This is part VIII in my Adventures in Real Estate series which covers the process of buying a teardown lot from contract to closing. Links to other posts in this series can be found at the end.
We fumbled this whole process so fantastically, that it makes sense to separate my recommendations from our story, so I’ll save our drama until after the guide.
Step I. Feasibility Study
Ordinarily a feasibility study contingency in a contract allows the buyer to withdraw from the contract recouping their earnest money deposit if within the study period (usually 7 to 10 days), the buyer finds the lot won’t suit what they want to build. If you’ve already got an idea of what you want to build and secured a site engineer (Steps 4 and 5 of this post), then you should immediately authorize your site engineer to prepare the feasibility study. The site engineer will look into such things as flood plains, Resource Protection Area (RPA) lines, water and sewer availability, and soil testing to let you know whether you can fit your structure on the lot and give an idea of what hindrances/additional costs you may face. Beware, however, that just because the site engineer doesn’t find anything in their research doesn’t mean you won’t run into issues down the road. Most of the research is on county and city records which are not infallible.
Step II. Secure the Construction-to-Permanent Loan
A “construction to perm” loan pays out in installments to cover the purchase of the lot, the demolition work, and the new construction. When the keys are turned over, it becomes your mortgage. You can find out more about getting pre-approved for a Construction-to-Perm loan here.
Because you probably aren’t dealing with home inspections, termite inspections or any of the contingencies you would often face buying an existing home, your major hurdle to closing on the home is securing the loan. This involves several steps, each contingent upon completion of the last, so you should start moving as soon as possible.
In order for the underwriters to approve the loan, they will want to see 1) a ratified contract with your builder, 2) a signed contract with your site prep company, 3) a signed contract with your driveway pavers, 4) an appraisal of the anticipated final product (not the current house, but the house you plan to build), 5) an accounting of every penny you own or can reasonably expect to own for a year or more.
Here is an approximate checklist of the steps you’ll need to complete to secure the loan, though individual requirements may vary:
- Complete all paperwork for the bank.
- Finalize a contract with a builder (if you have not already done so).
- Have your site engineer prepare a grading plan.
- Use the grading plan to get bids on the site work from demolition and construction companies.
- Use the grading plan to get bids on the paving work from paving companies.
- Have the bank schedule an appraisal of the anticipated final construction from the plans and contracts.
1. Complete a pile of paperwork from the bank.
This pile will keep replenishing itself at regular intervals. The faster you turn around paperwork, the more time everyone else has to do their job.
2. Finalize a Contract with Your Builder
As I stressed earlier, I would recommend signing with a builder before you bid on a lot. If you have not done so, you may really need to boogey to get that loan before the closing date. It is customary to add addenda to the contract after the initial ratification, but you may have to pay out of pocket down the line for things if you don’t include them in the mortgage at this stage. Try to be very thorough in understanding what comes standard vs. what you may have seen in the models. Ask to see examples of everything. For example, if you’re choosing cabinetry from a wall of doors, make sure you ask what the drawer fronts will look like as well.
Because of the sheer number of finish selections to be made in designing a home and the limitations of good decision making capacity on a single day, I suggest taking a lot of pictures and making those decisions over the course some weeks if possible–before you bid on the lot.
3. Have Your Site Engineer Prepare a Grading Plan.
Your engineer will need the plans from your builder including all the structural options you have selected to draft the grading plan for your home. If you make any changes to the plans during this phase, you may delay the completion of the grading plan which can have a domino effect on your other steps.
Depending upon the trees on your lot and the tree coverage requirements for your city/county, your engineer may recommend you have an arborist prepare a Tree Preservation Plan. In addition to telling you exactly what kind of trees you have growing on your lot, which trees are in poor health or dead and ought to be removed, and which trees have 40% or more of their root structure in the construction zone and ought therefore to be removed, the arborist will give recommendations for where your silt fence and root pruning ought to happen to protect the trees you leave in. The grading plan is what your demolition companies will use to construct their bid on your site prep work.
4. Obtain Bids on the Site Work.
Your builder will probably have experience and good working relationships with a couple of demolition and construction companies who do teardown site prep and can give you recommendations of whom to ask for a bid. The demo/construction company should also visit the lot themselves to check for anomalies anyone might have missed so they can give you the most accurate estimate.
