I’ve been looking at houses for a bit and we found a listing for what looked like a nice house, new construction, upper end of our budget. Come to find out that it’s actually not finished, and in fact the seller (first time flipper) is running out of loan money for the construction. The loaner got a new contractor and agent in, which is how we saw this listing, and now they are trying to sell it once it gets to the shell stage. Essentially we’d put down earnest money, the house would go to the shell stage (so drywalls up, plumbing, electrical work would be done, but floors, cabinets, sinks, etc would not; things like doors, windows, garage door are included in the shell), and then it would close. We would then work with the same contractor (or another I suppose) to finish things out. It would have to pass all inspections and essentially be exactly as expected or we could back out at any time with no penalties. It would of course cost a bit less, and we would be able to customize it to our heart’s content. Some big cons would be that banks generally don’t let you get a mortgage unless the house is inhabitable; risk of the budget/timeline getting out of hand after the shell is constructed; questions about quality of the work done to this point (although right now it’s essentially just foundation and studs).
Have any of you guys done something like this before? Is this something that’s even done? We have the luxury of not needing to buy right now, and we have a bit of time, but it would be a really great property in the location we want if it could work out. I’d be interested in both reasons to never do this sort of deal as well as any thoughts on how to go about it in the least risky way.
Haven’t done it but I’ve heard small local banks might be better for this kind of situation instead of BOA, Wells fargo, etc. Little banks can be more flexible.
If the bank lets you do this, do NOT let the seller put up the drywall or the insulation. Take care of it yourself. Honestly, I would probably get the shell of the house to the point where it’s weather tight (roof, siding, windows, exterior doors) and then get your own contractors to finish the job. You want to make it as hard as possible for the seller to hide any substandard work.
You’re buying from someone who knows they screwed up and has every motivation lie to you to minimize their losses. I wouldn’t go near this deal unless it was an absolutely fantastic price.
This is way out of my area, but I still have two questions. You said that this shell of a house is at the upper end of your budget. Will you be able to afford buying something at the upper end of you budget and having to finish and furnish while staying in, and paying for, your current living situation?
Second, Alpha Twit mentioned not putting up drywall, your OP said they would have drywall. That’s obviously your choice, but I’d strongly recommend you go to the city and make sure all permits are in order and inspections are on track, especially plumbing and electrical (and insulation if they inspect that). In fact, I’d go a step further and suggest you make your offer contingent on those getting passed.
The problem is if they haven’t had the rough-in inspection done on the plumbing and electrical, you’re going to have to tear the drywall down so the inspector can make sure it’s not just extension cords and garden hoses.
Thanks for the input. I can clarify a few questions. The actual price for the house is significantly reduced from the initial top-of-the-budget price so that with the estimate for the finishings would fall within our budget (even with the ongoing rent until the house is completed).
The inspections would be ongoing from here until the shell stage, so it would have to pass electrical, plumbing, etc before it would be sold as a shell.
The contractor who is now involved was brought on by the lender (bank) to finish the job to presumably limit the likelihood of the lendee declaring bankruptcy.
The additional information makes this sound a lot better. If you don’t find a bank that will finance, I would make the deal contingent on seller financing at market rate. Even if you do get pre-approved elsewhere, maybe use that as a bargaining chip to get the seller to beat that deal.
How long has it been on the market? What’s the average listing time for completed homes in the area? I have no idea how to work those into your calculations, but they’re sure relevant.
OK, if the contractor is answering to the bank rather than the seller then that changes the picture. You’re less likely to deal with outright fraud for one thing.
Just make double dog sure you like the way the numbers add up before signing anything.
We’re waiting for the new estimate from the contractor to give us an idea of how low we can offer, IF we go through with this of course.
Is there a way to essentially “invest” the money to complete the house, but to do so in a way that is risk free? That is, if for some reason it doesn’t close, we could get our money back. Would this be a worse idea than buying at the shell stage and completing on our own?
Is there a standard type of way these things proceed or is this a very unusual case?
Keep looking, is my advice. There are a lot of ways this can go sideways - from cost over-runs, to shoddy work, failure to meet code, wrong permits. You can back out, but you’ll be out money and time at that point. Better to look for something that will work for you now.
