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olivesmom_gw

Help with the purchase of a custom home pre-sale

olivesmom
11 years ago

We've been considering building a custom home for a while now. Over the past year there have been a few existing homes that have piqued our interest and I think I've posted about them here, but we keep going back to building.

In our area there's a small custom builder who appears to own quite a few lots (I think he purchased them around 2005-2007) and has them listed. One of his lots he has listed as a presale. The listing states: "Custom Home builder to build this wonderful floor plan or have the flexibility to design the home of your dreams. Rambler on acreage with a view of the mountain. Chance to build the home of your dreams with room to roam. Finishes include engineered hardwood flooring, slab granite..."

I have yet to speak with an agent about this listing and I have a few questions.

First off, am I correct in assuming that basically the builder will carry the contruction loan, so aside from our down payment we will just need a regular loan once the house is complete?

Second, we would like to go with a different floorplan from the same design firm. The one we want is larger, but is a 1 1/2 story as opposed to the one level listing. So the actual foundation won't be all that much larger. I'm also sure that I will want some nicer finishes and appliances than what the builder was probably planning on going with.

Do we find our the details of the listing first, as to determine what we would get for the current price he is asking and then ask him about the changes we want and how much it will cost? I figure if we ask for everything we want first he will come back with a much higher price, whereas maybe we would have a better idea of how much we are actually upgrading if we know what he was planning on including. Does that make sense?

Right now the listing is at the top of the price range that we are comfortable with. The current asking price would require us to put 10% down, and that's do-able, but I'm not sure we will be able to do much more than that. Any tips as far as negotiating this type of deal?

I'm comfortable specifying almost everything (lighting, plumbing fixtures, trim, exterior materials, kitchen, bath, flooring, windows, etc) as I'm pretty particular about what I want, I'm just hoping to get most of our wish list for the current price but I'm not sure that's going to happen.

A few months ago he sold a similar type listing in a nearby area and I would imagine by now construction has started. Im really excited as I don't think he's built anything in a while and it will be great to see his work.

So anyway, any advice for dealing with a custom presale? Thanks!

Comments (25)

  • new_home1024
    11 years ago

    We purchased a home in a similar situation and it is almost finished at this point. We found out specifically what was included, what flooring choices, molding, cabinets, granite, etc. For each item, if we didn't like the options that we included in the sales price, we paid an "upgrade" charge to what we wanted. There were several things that we did negotiate into the original sales price.

  • deeinohio
    11 years ago

    I think in this circumstance you carry the loan since the builder owns the lot, but the bank won't loan to him for construction. You buy the lot from him and hire him to build.

  • texas_cajun
    11 years ago

    I actually think it would be harder for you to get a construction loan if you didn't own the land - the bank would not be able to collateralize the house separate from the land. In fact, I can't think of a single construction loan program we looked at (we are in the process of starting to build a home) that would have let us get a construction loan to build on land we didn't own.

    A friend of mine is doing what you describe, and she had to put down a hefty downpayment, which effectively just operates like a deposit (about 30%) directly with the builder, but as far as financing, she just is getting a 30 year loan when the house is complete.

  • olivesmom
    Original Author
    11 years ago

    Yeah I was thinking it has to be presale that the builder is financing because the mls category is under "new contruction presale", plus the listing shows the floorplan, details, etc.

    Texas_cajun- I am worried that you mentioned a large deposit. I wonder if that is standard? I don't think we could do 30%, probably 10% max assuming you mean Deposit as in down payment.

  • kirkhall
    11 years ago

    I think you may NEED a large deposit as most custom, new construction homes will not appraise for the cost to build. You therefore, would not be able to qualify for a home loan.

    I think these are all questions you need to talk to the builder about; then have your attorney review the documents. Make sure, when it is all said and done, you will qualify at the bank and have $$$ to make up any gap, in the price of the loan v the appraised price.

  • olivesmom
    Original Author
    11 years ago

    Kirkhall- hmmm, I admit I don't have much experience with this, but I don't see why this presale listing would be different from the presale we bought back in 2005 from a production builder. The money we had to put down was determined by our loan (FHA).