5. Obtain Bids on the Paving.
We thought this was unique to our situation, but it turns out to be common. Your bank may also want to see a signed bid on driveway paving if that is part of the loan. Some demo/construction companies also do paving, some don’t. Normally, this is far too early in the construction process to be retaining a paving company, but as long as you get an official estimate, the bank will probably accept it. The paving company will also work from the grading plan to prepare the estimate.
6. Have the Bank Schedule the Appraisal.
The bank wants to know that whatever you are building will be worth at least as much as they are loaning you to do it, so they will have an independent appraiser look at the lot and the construction plans, compare it with the last three comparable sales in the area, and come up with a figure that they think your house will be worth when it’s finished.
Be warned that you very well may get a zombie appraiser who is looking at one thing only: the finished square footage of the home. He may simply multiply that by the average price per square foot of the past three sales regardless of their comparability to produce a number which might be completely divorced from reality. So, um, make sure your finished square footage is really high? I really don’t know what else to advise you when dealing with zombies. Perhaps this book will help.
Step III: Obtain Home Owner’s Insurance
Of course, you don’t need to insure the structure that you are tearing down, but you do need insurance on the construction work while the house is being built in case of fire or hurricanes or vandalism. Your lender will probably require proof of insurance before closing.
Step IV: Have All the Utilities (Gas, Electric, Water) Transferred to Your Name on the Date of Closing.
The very day of closing you will want them in your name so you can IMMEDIATELY have them shut off and request your razing letters. More on that in the next installment.
Step V: Final Walk-Through and Closing
Even though you’re planning to tear that house down, most real estate contracts include a final walk-through for you to see just what you’re getting. And then you sit at a big table in a title company’s office and sign another fat stack of papers and get some keys (or not, in our case).
And now for the juice. I made two major mistakes during this process. First, I didn’t sign with a builder before bidding on a lot. I’m not sorry I moved on the lot as aggressively as I did, not one bit, but I am sorry that I didn’t sign with a builder earlier. Second, after all the work I had done preparing our house for sale, marketing it, getting the contract to closing, moving our family into a rental, and finding and bidding on this lot, I was pretty well tapped out. From what I can gather, I have well above average energy, but it is not limitless, and at this point, it was spent.
After our offer was accepted I begged Kent to take over the reins. Of course I would be involved in choosing the structural options and finishes, but I asked him to be in charge of the loan. This move created some real problems because of the simple fact was that I knew a lot more about teardowns than Kent. This was my pet project that I had been educating myself on for some time. I was the right man for the job, and I asked someone else to do it.
I’m going to reconstruct this mostly from email correspondence including typos. The Builder below refers not to the company president of Classic Homes (who is remarkably intelligent and has promised to send me a headshot for this blog) but to the builder’s sales rep who was our contact at this point. Our realtor was Khalil el Ghoul, who killed it. (Still reading Khalil?) You can find out more about him here. We are so grateful for the amazing work our bank did for us as well.
35 Days Until Closing
Loan Officer to Us: I received your contract moments ago. Congratulations! It appears there is a settlement date of July 31st? That may be too quick. I would need the have plans/specs/contract from your builder in and all other documents (financial) from you 21 days prior to settlement.
Me to Kent: Wish we’d known that before we set the closing date. We have got to get the internet working in the rental. Maybe we can take the night off and make some serious decisions tomorrow?
Me to Realtor: We may need to get an extension of the closing date. Is that possible? How do we do that?
34 Days Until Closing
Builder Sales Rep to Me: When you delete structural options, i.e. rooms, extensions, etc. and add “design items” flooring, etc. the margin is very low for discounts since we often give many of the design items close to our cost. So in my opinion, better to leave [structural items] in since the design items can be done later and structural options add so much to value and appraisal.
Me to Kent: Sure, build me a giant empty box that will appraise well. I’m not taking out the acacia floors even if it means I lose the master sitting room and half the finished basement.
33 Days to Closing
Me to Site Engineer: We need to go ahead with the survey. The study period ends a week from tomorrow.
32 Days to Closing
Us to Builder: Attached is the list of options we want to include in our house and an offer we hope Classic will find acceptable.
Builder Sales Rep: I will take a look at your offer tomorrow.
31 Days to Closing
Builder Sales Rep: Hi Heather, Your offer is off by almost xxx so this will be countered by quite a bit.
Builder Sales Rep: The counter offer is xxx.
30 Days to Closing
Me to Builder: We would like to counter by offering xxx and additionally removing….
Me to Site Engineer: Is this really all we need?
