I have 2 questions: Have you been in a similar situation and what considerations tipped you one way or another? The 2nd is: What provisions need to be in the contract with the builder to pay him/her as the various stages of the building are completed? Is the money put in an escrow account to be drawn from and who/what conditions determines when that money is due? Do I need a building inspector to act on my behalf to protect my investment since there won't be a mortgage company/bank involved?

Any standard Lump Sum construction contract will have a compensation section that describes the total contract amount and the time and amount of progress payments without the need for escrow. However, the builder might want some evidence of your ability to pay those amounts before your current house is sold. Sometimes a "retainage" amount is withheld from the payments and then reduced as the work nears completion. You should always owe the contractor something until the punch list is completed to your inspector's satisfaction.

You should decide now who will propose the initial contract. A builder's proposal is sometimes considered a contract but often lacks important considerations especially protections for you. AIA A105 "Standard Form of Agreement Between Owner and Contractor for a Residence or a Small Commercial Project" is a good place to start. You can buy the printed form from the AIA or use it to make sure the contractor's contract is complete. All AIA contract forms naturally have a provision for an architect to be named. The architect provisions can easily be struck out and you might also substitute the name of your inspector as your agent. It is not necessary for your agent to formally approve the contractor's Applications for Payment, have the right to reject work or otherwise act in your place, but he/she must at least be given access to the site in the Agreement.

A construction Contract consists of an Agreement, General Conditions (sometimes part of the Agreement form as is the case with AIA A105), Drawings, Specifications (sometimes on the drawings), and any Addenda or Accepted Alternates.

Allowances should be for materials only and carefully described in the Agreement. They are miniature Cost Plus contracts inside a Lump Sum contract and therefore relinquish cost control. It is sometimes advisable to stipulate that if the buyout price or supplier is not acceptable the Owner can delete the Allowance and provide the material in question.

The AIA has never used a warranty clause. Instead it wisely extends the Correction of the Work clause for one year beyond Substantial Completion (14.2). Your state may impose other implied warranties.

You should also be aware that a building inspector is only interested in verifying that the project meets the building code in order to protect the interests of the public in terms of safety, weathering and energy conservation rather than your interests although the two do overlap.

Your inspector will be looking out for your interests and that may cause a conflict with a GC who thinks that is his job.

Who designed the project?

In addition to getting bids from 2 other builders, I've also paid the builder I'm working with now for a "plan review". My house designer, the builder and myself have been working together to modify/improve/correct the plans. I might note there weren't significant changes made to the plans through this process but good ones, nevertheless.

Next are the specs which I've been fine tuning throughout the process of designing my home. The builder will write the specs as they recommend and then we'll come together to merge them. When the specs are agreed upon, then they will put it out for a final bid. I did get a preliminary bid from them in the beginning before we started the plan review. I am under no obligation to use this builder as I am paying for their expertise at this point.

I'd be especially happy to hear from a homeowner about their experience in paying cash and how the process went with their builder. Thanks again for the comments thus far; I really appreciate them.

My current house is paid for. It's in a convenient location (close to work, shopping, restaurants), and we can't live anywhere else as cheaply/conveniently as we live here. Also, I like the idea of moving only once -- no, no, I LOVE the idea of only moving once. Another factor is that NOTHING ever goes on sale in this neighborhood; most of our neighbors are 60-70 and are retired; most of these houses have had only one or two owners. I suspect most of our neighbors are going to stay here 'til we start seeing estate sales. We are surrounded by a PLETHORA of newer neighborhoods with smaller lots, smaller houses, smaller pricetags -- but those smaller houses are more stylish than 70s ranchers, and they have perks like neighborhood clubhouses and neighborhood pools. I fear we could potentially see this neighorhood turn into rental property in the course of a couple years. That could reduce the value of our house. Part of me thinks it'd be wise to sell before "the tipping point" arrives. FYI: I am not emotionally attached to this house and would choose to sell it at whatever time would bring me the most profit. Anytime after my youngest's out of high school, that is.

If we sell this house, we'll probably get 150-160K -- we are in a part of the country with a very low cost of living -- though the house is big and ideally situated, it's in the oldest neighborhood in this area, and 70s ranchers don't bring top dollar. So we're still going to have to pull another 50K or so out of our investments to pay the rest of our new house.

