Reid Hutchinson
In simple terms, homeowners, bankers and contractors agree on the goal of building a new home with high-quality craftsmanship, and doing so on time and on budget. But the execution of these items can be another story, but it doesn’t have to be.
Homeowner, banker and contractor disagreements can result in project quality disputes, delays and cost over-runs. But these disagreements can be anticipated and eliminated or at least minimized. Let’s focus on bringing the homeowner, banker and contractor into alignment to help prevent homebuilding hiccups. I hope I can bring a unique perspective to this balancing act, given that I am a banker who also happens to still hold his general contractor’s license, based on previous employment.
Finding a good contractor is obviously one of the most important components when building a new home. A good contractor will have existing high-quality sub-contractor relationships, will follow a project timeline closely, and will accurately estimate and execute a project budget. Ask for at least three referrals, and ask to visit one of the homes the contractor has built. Get a sense of the contractor’s character, and make sure you can trust the contractor engaging sub-contractors who will build your home (it takes over 40 sub-contracting trades to build a home). Make sure the contractor is licensed in the state of Georgia, holds general liability insurance and workman’s compensation insurance.
The best bet, of course, is to have a bank with whom you already have a total banking relationship. In other words, a bank that already knows you and is already working with you on other types of deposit and lending products. Your bank will qualify the contractor and get formal approval to work with them. Finding a construction lender who will do some basic-but-important things like walk a jobsite should result in having the cash available to keep your project moving. If you don’t have a go-to bank, ask contractors which banks they have worked with in the past, and look around in your neighborhood to see who is lending in that area.
When a homeowner decides to build a home, often it is a dream home and they want the house built with much attention to detail. The contractor has a goal of getting the code inspections passed and the project completed so they can get paid. Homeowners should pay close attention to the mechanicals during the construction to ensure quality is “built in” because once the mechanicals have been approved by the code inspector, they are covered up with sheetrock and a problem may not surface until years down the road. When a costly home emergency occurs, it’s frequently related to the plumbing, HVAC or electrical.
The construction lender wants to ensure that the money lent is not more than the progress of the project. In order to monitor the progress of the project, the banker will use a third-party construction verification inspector to provide progress updates. Each time the contractor asks for a “draw” against the loan, the lender verifies work and transfers the money if the work has been completed. Homeowners should be closely involved in this process too.
The banker wants to make a sound construction loan that will be paid off. They want the construction loan to be secure and well collateralized, with appropriate equity on the front end. Like you, the bank wants to avoid failed inspections and stop work orders, and any other reasons that could cause the project to drag on. They’ll want a pre-qualification takeout letter from a mortgage company; in other words, to know what funding you have lined up to take over after your construction lending concludes. And, of course, the bank wants to get paid for the risk it takes.
Your general contractor needs access to cash on a timely basis, so their project isn’t delayed. They want architectural plans performed a certain way, so they can budget/estimate accurately. They will rely on sub-contractors to perform a high-quality job on time and on budget. The general contractor needs to be able to pay subcontractors upon passing of city/county code inspections.
Like the bank, the general contractor doesn’t want unforeseen circumstances, causing delays and cost overruns. And, like the bank, they want to get paid for time and expertise. Good general contractors and good banks build their businesses from referrals. Homeowners, bankers and contractors can plan well and work together, so each has their individual and shared objectives met.
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