Site Engineer to Me: Heather, Sorry, I thought you just wanted a “lot fit” drawing. I will complete [the feasibility study] today. Please mail the $600.00 check.
Me to Realtor: The feasibility study was clear. The lender is already telling us they are doubtful they can make the closing date. How possible or difficult would it be to ask for a new closing date a week or two later? We don’t want to turn off the sellers at all. We absolutely, 100% want to ensure this deal goes through.
29 Days to Closing
Realtor to Me: Once we are closer, then we will ask for an extension. Let’s try to get a solid date from the lender.
Builder Sales Rep: Attached is your Summary with the revisions you requested. Classic will offer you xxx.
Me to Kent: They adjusted their counter so they are still at exactly x% discount. Damn it.
Me to Builder Sales Rep: I just tried to call you. We also requested an induction cooktop. I talked to you about this when we met at the Hampton and we put it in the initial offer.
Phone Conversation Me to Builder Sales Rep: Yes, I really, really want an induction cooktop. Okay, fine, leave out the cooktop and I’ll put one in myself after. We have a deal!
Builder Sales Rep: Attached is the copy of your contact. What time can you come Thursday [to sign]?
Kent to Bank: We are sending you a copy of the unsigned contract today. We are signing Thursday and will send you the signed copy right away.
27 Days to Closing
July 4th: Contract signed with Builder! Happy Birthday, America!
25 Days to Closing
Kent to Builder: When can we get the contract and plans to the bank?
Builder to Bank: The contract will be ratified and sent early next week. (by Mon./Tues.)
22 Days to Closing
Builder: We sent the contract this morning to the bank. Thanks!
21 Days to Closing
Bank Automatic Reply: Thank you for your email and interest in working with [This Bank]. [YOUR LOAN OFFICER] IS NO LONGER WITH THE BANK. Your email has been forwarded to [New Guy] VP and Mortgage Banker.
Kent: Wow. I already called in to see what effect this might have, if any.
Me: YIKES!!!! Call me as soon as you get any information. I’m seriously concerned.
It was on this day, that I decided to really check up on how things were going. I asked Kent where he was with getting the estimate on the site prep and found out the grading plan had not even been ordered. We had lost about 9 days. Frick on a stick with a brick.
Me to Site Engineer: Please prepare the grading plan. I’m putting this check for $6,000 in the mail.
Me to Kent: I hope [Our Loan Officer’s] leaving doesn’t jeopardize our contract. WTH?
20 Days to Closing
Me to Realtor: The site engineer will be back from vacation on Monday. I called them to ask for a ballpark of how long it will take her to do the grading plan, but they said, “I don’t know what else she’s working on.”
Realtor: Honestly, I don’t think the seller will majorly object to a small delay.
Honestly, yes, he most certainly would.
Me to Demolition/Construction Company: How quickly can you turn around an estimate after we get you the grading plan?
Demo/Const Company: 48 hours if not sooner.
17 Days to Closing
Me to Demo/Const Company: Unfortunately, we do not have the full grading plan, but if you could give us a ballpark figure, we can revisit the estimate when the grading plan is done. We must have some kind of estimate for the loan within the next few days. Time is extremely tight. We would hate to lose this contract on the lot because we were unable to get a ballpark site prep estimate in time.
I hate to beg.
16 Days to Closing
Seller’s Title Company: We will need some insight into the time line due to issues that have appeared on title. We did discover four Judgments in favor of the Town of Vienna and another Judgment in favor of XXX XXX.
Me to Realtor: What does it mean for us?
Realtor: Not exactly sure right now.
This item became terribly interesting in the last couple of days before closing.
14 Days to Closing
Me to Site Engineer: Is there anything on our end we need to be doing to facilitate the grading plan?
Site Engineer: I have everything I need from you at this point. Once our field guys finish the topo and draw it up, I’ll grade out the house and send you a pdf file.
Me to Builder: Can we raise the top level ceilings to 9′ and flip the orientation of the house without delaying anything?
You think that was crazy bad timing, don’t you? I said “without delaying anything” didn’t I? What’s so unreasonable about that? Zoiks. Here we go.
13 Days to Closing
Me to Bank: Here is our contract engaging Demo/Const Company to do the site work.
PHEW! Bound to be nothing but smooth sailing now.
9 Days to Closing
Me to Realtor: Any word on scheduling the appraisal?
Realtor to Me: I check in with the lender today since our last update it had been ordered. Thanks.
