Signed contract to build new home - now what?

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pdanet
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Signed contract to build new home - now what?

Post by pdanet » Mon May 15, 2017 10:03 am

You can see our previous posting here(link)

We have signed a contract to build a home.

With structural and design center options - the final price is ~ $520K. We cannot lock in rates until 30 days prior to closing which will be sometime in Dec 2017 or Jan 2018. Today's 30 year mortage rate is 4.375% and I believe it maybe around 4.5% - 4.75% when we close.

We made $20K downpayment at initial contract and want to make another $84K(at closing) so it ends up being 20% of total price to avoid private mortgage insurance(PMI).

Are there any additional things we need to be thinking or what should be our next steps ?

We currently own a paid-off home(~$220K value) that we can either rent or sell it(after we move into our new home). Am inclined to keep it but spouse wants to sell it so we can be more aggressive in paying off the new home and not having a mortage.

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deanbrew
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Re: Signed contract to build new home - now what?

Post by deanbrew » Mon May 15, 2017 10:54 am

pdanet wrote:
Are there any additional things we need to be thinking or what should be our next steps ?
I would think you will plenty busy figuring out flooring, cabinets, hardware, fixtures, lighting, paint, etc. Or has all of this already been decided? I'm not sure there are that many legal and financial things to think about at this point.
"The course of history shows that as the government grows, liberty decreases." Thomas Jefferson

user5027
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Re: Signed contract to build new home - now what?

Post by user5027 » Mon May 15, 2017 11:06 am

Somebody, you or builder, need to obtain the permits.

miamivice
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Re: Signed contract to build new home - now what?

Post by miamivice » Mon May 15, 2017 11:20 am

Your next step is to pick out who your lender will be, and to confirm with the builder when you need to tell them who the lender is, if you are not going through the builders.

My past experienced (from 10+ years ago) was that the builder lenders cost more (interest rate and/or fees) but you get a kickback from the builder to go with their preferred lender. Not sure if this is true today. If you choose the builder's lender, you can refinance as soon as you want as long as there are no early payoff fees. We refinances within 1 to 2 months after closing.

miamivice
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Re: Signed contract to build new home - now what?

Post by miamivice » Mon May 15, 2017 11:22 am

pdanet wrote:With structural and design center options - the final price is ~ $520K. We cannot lock in rates until 30 days prior to closing which will be sometime in Dec 2017 or Jan 2018. Today's 30 year mortage rate is 4.375% and I believe it maybe around 4.5% - 4.75% when we close.
Nobody has any clue what interest rates with be in December 2017 or January 2018...it might be higher than today, same as today, or less than today. We simply don't know, anymore than we don't know what the stock market will be at this December.

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deanbrew
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Re: Signed contract to build new home - now what?

Post by deanbrew » Mon May 15, 2017 11:29 am

miamivice wrote:
pdanet wrote:With structural and design center options - the final price is ~ $520K. We cannot lock in rates until 30 days prior to closing which will be sometime in Dec 2017 or Jan 2018. Today's 30 year mortage rate is 4.375% and I believe it maybe around 4.5% - 4.75% when we close.
Nobody has any clue what interest rates with be in December 2017 or January 2018...it might be higher than today, same as today, or less than today. We simply don't know, anymore than we don't know what the stock market will be at this December.
True, and there isn't much you can do about it, either. You simply have to be prepared for whatever mortgage rates are when you close.
"The course of history shows that as the government grows, liberty decreases." Thomas Jefferson

Lindrobe
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Re: Signed contract to build new home - now what?

Post by Lindrobe » Mon May 15, 2017 11:32 am

I am building a home also. We are using a regional bank for our construction loan. We can lock in a rate as soon as we have signed plans and pricing from builder. If the rate goes down before we close, we get the lower rate. Maybe you should shop around and compare options for your loan.

Sanjuan
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Re: Signed contract to build new home - now what?

Post by Sanjuan » Mon May 15, 2017 11:35 am

Not to hijack your thread, but I'm at a similar time in the process. Signed the contract and am in the beginning stages of selections. When signing the contract, I didn't (but should have) tried negotiating some credits for allowances. As I start getting quotes, I'm sure I'm going to get some sticker shock on pricing for appliacnes, finishes, etc.

Any recommendations for negotiating prices for upgrades?

miamivice
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Re: Signed contract to build new home - now what?

Post by miamivice » Mon May 15, 2017 11:38 am

Lindrobe wrote:I am building a home also. We are using a regional bank for our construction loan. We can lock in a rate as soon as we have signed plans and pricing from builder. If the rate goes down before we close, we get the lower rate. Maybe you should shop around and compare options for your loan.
The OP isn't doing a construction loan. The builder builds the home using the builder's credit line (or cash, or whatever), and then sells the home to the buyer once it gets finished.

Lindrobe
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Re: Signed contract to build new home - now what?

