposit covers cash flow requirements-- provided draw requests are paid promptly. If large deposits are required and the builder is out of pocket for the excess, the builder's line of credit gets tapped for the excess. In that case, you should expect to pay more for the home to cover the interest on the builder's line of credit.

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Comments (9)

just_janni
5 years ago
You can't invoice for materials until they ship. Decent builders have a 15-30 day line of credit with their suppliers. There should be no reason that he runs out of your deposit and your bank is right to want materials on site. You can "blame" them in this situation, but it's great protection for YOU.

Is he buying a lot of weird stuff that's not ready to be installed? (I doubt it) then the combination of his line of credit and the inspections / draw process should be able to cover his cashflow - and you've given him $120K in advance IF he needs to order / stage material. (Which you should lay your eyes on, by the way...)

If there are crazy circumstances - he needs to be SPECIFIC in what that is -otherwise - it's band cash management and a sign of shaky standing. DO NOT give him more money, please.
sharchitect thanked just_janni
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sharchitect
Original Author
5 years ago
thank you both! With the amount of leg work I have done, I feel that they should be able to make it work with the 120k and their line of credit - while continuously being reimbursed by the bank.

The only 'out of the ordinary' items in my list are
1. nichiha siding as an accent -
2. storm bunker - I negotiated zero deposit
3. mono stringer metal stair - the stair guy wants about a 9k deposit which can come out of the 120k
4. (2)motorized drapery rods - 2k
5. dekton countertops for kitchen - 15k
6. sauna - 5k
The other items which they put on their list such as the ones below - I feel should be handled with their line of credit- since they are all pretty standard - correct?
1. hardie plank siding
2. tub and shower enclosures
3. wood flooring
4. plumbing fixtures
5. standard recessed lighting
6. nest smoke detectors
PRO
Charles Ross Homes
5 years ago
I'm not an attorney and I don't give legal advice, but I don't consider whether an item is "standard" or not to be relevant unless the contract terms dictate otherwise.
cpartist
5 years ago
last modified: 5 years ago
My question is - should'nt the running of the job site be done via the builder's line of credit and not my deposit? shouldn't the regular construction materials (siding, door hardware, smoke alarms, etc ) be purchased via the builder's line of credit?

Yes alarm bells should be going off. Financially secure builders use their line of credit. This sounds like what my builder was doing and he's basically bankrupt now.

Even the items not ordinary should be handled by their line of credit.

Do not give him another dime!
sharchitect
Original Author
5 years ago
thank you all.

we have not closed yet or given them the deposit. This all makes sense and what you all are saying is consistent with what I am gathering from co-workers etc.

We will stand our ground here.

Appreciate all these comments.
PRO
Jeffrey R. Grenz, General Contractor
5 years ago
That's a pretty generous deposit and adequate to work with. In CA the deposit is 10% or $1K whichever is LESS which is NOTHING. Most major const to perm lenders provide 50% funding for cabinet deposits and a few other items but we are usually paid in arrears. Clients who don't want to work with vendors I've established credit with sometimes find themselves funding those purchases. We do invest significant capital to keep projects moving. My contract does call for clients to fund deposits for special order, made to order products such as cabinets, certain entry doors, custom fixtures, custom windows, etc. Those are items you own whether you install them or not.
sharchitect thanked Jeffrey R. Grenz, General Contractor
cpartist
5 years ago
If you know who some of their subs are, you might want to double check that the GC pays on time. Or if you know the lumber store he uses, check to see if he's up to date on his payments. I wish we had done that.
sharchitect
Original Author
5 years ago
I am not sure who they use for lumber. so far I have met the cabinet guy- but they get 50% for cabinets, doors, and windows anyways from the lender

I am awaiting a response from them tomorrow to some tough questions I asked about their 'line of credit'.. let's see what they say. our contract expires coming Friday if they can't come to an agreement with the bank about all this.

I will check with the bank tomorrow to see what sort of checks they ran on the builder.

They do good work and I really liked them- until all this happened....Ugh!