7 Days to Closing
Me to Bank: The Builder will be sending over the final ratified copy of this addendum which includes our more recent changes. (Ceilings and windows. The Site Engineer talked us out of flipping the house orientation.)
Bank: I’ll forward this to the appraiser but this may delay getting the appraisal back if he has to make additional changes to the report.
6 Days to Closing
Bank: The underwriter has pointed out that the site work contract does not include the laying of the driveway. I will need the contract for that work if it will be a different company. Can you please try to have this to me today? I will have to adjust the loan amount again and the underwriter will have to review again before we can started prepping file for closing.
Me to Bank: I called fifteen paving companies today to try to get an estimate. Of the 15, only one said he could get me an estimate tonight. I will send it as soon as I possibly can.
Me to Kent: I called Falls Church Paving, H&H Paving, E E Lyons Construction, Washington’s Pavers, Tysons Paving, A-Pak, Espinosa, Tibbs, RL Harrison, Pete’s Asphalt & Concrete, Ruston, Universal, Asphalt General, BW Paving and JMV Concrete. None of them could give me an estimate today. Fifteen paving companies, and I’ve come up empty handed. Gee it would have been nice if they had noticed this earlier.
Or if I had.
Our Realtor to Seller’s Realtor: We are still shooting for the closing date, but the original loan officer(s) who were helping my client left the company without notifying their management or my client. So the file sat with no progress for nearly 2 weeks as we waited for an appraisal that was never ordered.
Seller’s Realtor to Our Realtor: I’ve spoken to the seller twice about the request for an extension. Each time he has told me of the commitments for the money during the first week of August, and has also mentioned that he doesn’t understand why it is taking so long to get an appraisal done. He has said that if the bank needed an appraiser, he could give them several names of appraisers who could get out there the next day. Most importantly for us, he has not said yes or no regarding an extension. I urge you to really put pressure on the bank to do its job and get the appraisal asap. You might want to put added pressure on them, telling them that is was their mix-up that has caused this problem. You might also want to let them know that there is a sizeable deposit at stake here. Khalil, again, I just want you to be aware that I really don’t know how the seller will react if this goes beyond July 31, and urge you to do everything in your power to push the bank.
Me to Bank: I just received word through our realtor that the seller is threatening to scuttle the deal if it does not go through by July 31st. We are extremely worried about losing this house. We would be devastated to lose this house over the timing of the loan.
5 Days to Closing
Me: This is exactly what we needed. I will write you a review on Angie’s List today for the amazing turn around time. Can’t thank you enough.
I totally made good on that for all three of those awesome companies. Check it.
Bank: Thanks for sending this back so quick. We’ll use the contract that you received today for the numbers and the loan. I just need to give the underwriter something so we can include funds in the loan. Does that make sense?
2 Days to Closing
Seller’s Realtor to Our Realtor: Please get back to me as soon as you can. Spoke to the seller today. He has another strong offer ($25k above ours), and he is aware that your 25K is now at risk. Don’t know the outcome if this extends beyond 7/31. Has the appraisal situation hopefully been straightened out?
Kent to Me: I talked to the bank. He said realtors always act like this, and we should have our realtor push back on their realtor.
Me to Kent: WITH WHAT? We have absolutely no leverage.
That’s funny because the realtor said the banks are always late. If they can have it ready 1 day late, surely they can have it ready on time, right? It’s like if you’re late to rehearsal by half an hour, okay, something happened. But if you’re late by 5 minutes, you just didn’t try hard enough.
Kent to Me: I’m going to call a real estate lawyer and see where we stand if this doesn’t go through on time. We’re talking about maybe a one day delay, and we could lose this whole thing? This is crazy.
Kent to Me: I talked to the lawyer. He said we will lose the lot if it doesn’t go through by the contract date. It’s material breach. But we may be able to recoup the EMD (Earnest Money Deposit). The first step is to have the bank write us a rejection letter.
Kent to Bank: I’ve spoken with several people today, including legal counsel, about the possibility of extending the closing date. If we are unable to close on July 31, I do not think we have a chance of getting the property. I understand there are a few open items, but an extension of the closing date is not going to be an option. I know we’ve mentioned this before, but we are desperate to get this property, and my family simply cannot afford to lose the $25,000 earnest money. If The Bank will not approve this loan for a July 31 closing, please send me a rejection letter. Please let me know if there is anything at all we can do to help out. I’m grateful for your time and effort.
