Posted by ray@lcorn on March 10, 2000 at 01:16:17:
Once I got past a $300T “lot”, I realized you must be talking about a subordination deal. In most cases, the builder supplies the funding for the house through a construction loan using your land as security. The construction loan will be secured by a first deed of trust or mortgage (I don’t know which CO uses). You deed the land to the builder and take back a second mortgage for the sales price of the land. It usually carries some rate of interest, generally to match the construction financing. As a builder I have negotiated subordinations without interest, but you’ll have to decide if that is a deal maker or breaker for you If the price is high enough, you won’t need the interest. Make the builder pay the realtor. I will guarantee he can get a better deal than you can.
When the house sells, everybody gets paid, in theory. Make sure the builder has the financial wherewithal to carry the interest cost on the project, and a successful track record of doing numerous similar deals. Check his references through past customers. He should have at least one bank reference that will provide details of his credit limits.
Assuming you are inclined to do the deal, make sure the plans for the house and the description of materials are subject to your approval. As to liability, have the builder name you as additional insured on his builder’s risk policy. That will cover things like someone getting hurt. It will not cover theft or casualty loss. The builder will have to purchase a separate policy for that.
As to risk, if he is a reputable builder, the risk is minimal. Construction loans are paid out as the house is completed, so the deal should never be in the position of owing more than the improvements are worth. He is improving your property. This all assumes that the market is good for this type of house.
Just out of curiosity, how much will the finished product bring in that market?