    This listing indicates conventional financing is applicable, and there's nothing else mentioned about deposits. If everything is predetermined then there shouldnt be any surprises for us, unless of course the house doesn't appraise. I will have to look more into that for sure, but I think with 10% down we'd probably be okay.

    This post was edited by olivesmom on Sun, Mar 10, 13 at 18:36

  • done_again_2
    11 years ago

    I agree that it would probably be hard to get a construction loan if you don't own the lot. We started looking at lots and found a development we wanted to pursue. We talked to a builder that happened to own the ideal lot for us. He won't require us to get a construction loan as he already owns the lot and had plans to build a spec. home. We could buy the lot from him and do with it what we want. He will only give us a specific time period to start construction or he will start the spec house. During the build we'll be required to put down a deposit but it's much less than 30%. Once the house is done we'll do traditional financing.

    FWIW, the builder has built a couple of houses in the development recently and said the appraisals are coming in higher than the actual cost to build (Midwest location).

  • rrah
    11 years ago

    I think you've made an erroneous assumption here.

    The purpose of putting the property into the MLS is to market a potential house (and the builder) and to offer compensation (commission) to agents. The fact that it is listed as a pre-sale has nothing to do with financing. It simply means it is not built at this time. It is an offer to build that house for that price in that location. He indicates he can build other houses also, but not for that price. It's marketing, pure and simple.

    It has nothing to do with the type of financing available or offered by the builder. Agents in the MLS are likely required to check off the type of financing available. The fastest, easiest thing to check off is conventional financing. At the listed price, you're talking about a jumbo loan with 10% down.

    If the builder was willing to finance construction, it would likely be in the description. That would be an attractive incentive for many buyers. With our second build (custom/semi-custom) the builder financed construction. It was in a brand new subdivision, and he was anxious to get a few houses up. It was also a different time economically for builders and different from the standpoint of getting money for spec homes. With our next build we had to finance it. Tract builders usually do the construction financing because they know it will sell to some one else.

  • olivesmom
    Original Author
    11 years ago

    Well I think I just need to clarify with the agent because I am completely confused.

    The more I dig around the more I think the builder is NOT financing the construction :(

    When I look up his sold listings his similar presale listings show a price they sold for, 750k for example, and when I look up the parcel information it shows a sales price for the property of 158k and then permits for construction. What I don't understand is why the mls shows a sales price of 750k when the land apparently sold as 158. I'm really confused.

    This post was edited by olivesmom on Fri, Mar 8, 13 at 20:28

  • kirkhall
    11 years ago

    He's willing to build his spec home on his land and sell the whole thing for 750k. That says nothing about what the bank will deem the house is "worth".

    What he paid for the land is irrelevant.

  • live_wire_oak
    11 years ago

    Looks like you'd need to finance 908 total (plus your upgrades), regardless of what it appraised for. And I don't think anyone would do a jumbo with only 10% down. If you have to get a construction loan, they do typically require 20-30%. If the builder is financing the construction, you would still need a standard loan for the purchase, but only be able to borrow the standard 80% of the appraised value. If it only appraised for 700 (a common scenario), then you would need bring a minimum of 348 to the table.

  • olivesmom
    Original Author
    11 years ago

    Heard back from the agent. Apparently the builder can carry the loan, though it's still unclear to me if the listing is trying to imply that or not. Guess it really doesn't matter since it is an option available to us.

    Kirkhall-I think I wasn't clear. I wasn't trying to say the builder bought the property for 158k, but that the recent buyer did and that the listing also sold for a price of 750k...so it was confusing to me. It still is, maybe though it had to do with the financing arrangement?

    Live_wire- not sure where you are getting 908k from. The listing that I'm looking at, and linked to, is 629 for the lot and the house (what materials and level of finish I'm not sure, but I can guess that we would want to upgrade a fair amount). Our only option in terms of financing is FHA, loan limits for our area are 567k, above that we will have to pay the difference. We could do 75k, which puts us at the list price. If we can't negotiate our desired upgrades for the current list price, or close to it, we will have to wait and save more cash. That's out situation.

