• Go to page :
  • 1 2
  • Text Only
Voting History
rated:
I made an all cash offer on a $240k new construction home to be built. In the builder's counter offer, he wants $3k earnest money deposit to be released to him 15 days after the contract is executed and an additional $9k non-refundable deposit directly to him after final plans are signed. I see this risk on my end, but don't want to back out of the deal yet. What can I write in my counter offer to move things closer to a final agreement and minimize my risks at the same time?
Thanks!

Member Summary
Most Recent Posts
What state are you in? In Calif, there is a max of 3% if you & builder agree to the "liquidated damages" clause on a st... (more)

slojt1713 (May. 10, 2014 @ 12:20p) |

mainuser (May. 10, 2014 @ 1:10p) |

Believe it or not, but reputable and honest builders are out there. They are hard to find, but they do exist... Referenc... (more)

v1rok (May. 10, 2014 @ 2:03p) |

  • Also categorized in:
Thanks for visiting FatWallet.com. Join for free to remove this ad.

This smells like trouble. $12k in non-refundable cash? Sounds like the builder is about to kick the bucket and run away with your cash.

JamesPolk said:   This smells like trouble. $12k in non-refundable cash? Sounds like the builder is about to kick the bucket and run away with your cash.
  I dont see how the builder can do anything, let alone run away with cash, once builder kicks the bucket?

anyway to put an escrow account in the middle of all that?

Find a different builder?

Buy older and put in new stuff?

Don't know where you are, but this actually sounds ridiculously low compared to what goes on in NYC.

If the guy is reputable and in business for a long time, there is no way he's going to ruin all that for 12K.  

kriskos4 said:   If the guy is reputable and in business for a long time, there is no way he's going to ruin all that for 12K.  
  
A reputable home builder? Are you on drugs?

Have him get bonded.

Hire an attorney and figure out a way to get some security on your $12k. Escrow account is good.

this is pretty typical in my experience. What happens is they build a house then the buyer backs out in the middle and they are left holding the bag on a home built to specifications of a non-existing owner and having to sell it to someone who doesn't want that 'exact' house.

kriskos4 said:   If the guy is reputable and in business for a long time, there is no way he's going to ruin all that for 12K.  
Even for those with a nice history the Nuclear Option is a possibility
Builders builder one recent example: http://windowanddoor.com/news-item/companies/architectural-tradi...
 

In my experience, Builders generally have clause of non-refundable amounts for new home construction. I paid 5K when I signed contract and another 5K when blue print was ready, discussed and signed off and construction began. All 10K is non-refundable in case there is issue in Mortgage process, which actually starts when home is near completion and within 60 to 70 days of closing.

There is a possibility that either party can take advantage of each other in this situation. Like stated earlier the builder can drop out with your money, but will have to answer for it in court when you sue them. On the other hand, when builders front the money themselves to build a house and no deposit is made the home owner can stiff the contractor out of payment and it is hard for them to get money to cover their costs.
Basically, you will have to do some homework on the contractor(s) and get to know them a bit before striking a deal. Make sure both parties are going to be honest and work together. Perhaps a different payment structure can be made so both parties can be satisfied.
Propose a contract that will pay out separately for each process in building the house. Pour the foundation, make a payment. Rough in the house, make a payment.... so on...

I don't really see what you are asking. Do you think the money the builder is fronting for you is refundable? It's not like he can take installed dry wall back to Lowes for credit.

Why are you using your builder as an architect?
Do you really like cookie cutter homes?

I have moved into new construction and I built a custom home almost 20 years ago and my builder did draws against the construction financing throughout the construction process. My builder had to satisfy both me and the bank in order to get their progress payments. I understand this situation is different, and don't think it is unreasonable for the builder to want the buyer to have skin in the game. Assuming everything is legitimate, the builder is supposed to be, purchasing materials, engaging trades and assigning staff to work on the project. They don't want to put this money out and have the buyer walk.

If the OP ends up having to provide the builder the deposit, since the builder has opened the door with a counter, I would negotiate for something for agreeing to the up-front money. Ask for penalties for non-performance (late delivery), ask for a $5K allowance towards labor for changes, service calls, touch-up and tweaks for up to a year after occupying the house.

