Deposits

You want to build a home. You will hire
a builder. How much of a deposit should
you "put down?" That depends.

First, when you provide a deposit it should be
clearly written down as part of your contract.
Your written contract! The deposit is credited
towards the purchase price of the home. It is not in addition
to the purchase price.

The amount of deposit depends on a few things. Primarily though it
depends on how your home is being financed. If you are obtaining bank financing the amount of deposit is less than if you are financing the home yourself.

When I am working with a customer that has bank financing I require a $7,500 deposit. This amount allows me to pay for the building permit, water and sewer permits and other miscellaneous costs that have or might occur before the first draw. My feeling is that the amount of the deposit should depend on (1) the price of the home, (2) the cost of permits that have to be drawn early in the project, and (3) if there are significant deposits that must be made early in the project.
I am considering raising the $7,500 deposit as in some municipalities the cost of getting started is more than I am collecting. Will likely go to a $10,000 deposit.

Now, if a customer is self financing the project (no bank financing) than my deposit requirement is much greater. Potentially 20% to 30% of the cost of the house. Why so much?

With bank financing, I know that I will get paid for the work that I do. If the owner gets hit by a bus. I still get paid.

When a customer pays cash for a home, it is customary in the industry to require payment for the work before the work takes place. Therefore, regardless of events that may affect the customer any and all work is paid in full. My trade contractors can count on being paid for the work that they do.

The 20% or 30% deposit allows me to cover the early parts of the building process. The most expensive parts. Then within 30 days I will bill for an additional amount depending on (1) how much of the deposit has been used, and (2) the cost of the work coming up.

The customer is still protected in this scenario as there will always be an amount that does not get paid until the house is fully completed.

One more thing about deposits. If you obtain bank financing, your lender will consider your deposit as part of your downpayment for the loan.

I am writing this article as I want people to understand the need for a deposit and what it should be based on. It should not be excessive.

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Build on! Build with confidence.