I recently purchased a property that I am planning to build a new home on. I paid cash for the lot and am looking to finance the build through a construction loan. I would like to be the GC. I have extensive experience in finance, but not as a builder. My father in-law who is a builder (licensed GC) has agreed to be the project manager and teach me the ropes. I am trying to do this without using him as the GC. My concern is obtaining a construction loan without a contractor's license. The value of the land is estimated to be about 35% of the total cost of the project, I have an excellent credit score, high income and very low DTI so qualifying for a loan would not be an issue, other than the fact that I am not a GC.
Is there anyone out there who has done this, and who could give me any tips?
It's very difficult to obtain a construction loan without being a licensed builder. Construction loans are very risky for banks even when loaning to an experianced builder.
Your best option to is use your father-in-law as the builder in a very limited scope. For example, you pay him $5,000 to be the "builder", but that only includes using his license and him giving you his list of recommended subcontractors.
That being said, if I was your father in law, I wouldn't do that. There is simply way to many things that can go wrong building a new home with zero experience.
@Andrew W. I cannot think of any new construction loan that would allow you to run a project without a license and proper insurance. How would you pull permits if you can't do so yourself? So, if your father has all the credentials, then he needs to be approved as the builder on the project. He will be required to have references and proper insurance but it's not difficult having him approved. And if your father wants you to be on the project with him...that's his call. It's his business, his job site, etc. so it's up to him who to use on what part of the project. The important step for you to consider is getting approved for a loan - have you done this step yet?
I'm not sure about National banks but I have spoken to two regional banks who theoretically will allow it. I am not sure what you are referring to about proper insurance. My question is about construction financing. I wouldn't consider doing anything without proper insurance. At least where I am located you don't need a GC license to get insurance and all subs would be licensed and have workers comp (requirement for permitting). Also, not sure what you are referring to regarding permits. You don't need to have a GC license to pull permits where I am located. No I haven't gotten approved yet, hence my question.
It's very difficult to obtain a construction loan without being a licensed builder. Construction loans are very risky for banks even when loaning to an experianced builder.
Your best option to is use your father-in-law as the builder in a very limited scope. For example, you pay him $5,000 to be the "builder", but that only includes using his license and him giving you his list of recommended subcontractors.
That being said, if I was your father in law, I wouldn't do that. There is simply way to many things that can go wrong building a new home with zero experience.
I'm a commercial GC in the Carolinas. A heavily regulated market. I started in NY and know CT pretty well.
The relevant license information can be found here:
You can get GL from a service like Next or some other non-insurance insurance company (meaning they provide a COI but don't cover anything should something happen.
If you are planning on selling this property I would strongly discourage you from going this route. Construction defects are common and implied warranties are the law of the land. So you will almost certainly be liable for any defects or deficiencies in the end product regardless of subcontracts and sub-contractors.
If you are trying to be a GC and using this to build your portfolio it's a good way to go. If you are trying to save money this is penny wise but pound foolish. Better off to pay the 50-100% markup and move on. And YES 50-100% markup is the going rate. It does not matter where in the country you are, or what anyone tells you, if a residential GC has been in business for more than 10 years their gross markup is 50-100%. It's the math of the business.
@Andrew W. I would also mention the LTC for new construction spec is typically 40/60. Without experience you should expect closer to 50/50.
A few items come to mind. Before you worry about whether or not to hire a GC are all of the land entitlements completed and has your permit been issued? Assuming the permit has been issued, I would imagine in a state such as CT you are located in a municipality that would at minimum require a licensed contractor to associate with the permit for the sole purpose of listing the municipality as a certificate holder under the insurance policy. Generally speaking self-performing construction can be wise if you are an experienced builder. It's a great way to reduce your costs and is a clear competitive advantage in sourcing opportunities. BUT this applies to experienced builders who have a strong track record of successful projects without trailing loss history. If you don't fall under that category you are really playing with fire. Hiring a reputable GC is more than just saving money on the build. While there are always risks (even when hiring a reputable GC), they are greatly reduced. You also have an insurance policy and builder warranty that protects you once the home is built. In the event there's a defect, are you going to file suit against yourself? I doubt your father in law's insurance will accept coverage either as you are clearly trying to circumvent the GC relationship to save money.
Thank you for the insight. My question is really on obtaining the financing. What I am trying to do is construct the home while learning from my father-in law who has been a licensed home builder for over 30 years. I don't want to have to associate my father-in law with the loan. However, I can certainly just use him as the GC if that is the only way to get the loan. I wouldn't call working with my father-in law who is a licensed builder circumventing the GC relationship. Also, my local municipality in CT does not require the use of a licensed contractor for an owner/builder permit. As far as insurance, as you probably know, it can be complex. But ensuring everyone is properly ensured (including myself) is a given. Builders risk, general liability, etc. are all purchasable by the owner.
Thank you for the insight. My question is really on obtaining the financing. What I am trying to do is construct the home while learning from my father-in law who has been a licensed home builder for over 30 years. I don't want to have to associate my father-in law with the loan. However, I can certainly just use him as the GC if that is the only way to get the loan. I wouldn't call working with my father-in law who is a licensed builder circumventing the GC relationship. Also, my local municipality in CT does not require the use of a licensed contractor for an owner/builder permit. As far as insurance, as you probably know, it can be complex. But ensuring everyone is properly ensured (including myself) is a given. Builders risk, general liability, etc. are all purchasable by the owner.
