Friday, May 02, 2008

AMT and Long-Term Capital Gain

Here's how you can encounter the alternative minimum tax (AMT) because of a long-term capital gain.

Congress didn't intend for the alternative minimum tax to apply merely because you have a long-term capital gain. When Congress reduced the capital gain rates in 1997 and again in 2003, it provided that the lower rates would apply under the AMT, too. But the way it works out, you may still pay AMT because of a large long-term capital gain.

The AMT exemption

A major reason for paying AMT in the year of a large capital gain is the AMT exemption. This is a special deduction that's designed to prevent the alternative minimum tax from applying at lower income levels. The problem is that the AMT exemption is phased out when your income goes above a certain level. For this purpose, capital gain is considered income, so it can reduce or eliminate your AMT exemption.

For example, if you're single and your income under the AMT rules is $112,500 or less, you're allowed an AMT exemption of $44,350. (This is the amount for 2007; Congress will have to take action to prevent the exemption amount from falling back to a lower level in later years.) Normally that's enough to prevent you from paying AMT unless you're able to claim unusually large tax benefits that reduce your regular tax. But suppose your income is around that level before you add a $200,000 capital gain (sale of a real estate investment, or stock, or perhaps sale of a business you built up). Your tax on the capital gain is 15% under both the regular tax and the AMT: $30,000. Under the AMT, though, the added income wiped out your AMT exemption.

How big is the effect? The answer depends on how close you are to paying AMT before this happens. Overall, a large capital gain can cause you to incur $10,000 or more of AMT.

Do the math

Here's how it works. For every $1,000 of added long-term capital gain, your regular income tax goes up by $150 (15%). When we move over to the AMT, the same $1,000 is taxed at 15%, but in addition eliminates $250 of your exemption amount, because the exemption is phased out at a rate of 25%. The exemption amount is used to reduce the amount of tax you pay on your ordinary income (the income that is taxed at either 26% or 28% under the AMT). So your tax under the AMT rules goes up by about $70, which is 28% of this added $250. You didn't really add another $250 of income, but your exemption amount went down by $250, and that exposed another $250 of your existing income to tax under the AMT.

Result? Under the AMT, adding $1,000 of long-term capital gain can increase your tax by as much as $220, consisting of the $150 tax on the gain itself and the $70 that hits you because the exemption amount is reduced. In effect, you're paying 22% on the gain under the AMT and 15% on the gain under the regular income tax, so a big capital gain can lead to a big AMT bill.

That doesn't necessarily mean you pay AMT every time you have a long-term capital gain. Most people have at least a little bit of a cushion between the amount of regular tax they pay and the level where they would have to start paying alternative minimum tax. (The size of your cushion depends on various items. See Top 10 Things that Cause AMT Liability.) Besides, the capital gain can cause some tax benefits to phase out under the regular tax, too. But there's a good chance you'll pay AMT if your income is in the range where the exemption amount is phased out and you have a large long-term capital gain.

More bad news

There's more bad news. People who get caught by the AMT because of a large long-term capital gain usually don't qualify for the AMT credit in later years. The AMT is being caused by items that aren't considered timing items. Possibly you have some timing items in addition to the large capital gain, and in that case at least part of your AMT would be available as a credit in later years. Typically this added tax is just a dead loss.

What to do

In many cases there isn't a lot you can do about this added tax. Sometimes, though, if you're aware of the issue, you may be able to take measures to reduce the impact.
Timing your capital gains

In some situations you can control the year in which you report capital gains. You may be able to delay a sale until after the end of the year, or spread the gain over a number of years by using an installment sale. There's no simple answer to whether these measures help or hurt, so someone has to sharpen a pencil and grind out some numbers.

For example, your gain may be at a level where spreading it over a number of years will keep you out of the AMT — or at least reduce the impact. In this case an installment sale might be an attractive alternative. But suppose your gain is so large that it will phase out your AMT exemption amount many times over. In this situation, you may get a better result by reporting all the gain in one year, so you're only affecting one year's exemption amount.