We own our building land outright as well, and we have the cash to build the house we want to build. Yes, if the cost is more than we anticipate, we're still fine to do an all-cash build. When we paid off this house 7 years ago, one of our goals was never, never, never to borrow another dollar for the rest of our lives. But if we stay in our current house while we build, paying cash would mean pulling money out of our investments, which are making money. Would it be smarter to borrow and leave the investments to grow? I might add that, having grown up poor and with little financial stability, I like the feeling of security that comes with knowing that the house in which I sit is MINE, MINE, MINE and no one can take it from me.

And my #1 goal -- which means more to me than building a house -- is getting our two daughters through college without debt. We're on track to do this, though the year they're both students will be hard on us -- we'll probably wait to start building 'til the first one had graduated; that'll mean we're on the downhill side of college tuition.

So I'm wondering which is our better choice:

1. Sell this house and with cash in hand start the build. We would probably look for a small rental near the house we're building (which is problematic -- it's rural, and little is available to rent). It would be convenient to live near the house while it's being built, but the rental money would be a waste. And we'd have to move twice. And we'd have to pay for storage since we would choose a small rental for just the two of us.

2. Stay in this house 'til the new house is built. This means we might be forced to wait a while for this one to sell. If we go this route, we could do it without borrowing, or we could borrow and leave our investments growing. I suppose the right answer is, Are the investments booming or floundering at the time we begin building?

We're prepared financially, and we still have 2-3 years before we begin . . . but I can't see the clear path for EXACTLY HOW we should proceed financially.

Granted, everyone's situation is different. Mortgage rates are low - that's true, but since 2008's stock market drop, they are higher than the return I'm earning on my investments.

+No bank to deal with
+No loan costs to pay (which can be $$$)
+No monthly mortgage payments
+No interest

-Less cash to gamble with investments
-Less tax deductions

I would not have paid cash, if money would have been tight.

I believe I might be a more attractive buyer to a prospective builder when I have the ability to start the project vs. another buyer who needs loan approval. etc. Whether that translates into possibly a lower bid because of less financial work for all concerned....we'll see.

I totally, totally agree with jrldh that you shouldn't pay cash IF it'll press you financially. You should never have all your financial eggs in one basket. I'd add that you should never withdraw retirement funds to pay cash -- you want the magic of compound interest to work in your favor when it comes to retirement accounts, and that takes years.

I am inclined to say that -- as a general rule of thumb -- if you CAN pay cash for a house, you probably SHOULD pay cash for a house. Why? It's a double investment: 1) A house is an item of great value that adds wealth to your portfolio AND ALSO 2) You can live in it, making it a practical investment. However, we've probably all had the experience of seeing our investments go up or down 10% (or more) in a single day or a single week . . . yet no one has ever come home to find that 10% of his house has disappeared. Okay, that's not quite true: Plenty of people have seen 10% (or more) of their house's value disappear . . . but, even then, all the rooms are still present. As I said before, I grew up a poor kid, and I find great solace in knowing that my house is MINE, MINE, MINE.

I do have a very practical question about the logistics of paying cash for a house: Does the builder require you to place X amount in an escrow account (or similar)? I mean, I might tell you (or my future builder) that I can easily pay cash for this house . . . but you don't actually know that I'm telling the truth. Or, I might have the money when the build begins, but what if I spend it during the build and can't pay at the end? If I've qualified for a mortgage loan, the builder knows I have the ability to pay -- later. It seems reasonable that a cash-paying customer should have to prove to the builder that he's "good for it". Just how does this work?

In my area, when the builders are putting up custom homes on their lots, they take large deposits to cover situations where the buyers doesn't follow through. I've seen deposits up to $500,000 forfeited. And even then, it's risky for the builder as the home may have unmarketable aspects and home prices have plunged.

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If you have the cash, I can't imagine any situation where it's better to borrow, unless you have a secure investment that yields a higher after-tax return than all the financing costs.

I smiled when you said no one comes home to find that 10% of their house has disappeared. Ten years ago, my home caught fire due to an electrical short. I learned foundations don't burn up ; ). I lost more than 10% of my home and if I hadn't had adequate insurance, I would not have been able to rebuild. This many years later, I can smile about it but it was a tough learning experience. I've essentially built my current home twice.

Yes, I'd like to know the answer to the escrow question, too. Thanks, everyone.

I didn't hire a builder but contracted directly with the trades (owner-builder/GC). I just paid the individual subs when the job was completed or in case of tasks where substantial material cost was involved, I paid a (varied) percentage upfront (like 30%) and the rest after completion.