    I think our next step will be checking out the builder, seeing their work. Hopefully that will be possible soon. If that all checks out then I guess we would contact the agent again to find out the details of their builder carried contruction loan, to make sure it will indeed work with our scenario. Then I will find out the specifics of the house they are offering for 629k and negotiate from there.

    This post was edited by olivesmom on Sat, Mar 9, 13 at 1:48

  • rrah
    11 years ago

    County records are one thing with one set of rules. Information is gathered for those records from specific sources. The MLS is another thing with a different set of rules. While the information sources maybe the same as county sources they may also be different. The "rules" about what is considered a sale differ as do the purposes of the information. The MLS data is for real estate agents and companies. They pay for it, thus their rules. County information is gathered for taxing purposes and in your county available to the public. In trying to gather information, you are confusing the rules and purposes of the two.

    That pre-sale house could just as easily have been listed in the MLS for $500,000 with a sales price of $750,000. It may also be the case that the house shown in the old pre-sale MLS listing is not the house that was built.

    You don't know how the construction was financed in those previous listings. If the buyer financed it, the builder never owned it and thus never technically sold it to the buyers according to the county. The MLS, because it has different rules and different purposes, recorded it as a sale for the agent(s) involved because they were responsible for bringing the buyer and builder together.

    Our county records don't show we ever purchased our house. It shows we purchased our lot. Later records show we received a mortgage for something (our house). The county records also reflect an increased assessment after the house was built. We never bought our house from our builder. We paid him for his services with our mortgage. Since we financed it, we always owned it.

    Just remember the county records and the MLS exist for different purposes. One is public. One is private. Because the purpose of each is different, the rules and definitions of what is a sale and a sales price differ. Yes, they contain some information that may seem to be the same at first glance, but again, they are operating under different definitions.

  • GreenDesigns
    11 years ago

    If you need to do a FHA loan, then you are looking in the wrong price bracket for homes. You're injumbo conventional mortagage territory.

    If the builder is selling the lots for 158, then financing the construction for 750K then that's the 908 that LWO is coming up with. Some builders will require the land purchase first so that the homeowner has some equity in the process. Sometimes that land can be used as the down payment on the construction loan, but often additional funds are required for that as well. In a private loan situation, pretty much anything goes. It's when you have to translate that private loan to one controlled by a bank that all of their rules and regulations about getting financing come into play. And, if you can't afford to outright buy one of the homes in the subdivision that is already constructed and for sale, then building there wouldn't work either as you are more likely to give into temptations to upgrade and icrease your costs beyond what one of the existing homes is selling for.

  • wagnerpe
    11 years ago

    This is all very interesting to me. I'm a casual looker at real estate in my neighborhood and we have a builder who is doing something similar. He used to be a production builder, but had huge financial problems, and has reinvented himself and his business model such that he buys tear down houses in build up neighborhoods and then builds homes of various models on the lots.

    When I see the list price on Redfin, I imagined that this is the price at which he wants to sell you the finished home, not that I would be contracting with him to pay a certain amount of money for the construction of the home and have to convert that to a mortgage for whatever the bank will give.

    When we bought a new construction townhome in a big development, we put some money down and took out a mortgage when we closed.

    I'm going to send a quick email to see what's what. I know I'm not in the market to buy right now, but if he is still doing this 3-5 years down the road, if this was a straight up purchase, I would be very interested in his homes.

    Here's the website for the builder:http://www.greenscapehomes.com/ and I've linked to one of his current new builds that I have my eye on

    Here is a link that might be useful: house for sale or just ad for builder?

  • olivesmom
    Original Author
    11 years ago

    Green designs- we are only considering FHA because with a previous foreclosure, FHA is pretty much our only option at this point. It's not the FHA's low downpayment that is attracting us, but that they only require 3 years from the foreclosure. Conventional and contruction loans would require a much longer length of time, up to seven years I think.