Timing other items

Another way to plan for the AMT is to see if you can change the timing of other items that are affected by the tax. For example, if you make estimated payments of state income tax, you may try to schedule your payments so they don't fall in the same year as your large capital gain. In some cases you may come out ahead even if you incur a small penalty for being late with your state estimated payment.

TAX IMPLICATIONS OF SELLING YOUR HOME

Careful planning is the key to keeping most of the profit from the sale of your residence. Under current law, a married couple filing a joint return can exclude from income up to $500,000 of the gain made on the sale of their principal residence. For a single person, the amount of tax-free gain can be up to $250,000. The magnitude of this tax break makes it critical that you plan to ensure that you qualify.

In the past, you were only eligible for a tax break if you rolled the profit of your home sale into your next residence and the sales price of the residence sold exceeded the cost of the new residence. Now, in addition to the $500,000/$250,000 exclusion, you no longer have to wait until you are 55 years old, to elect to exclude all or part of the gain and you can take advantage of this tax break more than once in your lifetime.

Second Homes and Rental Homes: If you have a second home from which you also live, go to work from or otherwise treat as your primary residence (say, every other year), it will take you four years -- two years for each place -- to qualify either or both homes.

The liberal law not only says you can take the exclusion on one home every two years, but also says you can claim it as often as you meet the qualifications. For example, if you have a rental property you move into after selling your first home (and taking the exclusion), two years later you can also exclude taxes on the gain from your rental-turned-primary residence

Qualifying for the Exclusion

To be eligible for the exclusion, you and your spouse (if married) must have owned and used your home as your principal residence for at least two of the five years that ends on the date of the sale. The periods don.t have to be consecutive, as long as they add up to two years. Short, temporary, and seasonal absences count as periods of use. If you have more than one residence, only the sale of your principal home (the one you live in the most) qualifies for the exclusion. The exclusion may not be used more frequently than once every two years.

What if You Have to Move Sooner?

Special provisions apply if, as a result of some unforeseen event such as a job change, illness, death of a spouse, divorce, or some other hardship, you are forced to sell your home before meeting the two-year residency requirement. Depending on your circumstances, gain may be fully excluded or the exclusion may be prorated based on the amount of time you lived in the house. For example, if for health reasons, you had to sell your home after one year, you can take half of the exclusion, which means your first $125,000 of profit is tax-free if you.re filing as a single ($250,000 if married filing jointly).

Calculating Your Gain

In determining your gain, don.t forget to account for qualified expenses that can be added to your home.s purchase price to increase your cost basis on your original house, including the cost of the sale. Increasing your cost basis helps to reduce the gain on the sale of your house and may lower or eliminate a potential tax bill. Qualifying expenses include home improvements, such as adding a room or a new roof, and the cost of settlement fees, property inspection fees, and title insurance. Unfortunately, if your gain exceeds the exclusion amount, there is no way to avoid a tax bill. Rolling over your gain into a new residence is no longer an option. You must report your non-excludable gain on your tax return and compute your tax bill at the long-term capital gains rate, which, for most taxpayers, is 15 percent.

Consult with a Tax Professional

Because of the potential tax savings and the complexity of the home sale exclusion rules, it.s a good idea to check with a CPA before selling your home.

Saturday, April 05, 2008

Major Plant Groupings at Winterthur

In 1962 an interviewer asked Henry Francis du Pont (1880-1969) to discuss the defining aesthetic principles of his great naturalistic garden at Winterthur. Du Pont replied, “For me, color is the thing that counts more than any other.”

The following is a list of the major plant grouping at Winterthur, showing the flower colors and time of bloom in Delaware (Zone 6B). For more than 65 years H. F. du Pont observed succession of bloom, experimenting with thousands of plants and refining the color combinations that are the essence of the Winterthur Garden.