That’s been my concern, but I’m not sure how it could go so badly for me. I figure I just don’t know enough. Assuming that by the time it’s at the shell stage and ready to sell that it’s passed all of the inspections, is there still a lot of permitting that needs to be done after that point? Is it different from buying an older house and then trying to renovate?
I know that Alpha Twit backed down a bit, but I totally second the first comment. Buy it now, as is, if you want to take this on. At the very least, I would bring in my own contractor now to take over the work rather than keeping the existing contractor. The current contractor may be in over their head too at this point and just want to move on with minimal additional loss.
As an example of meeting code not being a livable situation: A balcony or stairway to get to code requires <4" gaps to prevent anyone/any baby from slipping through. The easiest way to meet code and make stairways and balconies and lofts inhabitable is to just nail plywood around all areas. This is to say that meeting code does not mean ready to go for life. And in fact, in many cases getting to code quickly may set you back long term.
So I personally would low ball them even further and say that you want it as is.
Many people who have an old house and renovate do not go through all legal permitting. And in addition just a quick google for “Occupancy Permit” brings up a much higher threshold for a new build than a remodel: As an example https://www.seattle.gov/dpd/publications/cam/cam120.pdf says “A C of O is not required on remodel projects where the occupancy classification is not changing or for R-3 occupancy (single family or duplex).” So quite simply yes there is a significant difference for a remodel.
These are great thoughts, thank you. As for the new contractor, they haven’t actually started doing anything yet. They are working with the lender and the seller to get it to where it could be sold I suppose. As for buying it now, our main concern was that by making an offer now, we are assuming all the responsibilities of it as it progresses through each stage, whereas if we buy it at the shell stage, it has to at least have passed all the inspections up to that point. Is that not a better deal for us? If the new contractor has similar problems as the old, then at least we can always pull out of the deal and lose no money other than what interest would have grown on the earnest. I hope I’m not giving the impression that we have already made up our minds here. It sounds like it has a lot of potential to be what we’re looking for, but I didn’t know what significant downsides there could be, so this has been helpful.
This is California in case that makes any difference.
I just want to clarify what I said earlier. I’m assuming it’s what you meant, but just in case it isn’t…
While it has to pass all the inspections along the way, you need to go to city hall and make sure, for yourself, that it has actually passed all the inspections along the way. For example, if they rough in the plumbing and it fails the inspection or they never call the inspector and let them know it’s ready to be looked at, there’s nothing physically stopping them from putting the drywall up and hoping no one notices, or they don’t notice until you’ve taken ownership of the house. Then it’s on you to rip the drywall down, call the inspector, pay the higher permit fees for doing things out of order and replace the drywall.
Since the bank is involved and directly working with the contractor, as was stated earlier, these issues are less likely to occur and more likely to be ironed out before they’ll hand you the keys, but it’s still something to keep in the back of your head.
The nice thing about the bank doing this is that, unlike a regular seller, the bank maintains an interest in the house after the sale. They lose money too if you go broke trying to get it up to code.
Ah that makes sense. We’ll definitely be looking at the permits. I suppose that contractors doing shoddy work is a potential risk of a home renovation as well, so we’ll just have to go on their reviews and prior work which all seems okay. The original estimate was on the low side so I expect the the revised estimate will be significantly higher, which our realtor has already said we should take into account for an offer. Given the difficulty with obtaining a loan for this thing, we’ve pretty much decided that unless it’s a huge discount, it’s just not worth the risk.
Buying a home is crappy. Buying a home in one of the most saturated and expensive markets in the US is even crappier.
This made me chuckle, since BoA and Wells Fargo are local banks for me. 
The problem I would have with this or with building a house from scratch is that doing so involves a thousand decisions that are a matter of taste, style and budget. Do you want wood, vinyl or tile floors? Which of each? This tile will cost you $5 a square foot, while this other one that looks much the same will cost $50 a square foot. And then you have to make the decision for a bunch of other elements. Are you up for the challenge of making all of these decisions?
We thought about that, but fortunately there is a design that’s already been set. We are just hoping to make tweaks like what kind of flooring, cabinet colors, counters, things like that.