    The FHA limit for our county is 567k, so the plan is to take the maximum loan possible and pay cash for the rest (hopefully no more than 75k).

  • nini804
    11 years ago

    Our builder owned our lot, and marketed a "to be built" home that they had designed by an architect for this specific lot. We had to buy the lot from them, then get a construction loan to finance the build. If they carry the construction costs...I'd totally take them up on it! Otherwise, you are paying interest each month during the build on the loan proceeds.

  • kaismom
    11 years ago

    olivesmom,

    I think you need to get your financing picture together before you start looking at houses. With previous foreclosure and somewhat low down payment, it will not be easy for you to get a house that pushes your family to the limit of your income.

    All of this is a moot point unless you can get financing together. If I was a seller, I would not consider a weak buyer right now because the market is extremely hot in the Seattle Area, which seems to be where you are. There is no reason why a buyer should take a chance in a market like this. If they take a chance with a weaker buyer and the house does not close, then they lose time in this market.

    Sorry to blow your bubble but you are NOT an attractive buyer with a foreclosure and less than enough down-payment to make the closing a breeze.

    You may feel that you are ready to buy a house after your foreclosure, but you can't buy unless a bank says that they will take a chance on you.

    Good luck.

  • olivesmom
    Original Author
    11 years ago

    Kaismom: there's no issue with us obtaining an FHA loan and our down payment will be higher than the normal 3.5%. Also, the above scenario isn't pushing us to limits of our income- yes we need to save more, but DTI-wise we are more than fine.

    If we were to purchase a pre-existing home, at or slightly above the FHA loan limit we would not be a weak buyer. With the builder carry scenario, then yes they might consider us weak, I don't know. If all that matters to them is that we can close on the loan upon completion of the home then I'm not sure. If we have solid pre- approval and significant enough deposit (earnest money?) then I'm not sure why they would care about our previous foreclosure. In fact, it's not like the seller would know anything about our credit, they are just going to see our pre approval and DP.

    This post was edited by olivesmom on Sun, Mar 10, 13 at 18:37

  • _sophiewheeler
    11 years ago

    Don't let go of your dreams, but let a big dose of reality set in here. No builder would finance you as you couldn't get a conventional mortgage after the build was done. You are not going to get financing through FHA for the limit either if you also need a second mortgage to make up the difference. And you're not going to get that second mortgage at all for at least 3-4 more years. You would need substantially more savings at this point so as not to need that second. And then you still might not qualify for the FHA.

    Use that time to save more money and by the time 4 years passes (VERY quickly!) you will have the 30-40% downpayment for building or buying or whatever your needs turn out to be at that time. Use that time to develop a budget where you are maximizing saving and not stretching at the limit of your means to qualify for a home loan. That would be the worst thing that could happen. If you ever had to declare bankruptcy again because of of something like that with another market downturn, there isn't a lender who would EVER touch you again without a truly exorbitant rate.

    Count your blessings that you are currently in a home that you appear to own and be allowed to pay a note on. Doing just that, as well as managing the other forms of credit afforded you, will allow you to recover from the bankruptcy after a few years. But, it won't happen overnight. And buying a new home soon won't be a part of that. Not just yet. As my father said, you're counting chickens that aren't hatched yet. Worse, I think you're counting chickens from unlayed eggs.

  • chispa
    11 years ago

    We are assuming that Olivesmom's family suffered some hardship and had to "lose" their previous home. Maybe they did a strategic default due to their previous home being worth much less than they owed, so they were fine financially and could make the payments, but chose to unload a property that had lost value. Lots of people have taken this approach, write off a house loss with a foreclosure and take advantage of all the current banking and govt rules that have made this easy and with very short lived consequences to their credit.

    Without details all we have are assumptions!