March Bank
Color















Time of Bloom
Galanthus spp. (Snowdrops)
White















January-March
Adonis amurensis (Amur Adonis)
Yellow















March
Eranthis hyemalis (Winter Aconite)
Yellow















March
Chionodoxa spp. (Glory-of-the-Snow)
Violet blue















March
Scilla spp. (Squills)
Royal blue















March
Leucojum vernum (Spring Snowflakes)
White















March
Crocus tomasinianus (Tommies)
Lavender















March
Crocus hybrids
Various















March
Cornus officinalis (Cornelian-cherries)
Yellow















March
Muscari spp. (Grape-hyacinths)
Purple















March
Narcissus spp. and cv. (Daffodils, early)
Yellow















March
Anemone apennina (Italian Windflowers)
lavender, white















April
Uvularia grandiflora (Bellworts)
Yellow















April, May
Mertensia virginica (Virginia Bluebells)
Blue















April, May
Phlox divaricata (Wild Phlox)
Lavender















April, May

Winterhazel Walk
Corylopsis spp. (Winterhazel)
Yellow















April
Rhododendron mucronulatum (Korean R.)
Rosy lavender















April
Rhododendron mucronulatum (Korean R.)
Rosy lavender















April
Helleborus spp. (Hellebores)
Plum, cream















April
Corydalis bulbosa
Rosy lavender















April
Primula abchasica (Abkhazian Primrose)
Cerise and yellow















April

Quince Walk
Chaenomeles spp. and cvs. (Flowering Quince)
Coral, pink, white, red, orange















April
Viburnum spp.
Chartreuse, white, pink















April, May
Spiraea spp.
White















April
Exochorda spp. (Pearlbushes)
White















April, May

Sundial Garden
Magnolia spp. and cvs.
White, pink















April
Spiraea spp.
White















April
Chaenomeles spp. and cvs.
(Flowering Quince)

Pink, red















April
Prunus spp. and cvs. (Cherries)
Pink















April
Viburnum spp. and cvs.
White, pink















April
Fothergilla spp. and cvs.
White















April, May
Malus cvs. (Crabapples)
Cerise















April
Exochorda spp. and cvs. (Pearlbushes)
White















April, May
Syringa cvs. (Lilacs)
Lavender, white, deep
purple-red
















May
Paulownia tomentosa (Princess Trees)
Lavender















May

Azalea Woods
Anemone apennina (Italian Windflowers)
Lavender, white















April
Trillium spp.
White, various















April, May
Rhododendron (Kurume hybrid Azaleas)
Pastels















May
R. kaempferi (Torch Azaleas)
Coral















May
Rhododendron spp. and cvs.
Pastels















May
Hyacinthoides hispanica
(Spanish Bluebells)

Blue















May

Peony Garden
Paeonia (Hybrid tree peonies)
Red, gold, white















May
Paeonia (Herbaceous peonies)
Salmon, white, pink, red















May
Rhododendron (Kurume Azaleas)
Pink















May
Weigela cvs.
Pink















May
Kolkwitzia amabilis (Beautybush)
Pink















May

Sycamore Hill
Narcissus cvs. (Daffodils)
Yellow, white















April
Forsythia spp. and cvs.
Yellow















April
Cercis canadensis (Redbuds)
Rosey lavender















April, May
Paulownia tomentosa (Princess Trees)
Lavender















May
Syringa spp. and cvs.
Lavender















May
Aesculus cv. (Horse Chestnuts)
Rosey red















May
Kalmia latifolia (Mountain-laurels)
Pink















May, June
Chionoanthus virginicus (Fringe Trees)
Cream















May, June
Deutzia spp. and cvs
White, lavender















May, June
Philadelphus cvs. (Mock-oranges)
White















May, June
Viburnum spp. and cvs.
White, cream















May, June
Rosa cv. (Roses)
Various















May, June
Spiraea spp. and cvs.
White















May, June

Quarry Garden
Chionodoxa spp. (Glory of the Snow)
Lavender blue















March
Scilla spp. (Squills)
Royal blue















March
Narcissus cvs. (Daffodils)
Yellow















March
Caltha palustris (Marsh-marigolds)
Yellow















March, April
Cornus spp. (Cornels)
Yellow















March, April
Primula denticulata (Drumstick Primroses)
Lavender















April
Rhododendron spp.
Pink















April
Primula hybrids (Candlabra Primroses)
Fruit shades















May, June
Lobelia cardinalis (Cardinal Flower)
Red















July, August
Lobelia siphilitica (Blue Lobelia)
Blue















July, August
Ligularia sibirica v. speciosa
Yellow















July, August
Hosta spp. and cvs.
White, lavender















July, August

Enchanted WoodsTM
Cercis canadensis (Redbuds)
Rosey lavender















April, May
Mertensia virginica (Virginia Bluebells)
Blue















April, May
Primula elatior (Oxlip)
Yellow















April
Hyacinthoides non-scripta
(English Bluebells)