Post by Lindrobe » Mon May 15, 2017 11:42 am

miamivice wrote:The OP isn't doing a construction loan. The builder builds the home using the builder's credit line (or cash, or whatever), and then sells the home to the buyer once it gets finished.
Oh, I see. I am new to this process too. Thanks for pointing that out. What is the benefit of using the builder's credit line if you don't mind me asking?

miamivice
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Re: Signed contract to build new home - now what?

Post by miamivice » Mon May 15, 2017 11:49 am

Lindrobe wrote:
miamivice wrote:The OP isn't doing a construction loan. The builder builds the home using the builder's credit line (or cash, or whatever), and then sells the home to the buyer once it gets finished.
Oh, I see. I am new to this process too. Thanks for pointing that out. What is the benefit of using the builder's credit line if you don't mind me asking?
Well, let me try my best to to explain. It's regional and makes sense if you are experienced with these regions, but is hard to understand if your experience is different based on where you live.

When you buy a car, Ford finances the construction of the car, and then when you pay for the car you simply buy a car. You don't have to pay for the line item costs that go into a car, rather, the manufacturer takes care of that and you simply pay a final price to purchase a new car and transfer it to your name.

Some builders choose that model for new constuction. The buy vacant land, subdivide it, choose three or four models of homes that they are willing to build, decide which lots to put which model of home, and then "sell" the home. When they "sell" it there is no home on the lot. What you are doing is securing the option to buy the home at a specific price after the builder has completed construction. They allow a limited amount of customization but not a lot of customization.

This is dramatically different than when you own raw land and you approach a builder to build a house, who then builds exactly what you want on the land.

I guess the advantage with the OPs method is that you can walk away at little cost if you choose to renege on the purchase, depending on what is stated in the contract.

Lindrobe
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Re: Signed contract to build new home - now what?

Post by Lindrobe » Mon May 15, 2017 12:01 pm

miamivice wrote:Well, let me try my best to to explain. It's regional and makes sense if you are experienced with these regions, but is hard to understand if your experience is different based on where you live.

When you buy a car, Ford finances the construction of the car, and then when you pay for the car you simply buy a car. You don't have to pay for the line item costs that go into a car, rather, the manufacturer takes care of that and you simply pay a final price to purchase a new car and transfer it to your name.

Some builders choose that model for new constuction. The buy vacant land, subdivide it, choose three or four models of homes that they are willing to build, decide which lots to put which model of home, and then "sell" the home. When they "sell" it there is no home on the lot. What you are doing is securing the option to buy the home at a specific price after the builder has completed construction. They allow a limited amount of customization but not a lot of customization.

This is dramatically different than when you own raw land and you approach a builder to build a house, who then builds exactly what you want on the land.

I guess the advantage with the OPs method is that you can walk away at little cost if you choose to renege on the purchase, depending on what is stated in the contract.
Thanks, miamivice. I already own the land and we are working with a smaller, customer builder, so the construction loan was my only option I think.

pdanet
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Re: Signed contract to build new home - now what?

Post by pdanet » Mon May 15, 2017 12:07 pm

deanbrew wrote: I would think you will plenty busy figuring out flooring, cabinets, hardware, fixtures, lighting, paint, etc. Or has all of this already been decided? I'm not sure there are that many legal and financial things to think about at this point.
Those are done - and final price has been signed off on. What are the legal/financial things to think about?
user5027 wrote:Somebody, you or builder, need to obtain the permits.
Builder would do.
miamivice wrote:Your next step is to pick out who your lender will be, and to confirm with the builder when you need to tell them who the lender is, if you are not going through the builders.

My past experienced (from 10+ years ago) was that the builder lenders cost more (interest rate and/or fees) but you get a kickback from the builder to go with their preferred lender. Not sure if this is true today. If you choose the builder's lender, you can refinance as soon as you want as long as there are no early payoff fees. We refinances within 1 to 2 months after closing.
Builder is offering to pay $5K towards closing but am told total closing cost will be in the neigbourhood of $15K+ so we have to budget for that amount in addition to the final price. There is no room for negotiating on the closing costs. we tried!

miamivice
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Re: Signed contract to build new home - now what?

Post by miamivice » Mon May 15, 2017 12:14 pm

pdanet wrote:
deanbrew wrote: I would think you will plenty busy figuring out flooring, cabinets, hardware, fixtures, lighting, paint, etc. Or has all of this already been decided? I'm not sure there are that many legal and financial things to think about at this point.
Those are done - and final price has been signed off on. What are the legal/financial things to think about?
user5027 wrote:Somebody, you or builder, need to obtain the permits.
Builder would do.
miamivice wrote:Your next step is to pick out who your lender will be, and to confirm with the builder when you need to tell them who the lender is, if you are not going through the builders.

My past experienced (from 10+ years ago) was that the builder lenders cost more (interest rate and/or fees) but you get a kickback from the builder to go with their preferred lender. Not sure if this is true today. If you choose the builder's lender, you can refinance as soon as you want as long as there are no early payoff fees. We refinances within 1 to 2 months after closing.
Builder is offering to pay $5K towards closing but am told total closing cost will be in the neigbourhood of $15K+ so we have to budget for that amount in addition to the final price. There is no room for negotiating on the closing costs. we tried!
Again, the financial decision you have is whether you want to go with the builder's lender. You don't have to (by law). You can choose your own lender. Your own lender may have less closing costs or better rates than the builders lender but you will loose the $5k in closing cost assistance. Or you can go with the builder's lender and then refinance in a month (or in a week) if you can get a better rate on your own (which you probably can).