The builder I used was amazing. Their supervisor for the project cared more about the house than the architect or I did. They underbid my house and we had lots of complicated negotiations around how we addressed this issue, but I was very happy in the end. I don't think it is fair to assume all builders are out to get you. There is also no reason to do anything dangerous if you can help it, but I am sure there are many experiences like mine.

szedely said:   There is a possibility that either party can take advantage of each other in this situation. Like stated earlier the builder can drop out with your money, but will have to answer for it in court when you sue them.
  
If a contractor properly manages their liability, they can fold the business and make themselves totally not worth suing.
A general contractor failed to pay a subcontractor friend of mine (not residential work) and the contracting firm filed BK.
The sub's attorneys unanimously recommended walking away instead of throwing good money after bad trying to sue for the lost $80k.

The problem here is that the builder doesn't want to make a house sized wager that OP will close on the deal when the house is complete, and the OP doesn't want to make a house sized wager that the builder won't go BK before he gets possession of his new home.

I'm not entirely clear on whether the builder just wants 5% nonrefundable earnest money to help cover his cost if he has to find another buyer later, or if the builder wants OP to kick in more money as milestones are reached, effectively making OP the builder's construction lender.

i think the sticking point for OP is the term "non refundable". its also possible that OP and the builder do not have enough experience to trust each other yet.

OP is taking a risk but so is the builder. The builder is tying up his resources to build this house. He has to procure materials and pay his staff and subs for several weeks while the home is being built. He has more at risk than OP.

check with an attorney and consider putting the $ in escrow to be distributed at agreed upon defined milestones of completion. once distributed it is non refundable.

if OP is uncomfortable with the risk then consider purchasing an existing home.

This does not seem out of the ordinary for a house being built to your specifications. Why would a builder take the risk that you might back out, die, go bankrupt, or leave the country?

For me as a buyer, the worst scenario would be that the builder rolls the money and runs away, a law suit does not help recover the money when that happens. Remeber that I don't have the title to the home/land until closing.
On the other hand, if a buyer backs out of a deal, it is very likely the builder will still be able to sell the house to someone else just like any other spec homes out there. So, who takes more risks?

dxulab said:   For me as a buyer, the worst scenario would be that the builder rolls the money and runs away, a law suit does not help recover the money when that happens. Remeber that I don't have the title to the home/land until closing.
On the other hand, if a buyer backs out of a deal, it is very likely the builder will still be able to sell the house to someone else just like any other spec homes out there. So, who takes more risks?

  The flip side of this argument is that you stand to lose no more than 12k of your money. The builder has lot more at stake in the house that you decide not to close on. 12k is to compensate builder for the potential lower sale price. Whether 12k is the right amount needs to be decided based on specifics of the deal.

3k for making up plans requires several engineers and someone has to pay their salaries.
The 9k is probably for materials.

Oh yeah, here's $12,000 to a corporation I assume.  The corp files bankruptcy and Uncle Madoff smiles.

Then the builder wipes his arse with your 12K and starts a new corp. You file a complaint to your state and they file it under who cares.

$12k isn't too bad.  I had to put 5% down of the total contract price in order to begin construction.  The amount would have been forfeited if I had walked away from the deal.

joeH1974 said:   $12k isn't too bad.  I had to put 5% down of the total contract price in order to begin construction.  The amount would have been forfeited if I had walked away from the deal.
  12k out of 240k is 5%

dxulab said:   
joeH1974 said:   $12k isn't too bad.  I had to put 5% down of the total contract price in order to begin construction.  The amount would have been forfeited if I had walked away from the deal.
  12k out of 240k is 5%

  Didn't even look at the math.    Our contract price was almost $350k.

corporateclaw said:   
kriskos4 said:   If the guy is reputable and in business for a long time, there is no way he's going to ruin all that for 12K.  
  
A reputable home builder? Are you on drugs?