Blue















May
Rhododendron (Kurume hybrid Azaleas)
Red, white, pinks















May
R. kaempferi hybrids (Torch azalea hybrid)
Rose, salmon















May
Rhododendron bakeri (Cumberland Azalea)
Orange















June
Hydrangea spp. and cvs.
Lavender, white















July, August
Hosta spp. and cvs.
Lavender, white















July, August
Clethra alnifolia ( Summersweet)
White















August
Begonia grandis (Hardy Begonia)
Pink















August
Aster divaricatus (White Wood Aster)
White















September

For more information, see Winterthur in Bloom by Harold Bruce (New York: Chanticleer Press, second printing, 1986), and The Winterthur Garden: Henry Francis du Pont’s Romance with the Land by Denise Magnani (New York: Abrams, 1995).


Buy Foreclosed Properties for Zero Down

Here's how you can buy property with only having to put little or no money as a down payment.

  1. You will still have to make an earnest money deposit, something like $100 - 1,000 is common, $500 is standard in most states (this money is not refundable, and basically it sets you up a reasonable amount of time to close on the property, you pass that date, the bank takes your money). Earnest money is not required for the transaction. It is simply a guarantee that you intend to fulfill the deal. And, with any Buy/Sell agreement properly written earnest money actually is indeed refundable.
  2. If you are a first time home buyer you can potentially utilize an FHA (Federal housing administration) Loan. You can purchase a property with "Zero Down," zero closing costs, and it will more or less be tacked into the mortgage (and you'll end up with .5 - 1.0% higher interest rate than market is yielding for your credit type). The property however must pass specific guidelines, you will not be able to utilize this financial product if this house is in need of repair (foreclosed homes and fixer-uppers are two separate things).
  3. Use a credit card. You can technically, (legal, but falls in the grey area) do credit transfers, but you will eventually have to pay off the credit card. This is usually done on an investment property after you have obtained the house and then sold it again at a profit to cover your total cost plus interest accumulated.
  4. Credit card rates are almost always much greater than mortgage interest rates. Experienced mortgage brokers and lenders can help you with 100% financing on any property including foreclosures whether they are bank owned, lender owned or government owned.
  5. There is no secret to No Money Down foreclosures. While credit card advances to purchase property are by no means in a grey area provided you are either (a) indicating that your down payment is borrowed or (b) getting a large enough advance to pay "cash" for the property it is not very smart unless you have a credit card with an interest rate below about 9% amortized for 30 years. I don't know of a credit card amortized for 30 years.
  6. Even if the property is in need of repair there are lenders who will lend the full purchase amount and the full repai amount provided they are less than 80% of the after repair value (ARV).


Get a Down Payment Grant

Sources of money to use for your down payment when buying your home.

