Financing Your Custom Home Part 4: The Builder Contract

Make him your new best friend. A Builder's contract will make sure both of you are in agreement on all the details.

Continuing on in our series on financing your new home, I would like to share with you an additional step you can be working on while you await the result of your loan application. If you haven’t already, be sure to read blog posts 1-3 of the series on how to begin the construction loan process

Now that you have applied for your loan, you need to identify your builder and begin contract negotiations. Having a contract in place is a requirement of most construction loans. It is also an important way to protect yourselves and your future investment. What follows is an excerpt from an article on construction loans that I often refer to clients of Kelly Custom Homes.

As a part of every construction loan is an item referred to as  “a builder’s package”. This includes items such as a builder’s resume outlining previous construction experience, includes customer and supplier references, credit references, a line item cost breakdown, materials list and, a construction contract. This is a written agreement between the borrower and the builder for services to be provided by the builder for a stated consideration. A properly written and customary contract contains:

• A clear statement outlining the responsibilities each party will perform.
• The date of the contract, the scheduled dates for commencement and completion of construction of the project. An event date, rather than the actual date, is sometimes acceptable.
• The amount of payment the builder is to receive for each stage of construction, as well as under what conditions it will be received, such as passing inspection etc. If the property is located in a state that charges sales tax, the contract must specify whether the amount includes state sales tax.
• Proper reference to a completed and signed Line item cost breakdown and list of materials.
• A payment method that is compatible with the line item cost breakdown and the disbursement procedures of the investor.
• Provisions for possible changes to plans or specifications by appropriate change orders. Since most construction loans have a contingency provision a cost over run may be paid for using that provision.
• Full identification of all parties and definition of all names used in the contract (contractor, owner, subcontractors and architect).
• Architect’s responsibility, if any.
• Signatures of the borrower and contractor.

With a contract in hand, you can now feel more comfortable about your future home construction. Just be sure you carefully review with your contractor the specific provisions on upgrades and change orders. For example, you may think that you want a bare-bones kitchen with Formica counter tops, but then one day you see a granite counter top at a friend’s house and before you know it… change order and up-charges.

It is important to separate out needs versus wants in terms of your budget. Many things can be affordably added later (such as hardwood floors) and should therefore be put off to stay on budget. Other items involving structural considerations such as central air, fireplaces etc… will be worthwhile upgrades and cheaper to do during construction.

So be prepared, protect yourself with a contract and get ready to build!

Take care,

– Jim Kelly