  
They're out there, I've got one building an addition to my house right now (yes, he also builds houses).  A deal like this is more a calculated risk than a leap of faith.  Sure, he could become a crackhead and skip with your cash but not likely if he has a solid crew and/or partners.  I put down $8000 for a 20K job before I saw a piece of wood...I'm halfway into this thing and I'm very happy so far.

Another thought is that if this guy is good, he's got people lining up.  You make life difficult on him and he's got other work to do.  I was way down the list with my builder but I cut him a check and got next in line.

Just curious, about how much does a builder net from a $240k new build?

dxulab said:   I made an all cash offer on a $240k new construction home to be built. In the builder's counter offer, he wants $3k earnest money deposit to be released to him 15 days after the contract is executed and an additional $9k non-refundable deposit directly to him after final plans are signed. I see this risk on my end, but don't want to back out of the deal yet. What can I write in my counter offer to move things closer to a final agreement and minimize my risks at the same time?
Thanks!

  
I'd say no.  This is an all cash deal.  Show him that you have the means to close, but you should NEVER get in front of what is being delivered.
As a builder, do you think he pays for work or supplies in advance?  He does not.  You shouldn't either.

Ask him how this would proceed if it was a financed situation.  Usually there would be a construction loan where the bank paid out on various phases of construction after those phases had been completed.  Again, the bank would never pay out first.

He doesn't know you, so he wants some security... You guys need to come up with a mutually acceptable risk strategy, which might be an escrow account.  There is some up front cost that needs to be done, but probably not $12k worth..

Another way that I'd offer to mitigate would be to cover $12k of costs as those bills come in.  He needs permits, engineers, utilities connected - pay those things for him as bills come in up to $12k. 

I've done one cash deal on home construction.  Do you have draw terms?  IE - you're the bank, you should pay out in phases of construction.

I dunno, that escrow stuff is a racket....the title company usually charges you a fee ($350) each time it cuts a check to the builder... My neighbor is building now and they paid 40k upfront non-refundable. Also, as others have noted, people take the money and run. When the market was bad a lot of builders took the next guys deposit to finish the last guys house...or to finance the house they couldn't sell, a lot of people got left holding the bag..

timx said:   I dunno, that escrow stuff is a racket....the title company usually charges you a fee ($350) each time it cuts a check to the builder... My neighbor is building now and they paid 40k upfront non-refundable. Also, as others have noted, people take the money and run. When the market was bad a lot of builders took the next guys deposit to finish the last guys house...or to finance the house they couldn't sell, a lot of people got left holding the bag..
  
Then cut checks directly.
Builders usually operate on credit for materials and labor.  Not true of all services, but major stuff, they don't pay until it's in.
 

That doesn't seem out of line...what are you paying as the building has progressed...or is it all at the end.  I know some construction loans have the builder paid as the construction progresses.  So 5% front loaded down doesn't seem out of line.

Yea this seems pretty reasonable to me.

What builder company are you using? and what type of house are you building? I am thinkign of hiring a builder and building a 2 fam home. What is the typical cost of buildign a 2 fam  home  3bed/2bath on each floor plus finished basement?

When we built, we had to put down 6% non refundable (3% at signing and 3% after selections). Doesn't seem out of line to me.

stm69 said:   When we built, we had to put down 6% non refundable (3% at signing and 3% after selections). Doesn't seem out of line to me.
  Did you send the money directly to the builder or escrow?

What state are you in? In Calif, there is a max of 3% if you & builder agree to the "liquidated damages" clause on a standard purchase contract form.

Skipping 2 Messages...
Believe it or not, but reputable and honest builders are out there. They are hard to find, but they do exist... References (multiple references) and word of mouth are a good way to know who you are dealing with. We were lucky to get a referral to a wonderful builder. We did not pay a deposit. All payments are after completed work is invoiced. Not sure if the mutual reference helped establish the initial trust between the parties or not, but the deposit issue never came up during negotiations
 



Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.

Thanks for visiting FatWallet.com. Join for free to remove this ad.

TRUSTe online privacy certification

While FatWallet makes every effort to post correct information, offers are subject to change without notice.
Some exclusions may apply based upon merchant policies.
© 1999-2014