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Owner-Contractor:How to deal w/the bank?

dirkaz | Posted in General Discussion on November 30, 2002 07:39am

Hi All,

About 15 years ago I was in the building trades.  I worked at framing, roofing, and masonry (laid brick, block, stone).  My wife and I also built a small cabin by ourselves — laid out the footer, poured footer, laid block foundation, framed it, roofed it, plumbing, hired out the electric, etc etc.  I also had some formal training (just out of high school) at a trade school for framing and layout, etc.  — So, bottom line — I do have some experience in building.  I’ve also built some pretty decent cherry furniture.

Now — flash forward.  We live in Arizona now, and want to build an adobe house.  Adobe structures are not unusual around here (see http://www.oldpuebloadobe.com/) and the banker has no problem with adobe.  Neither does the building department — there are a few going up around here at the present.

The problem is the banker.  Apparently the bank has had too many problems with owner/builders or owner/contractors and doesn’t want to fund my project unless I, at minimum, hire a General Contractor and pay him a consulting fee to oversee the  job.  — Now, I can probably go to another bank, but before I do, please tell me — how do I calculate a fair value for this “consulting fee”?  I view this role as significantly less than if I hired a GC to do an GC job.

Basically this person would be signing a contract with me to oversee the job.  I’m not sure, but I think this implies (the bank’s thinking anyway) that his insurance would cover my job site.  But the main purpose of the bank seems to be that this person be available to lend his expertise if I need it and to make sure the sub-contractors are managed well.

Any ideas on how to calculate what I should have to pay this guy for his “oversight”?  — That is, I think I’m going to have to negotiate this and I need some negotiating points.

So — can anybody help me?  Thanks!  Dan.

P.S.  I have a very detailed set of house plans, blocks of “free” time to be at the job site to deal with problems, I have worked with subs before on other jobs at my present residence, and, as noted above, I’m fairly experienced with the various trades, etc.

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Replies

  1. FrankB89 | Nov 30, 2002 08:27am | #1

    What you might consider doing is find someone that has a good rep with a GC license to hire to work with you.  Just because a GC is required by the bank doesn't mean he has to be a big player with a fleet of trucks and a busload of employees.

    There are a lot of small independent folks who are reliable, who won't cost you an arm and a leg and have the net worth to meet the Bank's requirements.

    I know, because I'm one of them and am currently building a house with the HO, who, by the way, is competent.  To be honest, I'd sometimes rather work with a HO who has some skills and will work and pay attention than to deal with a marginal employee.

    Jules Quaver for President   2004

  2. Piffin | Nov 30, 2002 05:36pm | #2

    I do that sometimes - for the right person. But in some states a contractors license and insurance can be put at risk for this kind of thing and it will cost a couple of thousand just to get him to walk on site.

    There is one bank out of five here that works with owner-builders easily. And that one has had to reposses several unfinished piles of partialy thrown together lumber in the general shape of a house. That is what makes it hard to do. Too many who, unlike you, overestimate their ability and underestimate their costs.

    .

    Excellence is its own reward!

    "The first rule is to keep an untroubled spirit.

    The second is to look things in the face and know them for what they are."

    --Marcus Aurelius

  3. Bruce | Nov 30, 2002 06:19pm | #3

    I would suggest that you shop other banks, but go armed with the right weapons.

    Banks love to see documentation, and the greener they think you are, whether it's right or not, the more you have on paper the better.  We're not talking about a paper snow job, but some real proof that you've worked through the project.

    If you can handle the up-front costs out of pocket, get all of your permitting, approvals, and utility costs done and paid for (I'm assuming you have a full set of aaproved plans).  Get all of your bids and line item costs on paper.  Develop a real working time line for construction.

    In short, demonstrate to any bank you approach that you don't just see the "big picture", but you've gone above and beyond to see that you've covered every contingency you could up front.

    Now ask everyone you know who has dealt with a mortgage lender how they feel about them, and I'm willing to bet you'll find the right one.

    I have been in your position, and had the best luck with a young guy in a one person mortagage lending office.  He was sharp, he hustled, and he wanted success for himself and his clients.  This was after I had been to my own bank, where we have three accounts and good credit, and they gave me seven miles of paper to fill out and listed all of the hoops I'd have to jump through for them.

    Good luck!  

    1. dirkaz | Nov 30, 2002 08:45pm | #4

      Thanks, all, for your insights.  I'm in the very early stages of this project and can't really start until our current house sells.  However, I'm doing what I can to get ramped up.  -- I'll start checking out the smaller GCs around here, and also check with some alternative banks (and maybe my credit union).  -- Also, I think BEMW's point about comprehensive documentation for the bank is right on target!

      Thanks again.

      1. Manzier | Dec 01, 2002 04:53am | #5

        It's just a fact that some banks and/or lenders don't like dealing with homeowners who are building their own home, and it's not their profession.  And moving to a new area, and building, where you don't know the customs, subs, codes, etc. would probably make the situation worse.  Hence, the bank is wanting someone local, preferably a GC that they have experience with, to have some role in your project.

        Since you have to wait until your current house sells, spend the time getting to know the suppliers, subs, and building inspectors in your area.  Then, after your house sells, go into the bank and fill out a new application or personal financial statement that shows your cash from selling your old home.  I know 20%, or more, of cash equity into a project sure makes a marginal loan look a lot better.  Also, I don't know if I subscribe to the "kill 'em with paperwork" theory (Lord knows I have enough) but a complete and thorough cost estimate and a description of materials list would be must haves in my book. 

        Barring that, if you don't want to spend (waste) the money to pay a consulting fee for someone you don't need, shop banks.  There is a lot of difference between banks and loan officers.  Good luck.

        1. brucepirger | Dec 03, 2002 02:00am | #6

          I'm an owner/builder over in NY State. I'm "finishing" my 2800 sq ft. building now...I had help with the excavation, the footers, and laying the blocks...everything else is me (OK, crane to set trusses (32' clear span gambrels) and I handed the 5/8" out to the roofers on the 19/12 pitch!) Otherwise, it's all my fault. :)

          The bank initially laughed at me...they all did. So I started on credit cards...about $20K in cash and $57K on credit cards. Then the bank came out and said "How much you want to finish?" After that, no problems...

          A few comments:

          1. Worked with a small, local bank.

          2. A friend at work referred me to the chief mortgage officer...and apparently I am not the first one that has been hooked this way...so it probably helped considerably coming in without being completely off the street.

          3. I had the shell complete, windows on-site (though not installed), roof on, well, septic, electric, etc.

          4. This is a house 1000' off the road, way out in the boonies...a "unqiue" type home I was told...a negative from a financing viewpoint.

          5. If the bank hand't come through, I'd be paying monthly minimums at this point with no cash left to finish! So it is a HUGE risk.

          There's a thread a few months ago about this topic...

          So, maybe it is something to consider. Only paid about $300 in interest on all that as well...those 6months with 0 interest came in nice!

          Finally, let me remind you, BUILDING A HOUSE ALONE IS A HUGE AMOUNT OF WORK. Man years in time...so if you are alone...

          I'd do it again in a heartbeat...although I sure wish I had just one buddy that helped anywhere near as much as they had talked about helping...LOL.

          Good luck!

          One last thing....the BIGGEST headaches, BY FAR, for me has been dealing with contractors who did help! The cabinet/countertop folks...not what I had expected. I did hire a guy to help insulate/drywall...YIKES, had to take down a lot of his work because he didn't listen to me.

          Just remember, not many will care as much as you do....and if they do, you pay for their quality mindedness. This is a good thing in the end.

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