  • olivesmom
    Original Author
    11 years ago

    Holly: I'm not sure why you state that we could not get an FHA loan for the limit when our plan is to pay any difference with CASH (which is why for now, the maximum we can go over is about 75k- that's all we'll have available). We will not need a second. According to the mortgage people we have spoken to we should be good to go on an FHA as soon as we hit the magic three year mark, and that's coming up quickly. We are debt free except for our current mortgage, which isn't that substantial. We can qualify another home, plus carry the current mortgage we have and still be under the required DTI ratios. We do need rebuild our credit, and we are working on currently.

    Our situation is not exactly as Chipsa speculates, but pretty close. And it's not as if we just foreclosed. The home we gave up was vacant for two years prior to being foreclosed upon, it really dragged out and the delay has cost us.

    I want to buy ASAP due to:

    - Low rates (I know we won't get the lowest, but still it makes a huge difference)
    - rising inflation
    - in two years my daughter starts kindergarten and I really want to avoid moving once she's in school. I moved around quite a bit as a child and I don't want to do that to my kids if I can help it.

    If all else fails, yes we have our current home and are thankful for that, but we are ready to move on.

  • kirkhall
    11 years ago

    Starting elementary school should not be driving force for you in deciding when to buy. Anytime in the first half of elementary school, kids adapt wonderfully to a change of school...every year for them is like a new school 1/2 the time anyway, as the kids in their classes change from year to year (my daughter's school has 4 1st grade classes and only 2 kids from her k-garten class ended up in her 1st grade class). So, I'd not worry about "uprooting" your kids until they were about 9 or 10, realistically. Don't let that put you into a situation you might not be quite ready for. 75k on a 567k house really isn't much for the unexpecteds...

  • rrah
    11 years ago

    I agree that you really do need to save more. You've run into a bad financial situation in the past, perhaps through no fault of your own. What happens "if" you run into that or another financial situation again? Right now you have less than $75,000 saved. You've said $75,000 is all you will have available. What about 3-6 months of living expenses saved? Figure out what the mortgage on $567,000. Start saving that amount every month now. Conventional wisdom says to have 6 months of living expenses saved. Until that happens you shouldn't be thinking about a house full of upgrades that you "want." Also consider the additional expenses of a new house. Some one has to pay for the window treatments and the landscaping for example. There are $1000's of dollars of costs after you move into a new house. Where will that money come from?

    Our oldest child was about in 5th grade when we moved. Younger was 8-9. They were not harmed by the move and actually did very well in our new town. Older child is now out of college and 8 months after starting her first professional job has more than 6 months of savings stashed away. One reason she is able to save money is because she is debt free. We made it a priority to pay for her college without loans. Do you have any college savings for your kids? My opinion, partially formed because of the extensive debt I had after college, is that giving a child a good start in their adult life by helping them graduate debt-free is far more important than raising them in the big house full of the latest upgrades and wants.

  • olivesmom
    Original Author
    11 years ago

    Rrah: the 75k we will have for DP is independent from our emergency savings, which is not the amount you suggested but is a number we are comfortable with.

    Over the past five years we manages to dig ourselves out of a MAJOR financial mess. We've paid off substantial debt all while managing to save and pay cash for both the unexpected and expected expenses. I feel good with where we are at and how we are doing.

    We may end up waiting longer and saving more for our next home, as the more I research the more I think the home we want will cost more than initially anticipated. We have to balance that though with the risk of rates rising. Our DTI is low, but when we purchase another home we will be keeping our current one so we will be approaching the upper limits of acceptable DTI ratios. If rates have increased substantially I think it will essentially negate any increased savings we put down.

    It's not as if we are acting today anyhow. We are not yet at the three year mark and we cannot do anything until then. And it's probably all a moot point unless the builder carries the contruction loan. For now I'm trying to determine if a builder carry scenario is a viable option (sounds like it might be) and determine how much we might be looking at to build.

    We are definitely not as risk adverse an many on this forum probably are. Not to say we haven't learned from our past mistake- we have and have moved forward doing things differently. However, we are okay with taking on another larger mortgage given that we have no other debt and because if we wait too long rates might inhibit us from buying as much house as we would like.

    I do appreciate all the advice given and I have much to think about, so thank you,