Cautionary Tale: Red Flags

Hiring a builder is like entering a temporary business partnership. And whenever entering a new relationship, you should always be watching out for red flags. This week I encountered a couple that got burned by their “fixed-price” builder. Hopefully by sharing their story, I can help others avoid this kind of situation.

I got a call from a prospective customer looking for a new builder. They had run their old builder off the job. We scheduled to meet them at their property. When I arrived, this is what I saw:

The foundation pad had been dug out, but the county had posted a stop work order. The builder had started work without any permits. No septic permit, no building permit, nothing!

The couple, who both worked in the construction industry, had chosen a builder because he seemed honest and gave them an attractive fixed price. As the build began, they got their first red flag. The builder immediately upped the price $6,000 saying excavation had cost more than anticipated. Then the second red flag came when the builder upped the price by another $10,000 because the driveway was longer than anticipated. At this point they hadn’t started building yet and the price had gone up $16,000. The third red flag came when they arrived at their site and found the builder had cleared the lot and dug out where the house would go without consulting them. Turns out the location the builder chose wasn’t what the couple wanted. The final red flag was the stop work order the county posted on their property. At this point, the couple immediately began looking into the builder. They had paid him $10,000 up front. They discovered that once the builder had a contract with them, he went and pulled the first draw from their bank without their knowledge. That draw was 10% so roughly another $50,000. The couple had paid the builder about $60,000 and all they had to show for it was a cleared lot and a stop work order.

This story has a sad ending. We worked and worked with this couple to try and get the home they wanted built, but in the end we just couldn’t make the costs line up. The couple abandoned their plans to build and put up their property for sale. Had they chosen us from the beginning, they would have been able to complete their home.

How can you avoid a situation like this?

Here are a few tips:

• Check your builder’s references. He should have more than three. We give our potential customers a full page of references. The best references aren’t the people whose houses are still under construction; the best are the people who recently completed their homes.
• Research your builder’s reputation. What homes have they built? What are their online ratings?
• Understand up front how you will be charged throughout the build of your home. Ask your builder exactly how and when you’ll be billed before you sign. Your payments should track work that’s actually finished, not run far ahead of it. With a construction loan, draws are paid as work is completed and verified, and you should never let a builder pull a draw you haven’t seen. We lay out every draw in your Home Portal before any money moves, and you approve each one yourself.
• Watch for red flags! If you think something doesn’t seem right, seek out a second opinion.