Me to Our Realtor: The bank forwarded us a copy of the appraisal, and we signed the appraisal letter today. The appraisal came in at XXX which is higher than the loan amount.
Realtor to Me: Time may have been bought:
Seller’s Title Company: I have a concern about the outstanding title issue on this Property in terms of the Judgment…Otherwise, we may need to delay settlement to obtain the documentation necessary to ensure that this Judgment is properly paid in full and/or released.
Me to Realtor: Interesting. Please keep us posted.
Khalil reminds me that “Todd at Ekko Title had found a way for us to delay settlement if needed. We technically could have held off settlement in lieu of a portion of the sellers funds being held in escrow due to previous liens on the property. The contract called for the seller to convey clean and clear title but technically the title was not clear until they received our funds to pay off their judgements.”
That was also the day I wrote this post:
I hardly know how to write anything. We are so worried about losing our contract on the teardown property this week. We spoke to a lawyer today to see what our options are if the bank drops doesn’t prepare the loan on time. At best, there may be a possibility of recovering our investment, but we would lose the lot which is all we ever wanted.
I forced myself to look online for other options today, since there is a very real possibility this deal will fall through, but I am dead inside. It felt like signing up for Match.com while the love of your life lies terminally ill in the next room.
Our Realtor to Bank: As you know we are in dire need to close Wed. or the buyer could lose their deposit, which we can not let happen. Are we on track to close Wed.?
Bank to Realtor: I’m working on it. The borrower got us their plans and specs for the build project late and I let them know at that time that an extension may be needed. I am waiting for a couple of things from the builder before this can go back in for final. I have stressed the urgency to him so hope to have them soon.
Stupid borrowers. Eye roll. Wait. He means us.
Realtor to Bank: What do you need from the builder exactly? We will try to help.
1 Day to Closing – 3:15 pm
Bank to Realtor: I just spoke to our closer and she indicated that this transaction will be closing tomorrow at 3PM. Regards.
Realtor to Me: We are all set!
Realtor’s Assistant: I meant to send this about a week ago but got lost in the shuffle of trying to make our closing date. 1. Arrange utilities effective on settlement date. 2. Arrange funds for settlement, wire transfer or certified check. 3. Make sure the lender has all final items, including proof of home owner’s insurance. 4. Bring ID to settlement.
Day of Closing
Friend to Me: Did you win?
Me to Friend: Headed to the bank to get a check, then a walk-through, and closing at 3. I can almost breathe. Almost.
The walk-thru ended up not happening at all. My realtor kind of tried to go in the house, but it had little floor left and was covered in mold. Any notions we had had of having a sleep over there or inviting friends over for paintball shrivelled and died at first sight of the interior.
The seller (who was the brother-in-law of the owner/occupant) had a big smile and a strong handshake and was flat out sweet when I met him, his realtor, and Khalil at the property. I’m sure he was as happy as we were that the whole thing came through on time. He told me several times that he loved the letter I sent with our original offer. I felt strange meeting this guy for the first time who was responsible both for selling us this amazing lot and for scaring us half to death threatening not to. I also felt like if I could have met him and talked to him instead of working through all our intermediaries, we could have figured something out much easier and sooner that he would have found acceptable. It’s too easy to be crappy to strangers over email.
The woman from the bank who was responsible for so much of the work that went in to our loan drove in all the way from Leesburg to see our closing go through at 3pm. It was great to finally meet her and thank her for moving mountains over there. I definitely don’t envy any of that team the task they had in dealing with us nightmare borrowers and the other loans that were left in their lap by the guy that walked out midstream.
So the moral of the story is: sign with your builder early, don’t make any last minute changes, get your grading plan going the instant your feasibility study gives the all clear, figure out exactly what your bank needs to see to prepare the loan, and get it to them as fast as you possibly can.
Now if this snow would ever end, our house might actually get built!
Not dead yet? Try reading:
- Adventures in Real Estate Part I: Considering Using an Alternative Realtor to Sell a House
- Adventures in Real Estate Part II: Listing the House FSBO
- Adventures in Real Estate Part III: Making the Sale FSBO
- Adventures in Real Estate Part IV: From Contract to Closing FSBO
- Adventures in Real Estate Part V: Using a Rebate Realtor to Buy a House
- Adventures in Real Estate Part VI: Teardowns 101
- Adventures in Real Estate Part VII: Bidding on a Teardown Lot