Builder Deposits in a New Home Neighborhood

Real estate is local and even varies in the Triangle Area of NC so check with your agent to find out what deposits are like in your area. I hope this will give you an idea of what questions to ask.

Get Preapproved

The first step in buying a resale or building is the same, meet with a lender and get pre-approved. The pre-approval is only as good as the information you provide your lender. It pays to be very through at this stage because you don’t want expensive surprises later. Your lender will check your credit and review your income and debts to determine the loan amount you will be approved for and the loan options. You will discuss what is a comfortable payment for you, what cash you will need for a down payment, and closing costs.

Deposits Vary

When you are planning on building or buying a new home from a builder there aren’t set rules about deposits, upgrades and timing of payments. There is also some risk involved because your new home doesn’t exist yet and that can be both good and bad.

The amount and timing of deposits can depend on the neighborhood and builder. In the Chapel Hill area you will find new home neighborhoods with builders who sell just a few custom homes a year to large national and regional builders. The plans and changes provided and allowed by the builders can vary from only cosmetic upgrades to structural changes. The builders contract (totally biased toward them of course!)will detail the amount and timing of deposits and other payments.

A small custom builder (up to about 20 houses a year) almost always has the largest deposit requirement, often 5%-10% due at contract signing. It’s pretty much always non refundable so you will need to make sure you can get financing before you sign the contract. Builders feel justified with this large deposit because they will have to purchase the lot from the developer,get a construction loan, and build to your specifications.

You’ll Need Cash for Upgrades

After the contract is signed you will usually have to pay for half to all changes and upgrades in cash at the time of the change. You will have a significant amount of cash tied up during the building process so if you have a home to sell you should go ahead and do that before you contract to build even if you have to rent during construction. Builders won’t do contingencies except in special cases when they were planning on building the home as a spec anyway. I would not recommend signing a builder contract and then putting your house on the market expecting a sale, even if you have the cash.

The Construction Loan

Sometimes a small builder doesn’t have the capital to purchase the lot and get a construction loan. The builder may have an arrangement with the developer to purchase lots as they get a contract. The builder may have you get the construction loan and the lot will be purchased by you with the first construction draw. Lenders usually will lend you 75-80% of the appraised value for a construction loan and you will be responsible for construction loan interest (interest only on the amount drawn) and any changes above the amount of the loan. The bank will send a representative to check the progress of the home and releases construction funds to the builder depending on the % of completion according to a preset schedule. Your construction loan can be converted to permanent financing when the home is completed although you won’t be able to lock in your rate until 60 days or so before completion. You shouldn’t have to give a builder deposit if you are getting the construction loan.

Check Out the Builder

The deposits are set out in the builder contract. The builder contract is is to protect the builder not the buyer. In my experience the builders won’t make changes at all to their contract but it is a good idea to have your attorney go over the contract with you so you understand what you are signing. You should also check the builder references and suppliers because there is risk involved for your deposit money and sometimes the clues that a builder is in financial trouble are not obvious.
Buying an existing home is the easiest way to go and you may be able to negotiate the price but building your home will give you the home you really want and can be a fun and rewarding process if you are prepared.