@Andrew W. I think you are missing the point @Stuart Udis and I are trying to make. It's not can you finance this without a builder (of course you can) it's should you? And do you understand the long tail risk of a self build?
If your intention is to live in the property and learn while you build it. Yeah. Good strategy. If your intention is to sell the property upon completion this is not a good strategy.
1. Yes, CT will allow you to pull the permit as an owner/builder but a permit and inspections will not shield you from construction defect litigation. As an unlicensed builder your GL will not cover completed operations. So you will have naked liability here for 10 years.
2. Most states with a license requirement forbid the subsequent sale or rental of an owner build for some period of time. Where these restrictions exist, they are recorded on the title. Meaning you will not be able to furnish a clean title within the time period. Without a clean title this property will not qualify for a conventional mortgage.
3. Listing your father in law as the builder will not tie him to the loan. But it will tie him to the outcome of the build. See point's 1 and 2 above.
So my question is what is your strategy here? If you are trying to build a construction business this is an excellent strategy. If you are trying to pinch pennies on a development project than you simply have a bad deal and need to bail.
As I stated in an earlier post, the land value is already well short of the equity required for a construction loan. You will need to come up with an additional 15-25% of the LTC to get the loan. More importantly, as a first time builder, even with guidance, you are not going to hit your number. If the deal does not work with a 50% overrun in the cost of construction than the deal does not work.
So. If the goal is to learn the business and start a portfolio. Great idea. If the idea is to save money by "being your own GC" this is a recipe for failure.
The insurance coverage you will want to protect against trailing construction defects will not be covered by the policies you stated in your last post. This is the benefit of retaining a GC with the appropriate insurance. My point about your father-in law merely relates to how his insurance carrier would likely respond to a claim- coverage would likely be denied. It appears you are focused solely on the financial components of the project without understanding the insurance and liability factors of self-performing the project in the manner in which you propose.
I recently purchased a property that I am planning to build a new home on. I paid cash for the lot and am looking to finance the build through a construction loan. I would like to be the GC. I have extensive experience in finance, but not as a builder. My father in-law who is a builder (licensed GC) has agreed to be the project manager and teach me the ropes. I am trying to do this without using him as the GC. My concern is obtaining a construction loan without a contractor's license. The value of the land is estimated to be about 35% of the total cost of the project, I have an excellent credit score, high income and very low DTI so qualifying for a loan would not be an issue, other than the fact that I am not a GC.
Is there anyone out there who has done this, and who could give me any tips?
I recently went almost the exact same route. Bought the lot cash and found a bank who referred a builder to put down on paper to be responsible for a fee but understood that I would be a first time builder for my own personal build. I am also using it to build my portfolio and the bank agreed to allow me to be the builder on my next build. I am registered as a GC in Dallas TX and have the master and building permit in my name. I have all the subs lined up and begin this week. We just closed and the "builder" received the first draw which they sent to me so it is possible!
My question is how do taxes work? Do I pay sales tax to each subcontractor and get each of their w9's?
In Texas we have sales tax of 8.25%, no state tax, and high property taxes. I am not doing this for income so I would like to know do I need to pay income tax on the draw money? Are materials and labor taxed differently?
Thanks.
I recently purchased a property that I am planning to build a new home on. I paid cash for the lot and am looking to finance the build through a construction loan. I would like to be the GC. I have extensive experience in finance, but not as a builder. My father in-law who is a builder (licensed GC) has agreed to be the project manager and teach me the ropes. I am trying to do this without using him as the GC. My concern is obtaining a construction loan without a contractor's license. The value of the land is estimated to be about 35% of the total cost of the project, I have an excellent credit score, high income and very low DTI so qualifying for a loan would not be an issue, other than the fact that I am not a GC.
Is there anyone out there who has done this, and who could give me any tips?
I recently went almost the exact same route. Bought the lot cash and found a bank who referred a builder to put down on paper to be responsible for a fee but understood that I would be a first time builder for my own personal build. I am also using it to build my portfolio and the bank agreed to allow me to be the builder on my next build. I am registered as a GC in Dallas TX and have the master and building permit in my name. I have all the subs lined up and begin this week. We just closed and the "builder" received the first draw which they sent to me so it is possible!
My question is how do taxes work? Do I pay sales tax to each subcontractor and get each of their w9's?
In Texas we have sales tax of 8.25%, no state tax, and high property taxes. I am not doing this for income so I would like to know do I need to pay income tax on the draw money? Are materials and labor taxed differently?
Thanks.
Would you be willing to share a name of the bank or how you found one? I’m also in DFW and interested in doing a hybrid of owner/builder after the mechanical phase.
@Alan Walker - Sorry for the delayed response. Long story short, I ended up hiring a general contractor under a cost-plus arrangement. It is somewhat of a unique situation. The spec home that I am building was based off of a home that was built not far from my property. I used the same basic plan and architect, and the GC is the same one that build that house. So he knows the cost etc. I am also very involved in reviewing proposals, selecting subs, design, etc. That is part of what I am paying the GC for, however it has allowed me to understand the process in depth, as well as keep an eye on costs. This was also significantly easier to get a construction loan. Given the factors that I noted in my initial question, the construction loan was very easy. My plan is to complete this build and proceed with the next. On the next, I may build the home myself, not using the GC. I anticipate that the construction loan would be easier with the same bank that I used for the first spec home, since we will have history, etc. I am using a local bank - Savings Bank of Danbury. They did say that it is possible to get a construction loan without a GC, but it takes a good story, etc. Assuming I do go that route with them on the next build, I'll post how that goes.