Is ‘builder financing’ a good way to go?
Question: My wife and I own a lot in Cape Coral and we are in the process of building our retirement home. We had hoped to pay for the construction in draws from our savings, however some unexpected bills came up so we couldn’t pay the most recent requested draw. The builder has offered us the option to handle financing the remainder of construction for us, all we would need to do is sign their agreement, and convey title to our property to the builder. Is this a good idea?
Answer: Credit markets continue to be tight relative to 10 years ago, so many people are still finding it difficult to obtain conventional loans. Based on your question, it appears you have already made at least a deposit, the first draw and possibly multiple draws on construction to the builder. That means you have tens of thousands of dollars invested in construction, in addition to the value of your lot.
The contract the builder is proposing will provide the terms of what the builder is offering and requiring of you. It is likely that the builder will require you to convert their financing to your own financing by the time construction is complete, which is likely less than a year away. Ask yourself, If you are unable to obtain conventional financing now, what will change in your situation in the next year that will make you eligible for financing? If the answer is “I don’t expect my credit situation to change,” then you must proceed very carefully. What does the contract provide in the case you default, either by not purchasing the house outright, or not financing by a certain date? How does this compare with your current construction agreement? Is the builder going to keep your lot, if so will you receive the value of it back in cash? What about the payments already made to the builder, will you receive all of your money back, or forfeit everything?
My experience in these situations is that it is almost never preferable to transfer the title of your property to a builder. You lose almost all control of the situation if you do, and if the agreement is written for the benefit of the builder instead of you, you could incur significant losses. However, if the circumstances leave what appears to be no other alternative to “builder financing,” it is highly recommended you consult with an attorney to review the documents and advise of the potential pitfalls of such an arrangement, as well as the potential for other alternatives.
Eric P. Feichthaler has lived in Cape Coral for 27 years and graduated from Mariner High School in Cape Coral. After completing law school at Georgetown University in Washington, D.C., he returned to Southwest Florida to practice law and raise a family. He served as mayor of Cape Coral from 2005-2008, and continues his service to the community through his chairmanship of the Harney Point Kiwanis Club KidsFest, which provides a free day of fun and learning to thousands of Cape Coral families, and funds numerous scholarships. He has been married to his wife, Mary, for 13 years, and they have four children together. Recently, he earned his board certification in Real Estate Law from the Florida Bar. He is also a Supreme Court Certified Circuit Civil Mediator. This article is general in nature and not intended as legal advice to anyone. Individuals should seek legal counsel before acting on any matter of legal rights and obligations.