Can a builder get paid for an under contract under construction property?

Question

Hi everyone, my company builds single family homes in SW Florida, I have had a few potential buyers reaching out to me regarding potentially submitting an offer and going under contract for different properties, while they are under construction. My question is, are there companies out there who will pay me/give me funds (not sure what the best way would be to put it is), for an under construction-under contract single family home? Note that we use construction financing for our builds. Are there any other advantages for me, as the builder of a pec home for going under contract with a buyer while the home is under construction. Thank you in advance for your insight!

Peter Davis · Answer

It depends on the contract you're using and what's agreed by both parties, but I think @Mark Bohstedt 's approach makes perfect sense. The buyer should have some skin in the game and forfeit their deposit if they decide to cancel the purchase.

Mark Bohstedt · Answer

Ryan, I’m building a spec right now that we got an offer on at the footing stage. I required a non refundable deposit and this allows the buyer to have some input in cabinets, paint, etc. If they back out they forfeit the deposit. Otherwise there isn’t much reason to tie it up before it’s completed, and, without a non refundable deposit I certainly wouldn’t change any finishes just in case they did cancel the contract.  We already had the construction financing in place so that’s on me to pay. The only time the client is responsible for making payments is if they have us build a house for them, in that case we require they get their own construction financing.

Ryan Dori · Answer

Thank you for the reply Peter. If I go under contract with a buyer while under construction, and the buyer decides to back out, let's say, prices go down (hypothetically). Do I keep the deposit? Can a sale be forced? Just curious as to how this works. Thanks again!

Peter Davis · Answer

I think it also depends on timing and where you are in the real estate cycle, and how long to CO for a particular home being considered for this option. There's been a big increase in new home construction inventory in SW Florida as of late, with more coming out of the ground. Buyers have lots of options, especially in the $300K to $400K range. All the big boys (Lennar, DR Horton) and the more local/regional ones (Christopher Alan, WJH, LGI) try to go under contract with buyers before even breaking ground. I doubt mortgage interest rates will go low enough anytime soon to significantly drive absorption of new construction given the current high inventory. Having that certainty of a buyer in place is a nice thing even if you risk giving up some potential upside.

Carini Rochester · Answer

Locking in the buyer I'm sure is the main motivation. No one has the reliable crystal ball. If that's your prediction (prices will go up) then tell this interested party to check back with you as you complete the construction.

Ryan Dori · Answer

Yes we do that at the moment, I was wondering if there is another reason as to why home builders would accept contracts while under construction other than locking the buyer. I get that the is the main goal, but I was wondering if there was anything else that I potentially was missing. Wouldn't you say that locking in a buyer has its disadvantages as well in a market where a lot of professionals believe interest rates will go down and therefor prices will go up?

Carini Rochester · Answer

Why wouldn't your construction financing continue to finance the build? You would accept the buyer's purchase offer, your attorney would hold their earnest money, and there would be a closing after you get the certificate of occupancy.