If you recall in an earlier post I mentioned (very bitterly) that a construction loan is a reimbursement account. Which means that in the absence of a completed (sell-able and livable) structure the bank requires the GC and the buyer to take on the majority of the financial risk for a building project. If you happen to be both then you better hold onto your pants because (you may lose them and your shirt) as you are now liable to front ALL of the costs to fund your project before you see a dime of loan money from your bank. The bank will only disburse funds if you can prove that each line item of work is 100% completed. There have been times during this process where we have wondered why the hell we even bothered getting a construction loan because we have felt like we were building the house out of pocket.
Unfortunately if you are not part of the building community and or have a working relationship with lumber yards and sub-contractors it's tough to prove to vendors that you are "good for the money" even if you tell them you have a bank loan to back you. So we have found that many vendors and contractors have required substantial deposits from us upfront, when they are half way done and when they finish. These have been the most expensive relationships to foster and manage. I swear the deposits for our rough work alone could run a small NH town. As a GC it's your job to juggle your working capital to ensure you can cover these costs. And let me tell you juggle is an understatement.
My husband, father and I had to estimate the total cost to build our home way before a single person stepped foot on our job site. What we thought we wanted day one changed multiple times before actual purchase and install. Many of these changes were triggered through education (exploring new options and deciding to use better materials). Did you know that there is a difference in quality of nails? I didn't and I never in a million years thought I would ever be having conversations about this! If you install exterior cedar shingles it is recommended that you upgrade to stainless steel nails to ensure they never rust and stain your cedar. The going rate for one box of stainless nails is $130. The alternative and less expensive option is to use galvanized nails and they run about $40 a box. Nail at your own risk people!
Just when we thought we had experienced all the crazy that is the construction loan process we were schooled again. You would think that spending wisely to upgrade your home's (infrastructure, materials or finishes) would have a positive outcome. Ironically from the bank perspective you have now altered your original agreement. Banks have to track your loan disbursement to zero. How can they verify that you are 100% complete with a line item if the real cost to complete that work is higher? They will still only give you the money you agreed on even if it's less but now they force you to pay the difference before they let you access the funds. The bank may even require you to deposit money into your disbursement account to make this happen!
Now you can appreciate why builders jack the cost of upgrades up two fold. They are just trying to recoup their profit and cover the cost differences for the bank.
The whole construction loan process is geared to protecting the bank. We are left scratching our heads wondering how anyone is able to build at all?
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