  1. Determine approximately how much money you need. Your banker or mortgage broker can help you with this. Your real estate agent should be able to help you if you haven't gone to the lender yet.
  2. Investigate local bank programs. Sometimes lenders will provide mortgage loans, particularly to first time home buyers, that require NO down payment. There are federally guaranteed loans that are often available through the VA or the USDA. These require no down payment - which is just as good as getting a grant, eh? Federal programs from the FHA insure loans so local lenders will make minimal-down payment mortgage loans.
  3. Look into HUD (Dept of Housing and Urban Development - a huge Cabinet agency, 2nd in size only to the Dept of Defense). This department has a very under-used, but super program that grants money for down payments. This program is called: ADDI, or American Dream Downpayment Initiative. A clickable link to it is on my website (that URL is below) or just search for HUD.
  4. Consider private "charitable" sources of downpayment money. Most of these essentially require the seller to fund your down payment. This is rarely a good idea. You have (hopefully) wrung enough other concessions out of the seller, like a very reduced price, that s/he will refuse to do this for you. But - no matter, you can almost certainly do this on your own.
  5. Remember to be patient. After all, you will be dealing with civil servants! (Civil servants are quite often dedicated public servants that stand up for the public's long term best interest (as opposed to politicians who sometimes stand for their own short-term ephemeral interest). That said, they are often underpaid and overworked, and have built stable systems in an ever-volatile democratic government. Therefore, they sometimes appear ornery and difficult. Keep in mind though, there may be a method to their madness.

How to Get a Construction Loan

Learn everything you should know before you even think about applying for a construction loan.
Obtaining a good construction loan is a lot easier when you have been handed a course of action.

Steps


  1. Get pre-qualified for a loan. This will help to determine if the requested loan amount is within your budget. It will also allow you to find out what the monthly land or mortgage payment is going to be, and to make sure you qualify before you run out and buy land.
  2. Find an experienced construction lender. Local banks, if they do construction loans, might be able to offer you a great rate. National Lenders are more likely to have construction programs. But your first consideration should be construction lending experience. Even more than a mortgage loan, a construction loan is complicated. Avoid using any entity that provides you with a loan officer who doesnt have significant experience providing construction loans to consumers.
  3. Choose the right construction loan product. Call your local banks and ask for the construction loan department or a construction loan officer. Most of the time, you won't get anywhere. If you do find a bank that will do a construction loan, they usually can only offer one product that may or may not be competitive in today's marketplace. A typical construction loan nowadays is a construction to permanent loan that may or may not allow you to lock-in today's low interest rates until the home is completed. If you choose a loan that does not allow you to lock in upfront, the interest rate may end up higher along with your monthly payment. This is usually not what you want, so be careful. Some things to watch out for:
    • Some lenders have a higher interest rate if you lock in upfront.
    • Some lenders try and sell you on a higher rate or adjustable rate during construction with the hope of a float down rate after the home is built.
    • Some lenders have a non competitive long term lock along with a fee.
    • Some lenders have such bad service no matter what rate or program they have, it's not worth doing business with them.
    The most important thing when searching for a good construction loan is to find an experienced construction loan specialist that knows which banks are the best. The best banks can offer you a low rate now, upfront, before you start building your new home.
  4. Understand how the construction loan industry has changed. Today's construction loan choices include the 30 year fixed, 15 year fixed, 1 year ARM, 3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM and the popular interest-only loans. The construction loan of the past was a short term 1 year loan that the customer would have to refinance into a new loan once the construction was completed. This two time process cost the customer two sets of closing costs and you would have to re-qualify for the new loan once the home was completed. The most popular construction loan today is the "One Time Close" but not all are created equal. Just like any product there are the best loans, good loans and downright bad loans. With today's technology, you now have the ability to obtain a construction loan from the best banks in the country and sign your loan documents at your local title company or escrow office. This benefit allows you to have the most competitive construction loan available. The loan that you should apply for is simple; ask for the lowest rate, one time close for a specific period of time that you think you'll be living there. The graph below shows the type of loan you should apply for depending on your needs.
  5. Know where to go. Most banks offer loans, but not choices. One way to get different choices is to go shopping to every bank in town. Or you can call an experienced construction loan broker who has done all of the homework for you and has direct access to hundreds of banks nationwide. A broker is a representative for hundreds of banks. Although the broker serves as middle-man, his or her services will not cost you anything extra. That's because brokers get loans at wholesale rates, and pass them along to their clients at retail prices, just like any other business. In fact, because or their volume, many brokers are able to offer their clients better deals than you can get by talking to the banks on you own.
  6. Decide if you are going to lock in your interest rate until completion of your house, or let them float in the hopes that rates will go down. If the rates are heading upward, lock. If the rates are stable, relax. If the rates are headed downward, float. Always ask. Is the construction loan rate locked upfront or floating during the construction loan period? Then ask, is the rate during the construction loan the same rate when the loan converts into the mortgage period.
  7. Know your construction loan officer and his or her level of experience. Loan salespeople usually have one main goal in mind when helping you with your loan request and that is the commission (also known as loan fee, points, or yield spread premium). The following questions allow you to quickly find out if your loan officer is experienced at construction loans and is not simply after your money:

