Builder Payment Schedule - No financing
I have a unique situation.
I am considering to build a custom home. I am not taking a loan from a bank but family loan for 2% interest rate. As far as the builder is concerned I have cash, all of it.
Builder wants me to put the money in a 3rd party escrow account. I don't think that is fair. I want the control of the money.
Overwhelming majority of the cases Bank owns the house that is being built until the home owner pays off the loan. Banks like to have their inspector to inspect the house before writing the check to the builder to protect its own interest. Banks want to make sure the house is build to the standard before writing the check because they are the one who will get stuck with the house until after the home owner pays off the loan. Whoever pays, has the control. In most caresses it is the bank.
Obviously, any home owner (or any purchaser, building or anything) whoever pays should have the control.
Builder puts in money only in small but multiple steps. Each steps are paid after the completion. At no time builder is going to spend $1.5 million. But for home owner $1.5 million is at stake toward the end if the house is not properly build.
All my research finding advises the home owner not to do business with any contractor who can't get started with his/her own money. They say, any reputable contractor should have cash reserve for their business, let's say painter, should be able to get started with their own money. Payment follows. But it is OK to give small percentage of, say 5% or so in advance for the current project. NOT 5% of the entire amount. But I am willing to be very flexible on this.
Currently, I got a project done through a general contractor for $55,000. I paid him in 5 installment as the work progressed. He asked $1,000 in advance, at the very beginning of the project and I wrote the check. That's OK.
Now, it is not fair to compare $55,000 with $1.5 million here. Because at no time builder will be under the burden of $1.5 million. This is why I asked the builder to give me a payment schedule and I will write the check as a milestone is reached.
Here is another way to look at it.
Since the home owner is paying and no bank is involved owner should have the right to fire the builder any time. But of course, the home owner must pay the builder for all the work up to that point. Home owner then have the right to bulldoze the half build house and start all over again. Home owner is not obligated to pay the builder entire $1.5 million say, right after the foundation. For example, hypothetically if the owner decide to stop the project right after the foundation then he should be able to do so. It is home owner money he should have the right.
If there is no payment then builder can stop the work.
As far as initial cash advance is concerned, any reasonable amount is OK with me. But after that initial 1st payment, all remaining payments will be only after the work is completed.
I am getting a family loan.