My financial advice is to look into using a different lender for better rates and closing costs. Either go with a different lender from the get go if you can or refinance almost immediately after closing. That's my opinion from a financial perspective.

$15k in closing costs seems high. You will have odds days interest. You will have some taxes but taxes should be low at closing because taxes are based on unimproved property which are less than improved property. Everything else is just "fees" and different lenders charge different amounts of fees, but structure them to look like mandatory items.

llama1963
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Re: Signed contract to build new home - now what?

Post by llama1963 » Mon May 15, 2017 12:38 pm

Be very careful....

Who is covering interest during construction period? You or the builder?

Is the builder a large national firm (Lennar) or custom (local) contractor?

What is the construction period - 9 or 12 months?

There is an advantage of dealing with the builders bank. Even if the interest rate is a tad higher. They are familiar with their work quality and are comfortable he will deliver the product at the end. This is HUGE is beyond what the cost would be for a lower interest rate.

Is the construction contract fixed price or cost plus?

Banks that tell you they can fix your 30 year interest rate prior to the "certificate of occupancy" being issued are playing a game. They quote you a rate over market and are placing a bet interest rates will not move over the next 12 months. Therefore, they collect the "service release premium". If you do this, ask them for a "one time float down" between closing and construction being completed.

Good luck!

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verbose
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Re: Signed contract to build new home - now what?

Post by verbose » Mon May 15, 2017 1:16 pm

miamivice wrote: I guess the advantage with the OPs method is that you can walk away at little cost if you choose to renege on the purchase, depending on what is stated in the contract.
We live in a large new-home development. We initially signed a contract contingent on the sale of our home and our ability to obtain financing. But that was just to hold the lot. The builder does not even break ground with contingencies. When we "firmed up" all contingencies were removed. After that, we owed the entire amount at closing--no matter what happens in our lives and no matter how long it takes the builder to actually build the house. This was not a problem for us, but we know people who divorced while building and people who died while building. They (or their estate) still were contractually obligated to purchase the house at the agreed-upon price. If someone can't buy it, they will be sued.

I find it very unlikely that a builder would have a lightweight escape clause once construction has started. For those who aren't comfortable with these kinds of terms, most builders also have "inventory homes" that are still new homes but are either "ready to move in" or "ready to finish" and the sale process for these homes has a much shorter time-frame.

As for what the OP should be doing now... watch the construction very closely. While the OP is probably technically not allowed on construction premises, that might not be firmly enforced. We visited our home under construction daily (it was convenient to do so) and found some errors and omissions while they were still easily fixed. The builder was happy to hear about the issues and didn't ask how we found out (of course they knew).

miamivice
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Re: Signed contract to build new home - now what?

Post by miamivice » Mon May 15, 2017 1:25 pm

verbose wrote:
miamivice wrote: I guess the advantage with the OPs method is that you can walk away at little cost if you choose to renege on the purchase, depending on what is stated in the contract.
We live in a large new-home development. We initially signed a contract contingent on the sale of our home and our ability to obtain financing. But that was just to hold the lot. The builder does not even break ground with contingencies. When we "firmed up" all contingencies were removed. After that, we owed the entire amount at closing--no matter what happens in our lives and no matter how long it takes the builder to actually build the house. This was not a problem for us, but we know people who divorced while building and people who died while building. They (or their estate) still were contractually obligated to purchase the house at the agreed-upon price. If someone can't buy it, they will be sued.
I'm pretty sure death negates contracts. I don't believe you can force an estate into taking out a loan and purchasing an home. No lender would lend anyways because there is no income stream to pay back the loan.

I don't remember the escape clause in the house that we built many years ago. It was during a time of high appreciation and many home builders were encouraging their buyers to back out, so they could sell it at much higher prices.

Beach
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Re: Signed contract to build new home - now what?

Post by Beach » Mon May 15, 2017 1:33 pm

Lindrobe wrote:Thanks, miamivice. I already own the land and we are working with a smaller, customer builder, so the construction loan was my only option I think.
1. Have contingency in your 20% down payment in case your "new" appraisal comes in lower than what it is appraised at now. We were appraised at $485K and after the house was completed it went down to $450K once the house was completed. We had a 20% down payment budgeted and ended up not making it.
2. Have more contingency when you go over budget picking out your selections in the build process. Our builder did an excellent job sticking to things within his control (roof, plumbing, electrical, etc), but going into showrooms and picking what you want gets expensive and his budget estimates were unrealistic.
3. We ended up having to finance with PMI because we blew our budget. Make no mistake, a construction loan is very risky compared to a builder backed loan. You are on the hook and you are responsible once you start pulling money from the bank.

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