I’m just finishing my first spec house and several potential buyers have asked about having the basement finished. What’s the best way to pay for this? I don’t want to put any more $$ into the house at this point.
My thought was that any potential buyer would “hire” me to finish it after closing – but my realtor say’s that most buyers will want to incorporate the cost into the end loan. Should I just require a “non -refundable” deposit equal to the cost?
Here’s a link to view the house. Thanks
http://www.greenrealtymt.com/properties/detail/residential/184361/
Replies
Could be tricky. If they sign a purchase agreement and put down earnest money, what happens if a contingency unrelated to the basement is not met? Most purchase agreements are going to have bank financing as a contingency, and if they can't find a loan they get the earnest money back and you are out the cost of the basement finish.
Where is your realtor on this question? He's got his picture on the web site there, maybe he has ideas on how to structure it. No matter what... if the money for the basement is part of escrow, you don't get it unless the deal closes.
Thanks David for the reply. It does seem like a catch 22, with all sorts of things that can go wrong. I believe the realtor has more faith that everything will go smoothly than I do. He just said that the buyer will put down a deposit - say 10K. But that's less than a third of the costs, and like you said, if something goes wrong before closing then I'm out my costs and will probably have to return their money to boot. Thanks, Clay
Edited 9/6/2008 9:49 am ET by CSmith
"will probably have to return their money to boot."WHY?What you are talking about won't fit a standard contract. Don't use one.You might end up with a 2 stage deposite. A nominal amount, say $1,000, earnest money on the sale of the house and following "standard terms" for you area and type of deal.Then, at some other point, close to the sale being solid, a non-refundable deposite of $10-20k or whatever is worked out.Most likely, is that it will work out 2 ways. One is that you finish it completely before the sale and wrap it into the price. That may be completely on your own risk or with then paying for part of it - if they have that much cash and are willing to risk it.Or it will be treated by the bank as a custom build. It would might be a construction or permanate loan, or it might start off with a permanat loan. But in any case it will be apprasied as a finished house and like a new construction an apprasial based on the plans for the basement finish. And that share of the value will be held in escroll and released as the basement is finished.If you have a construction loan on it how (or did) I would talk to that lender. Not for then to fiance the basement (although they might), but to see what kind of options that might be available.And/or any mortgage lenders that you are familar with.The end deal will end up being controlled by the mortage compay.So that would be the starting point to look for some options.Then use YOUR attorney, one that is real familar with realestate, to write or at least review you contracts.As I said this won't fit into the standard contract forms and trying to use one will possibly leave one of the parties and maybe all of them at risk..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
Thanks Bill & John, you've given me some good points to consider. I'll discuss it again with my realtor and also my lender on Monday to see what all my options are. It may end up not being an issue, but I met with the potential buyers yesterday for 3 hours answering all their questions, and I know that they're interested in finishing the basement, so I'm trying to get my ducks in a row before another possible meeting.
Again, thanks to everyone for the help. Clay
(Edited to add) - I don't want to sound like I don't trust a buyer, - however, my neighbor recently accepted an offer on his house which was for sale. He completely moved out with his wife & kids into a rented house only to have the sale fall through at the last minuite. He moved back into the house minus the wife.
Edited 9/6/2008 12:50 pm ET by CSmith
>I don't want to sound like I don't trust a buyer<
It's not the person you don't trust. It's the circumtances that lead up to the sale you shouldn't trust and expect to occur flawlessly. Everyone thinks their house will sell in 2 weeks for 3 times what they bought for 3 years ago.
Keep us posted to what happens, especially the banks position.
One thing you need to be sure to take from Bill's post is to use your own atty for the contracts. My dirt (realestate) atty is one of sharpest people I've ever met and I'd never want to be on the opposite side of him in court. Find one like that if you don't already have one.
Price it as if it had a finished basement but tell clients its finished to suit their needs.
They get a custom (with in reason) basement and you get your money.
At the most, maybe frame it out then let the new owner pick finishes.
Family.....They're always there when they need you.
That's a good idea. Just raise the price of the house to cover the basement finish, but don't do the work until after closing. The only problem might be with the bank, and if they will lend the extra amount before the work is done. I guess that would depend on the cost to appraisal numbers. Thanks, Clay
Thats why I say frame it up. Maybe, maybe sheet rock to appease the lender. Then finish to suit.
Family.....They're always there when they need you.
>maybe sheet rock <
but SR usually needs to have the electric behind it as well as any other mechanicals.
to the OP I'd give them 2 prices/2 contracts. 1 to buy the house and then 1 to finish the basement immediately after closing.
But what if they want to finance the basement with the house purchase?
Thanks guys for the suggestions. I like the idea of raising the purchase price and starting the work after closing. Maybe frame it in beforhand. I would think that the lender would be fine with everything, provided it was in writing and signed by all. Clay
Edited 9/6/2008 10:05 am ET by CSmith
that's a good quesiton.
If they can get financing to cover the cost to finish the basement then they have some type of equity balance from something because the bank/appraisers won't appraise it that high with just a promise (although a contract from the builder/seller might get them leaning in the right direction, but probably not). Home Equity would be my first suggestion from their equity (financing available suggests the equity). That may not have the same interest rate as the primary loan though making it not so appealing. If they're carrying cash from the previous sale that's not required to initiate their new priomary loan they cna use that or protions of it.
But if I was the OP I'd let the problem sit in the lap of the buyer since they're exposed to almost no risk at all other than their earnest money. Maybe he can get the earnest money to cover all the material costs?
Yeah, I know once you get to sheet rock you're pretty well commited. It is an option though.
Family.....They're always there when they need you.
All good suggestions above which I can't really add to. Just want to say nice job on the house. It looks great!
Runnerguy
PS. The site your home is listed on states: Basement-NONE
That is why it is no expensive to finish it..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
Beautiful------I'm still laughing....
Here in MD finishing the basement after settlement would mean you need a home builders license along with a home improvement license because after ownership transfers it is now an improvement, requiring a new permit.
I hate this state.
Potential buyers (dreamers?) ask about finished basements having heard stories of builder finished for $30k vs custom at $100k.
If they are stretched to the limit take no risks, no favors.
Can they qualify (for example) $30k added to their mortgage? If so, increase selling price by same, w 20% financing they need another $6k down.
Small risk to you is that if deal falls thru, now you are marketing @ $310k.
Can't qualify? Escrow to you the difference, whether finished or studded out price.
No risk to you.
Best of luck, be careful, oh yeah, nice house.
Your realtor is interested in selling the home and getting his percentage of the sales price. He is worried about getting stiffed for his percentage of the finished basement, not doing what's best for you or the buyer.
Your question is better answered by a sitdown with the purchasers and the person making the loan. Many realtors know very little about financing--what they do is a sales job.
Best of luck!
Beer was created so carpenters wouldn't rule the world.
Thanks to everyone for the good advice and the compliments on the house. I will definitely cover my rear as best I can without scaring them away, or for all I know, I may never hear from them again anyway. Either way I really appreciate your help and I'll be better prepared for a situation like this in the future.
Since I really don't want to do any more work on the house even if they do come up with the financing, I think I'll "put it in their lap" to figure out how to pay for it. Unless they're sitting on a pile of cash or have lot's of equity they may be inclined to just purchase the house as is. To finish the basement now allmost seems like building the house all over again.
I thought that a spec house was the way to go, but I'm not so sure. Between the financing costs and realtor fees, and my tendancy to give things away ( I build every house as if it were going to be mine ), the jury's still out. Oh well.
Thanks again and I'll keep you posted on how things turn out. Clay