There are advantages and disadvantages both ways, financial and otherwise. It would be very prudent to speak with a competent lawyer, not a Real Estate Agent, before you commit to either. When you select the lawyer make sure it will be the one handling your entire transaction from start to finish to prevent duplicating fees for the lawyer. The reason I recommend a lawyer is that a RE Agent is unable to provide you with legal advice unless they are also a lawyer.
What you are describing with the builder's 5% down financing arrangement (then converting to a final loan after 7 months) sounds no different than an interim construction loan, except you possibly may not have to pay an interim construction loan interest during the build. I would find it a little difficult to believe that the builder is willing to front the construction costs with a high possibility that the deal could always go South on them and they might up with a home they then need to sell. Large tract builders can do this type of arrangement as they have the financial resources and better chance of selling the home if the deal does go sour. I would look through their contract closely to make sure that there are no hidden fees or heavy penalties if the project is delayed or halted. I would also be weary if there are many conditions imposed on you, and rights removed (such as remedies and inspection rights) in the event the builder is not performing.
The advantage you have by using your own funding sources, especially in light of the current economic situation, is that the institution financing the interim construction loan is going to be very careful about paying the draws without adequate proof of milestone completions. I would also hope that the financing arm would also perform at least some due diligence on the builder as well. After all, they are taking a chance that the process is going to progress properly and the builder will be using the funds for your build and not another ongoing build.
Either way, when you do speak to a lawyer make sure your contract with the builder specifies ALL of your rights and remedies for ALL phases of the project. It should include the unfettered ability for you to hire an independent Inspector to watch all phases of construction, what the builder's responsibilities/timelines/etc. are to handle any and all issue that does arise and what recourse you will have against the builder if they fail to meet milestones or do not perform under any aspect of the contract. Any good and reputable builder will not have any issue with a contract that protects both you and the builder.
I think you should read Nicholas Ricci's blog and give him a call. He may be able to help you. You can find Nicholas' blogs by searching the member profiles. The board is not allowing me to post the URL to it.
Emmanuel J. Scanlan
PS Inspection & Property Services LLC
TREC License # 7593
International Code Council, Residential Combination Inspector #5247015-R5 (Electrical, Mechanical, Plumbing and Building)
Texas Residential Construction Commission, Third Party Warranty Inspector #1593
Texas Residential Construction Commission, Inspector, County Inspection Program
Texas Department Of Insurance, VIP Inspector # 08507061016
Hayman Residential Engineering Services, Field Technician
CMC Energy - Certified Energy Auditor
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