I hear this question a lot. Last time I heard it, it came from a gentleman who had already done it, written a deed to legally turn his land over to a builder so the builder could get financing through his regular bank to build the house.
From a pure logistical standpoint it makes sense: a builder, with a long-standing banking relationship, can get a construction loan to build your new, custom home quickly and without any effort on your part. And, if you are worried about getting a construction loan yourself, or have applied for one and couldn't get it, this is a possible solution.
Here's how it works:
You own land, and you want a builder to build your house on it. The builder will finance the construction - you'll deed your property over to the building company, and you'll buy the house (and land) from the builder when it's done using a conventional long-term loan (what people commonly call a "mortgage"). Doing it this way, the whole financing process is simplified for you, the buyer. It's also simplified for the builder, since he doesn't have to help you through the process of getting your own construction loan.
The risks you take
There are some risks, though, that you should know about when considering signing over your land to a builder.
Here's an example:
The gentleman I mentioned above (we'll call him Joe) made an agreement with a builder to build his family's home on their land. This was to be their forever home, built on land they've dreamed of living on for years. As the planning progressed (no construction yet), the price of the house kept going up, even though Joe and his wife (let's call her Beth) hadn't made any changes outside the scope of the original agreement. At first, the price increases seemed to make sense, but when they kept coming, Beth became suspicious.
After several more unexplained price increases, Joe and Beth asked for their deposit back, which the builder refused. Well, as you can imagine, Joe and Beth had lost all trust in the builder, and wanted their land back. That's where things got sticky.
The builder at first simply refused to deed the land back over to Joe and Beth. Then he threatened to sue them for breaching their contract.
Here they were, just wanting to build a forever home for their young family out on the land of their dreams, and not only were they being threatened with a lawsuit for only trying to back out of what seemed like a trap, but they felt like they were about to lose their land as well!
One thing led to another, and finally they were able to wrestle ownership of the land back from the builder. But, they still wanted to build their dream home.
The solution
The solution was to get a construction loan themselves. This can seem like a daunting task, since getting a construction loan isn't something most people do very often. But, by getting their own financing, Joe and Beth were able to keep control over their land, their money, and not let the builder hold the land over their heads if things were to go sideways.
For more inside info, visit my blog page on the topic of financing and construction loans.
Also, feel free to download this free guide on how to turn your raw land into your forever home.