    • How long have you been doing construction loans? 5 years or more is best.
    • What is the loan to cost (LTC) required for construction loans? This is cash equity such as down payment on land. This can range from 5 to 20%.
    • What is better? The voucher or draw disbursement system and why? Draw is now the most popular because the customer has the control of the money.
    • Does the bank require a contingency and an interest reserve account? This is a choice but most banks automatically add both to the loan amount.
    If the loan officer (sales person) can answer these questions with no problem then they have passed a pretty good litmus test.
  8. Find out how to qualify for your loan. The first thing your loan officer wants to see is your completed loan application. The loan application called the (1003) will tell a story of your financial picture. The completed loan application will tell the loan officer many things including:
    • What type of loan you want
    • How much money you need
    • Where you currently live
    • If you rent or own
    • Your social security number
    • Your current employers
    • A list of all your assets (money) and liabilities (bills)
    • How much money you make
    • How much real estate you own
    • Some declarations along with some government questions
    The loan officer will analyze this and other documents (including your credit report) to determine whether you qualify. This analysis yields a ratio called the income to debt ratio, and depending on the bank's underwriting guidelines, this ratio will usually range from 36% to 45%. The income to debt ratio is the percentage of monthly debt payments (including your new mortgage payment, taxes and insurance). This ratio should not exceed 36% to 45% of your monthly income. Some banks will allow you to exceed this ratio if you have an excellent credit history and excellent credit score. The current and the most popular method of qualifying for a loan today is the stated income loan. Stated income allows you to qualify without verifying your income on your tax returns, W 2's or pay stubs. The only thing the bank verifies when applying for a stated income loan is your credit score, bank statements and that you're employed.
  9. Avoid the "bait and switch". The mortgage lending business is notorious for baiting and switching, which is when a loan officer or advertisement offers you one thing and then tries to sells you something else. Typical signs of baiting and switching are obvious, some basic examples are:
    • Over the phone, you are offered a much lower rate than any other quote and once you've sent in your application the rate you were quoted has all of a sudden vanished.
    • You are offered a construction loan with no points and no loan fee's. What you are not told is that you are paying for it with a higher interest rate and the costs are built into the loan.
    • You are told that you will not have any payments while you're building. What you're not told is that all construction loans have this option and it's called "interest reserves" and the payments are added to the loan amount.
    Remember that if it sounds too good to be true, there's usually a reason. Always get your quote in writing, and if you are satisfied with the rate and construction loan program you are quoted, ask to lock it in upfront.
  10. Realize that most loan products typically go hand in hand with banking guidelines. These guidelines are provided to loan officers to coincide with the customer's qualifications. For example, if you have a very high (FICO) credit score with land free and clear, you have more loan options than the person with a very low (FICO) score and no land equity.
  11. Make sure your loan officer has structured your construction loan properly. Structuring construction loans for approval is vitally important and is the last thing on most customers’ minds. Common mis-structured loan scenarios include:
    • Missed deductions
    • Low cash equity
    • Improperly completed appraisal
    • Unexplained credit derogatory
    • Income incorrectly calculated
    • Mismatch of customer loan request to the correct lender
    • Plain and simple incompetence

  12. Factor interest reserve and contingency funds into the cost of building your new home. Interest reserves are added to your loan amount to make the monthly payment on your loan. Yes, you read that correctly, you will not have to make a monthly construction loan payment while your home is being built. The payments are made from this interest reserve account and no, it’s not free. This reserve is added to your construction loan amount. Interest reserves were designed for the benefit of the customer. Most people building a new home are either paying rent or have an existing mortgage payment while their home is being built. The last thing a customer needs is another monthly payment while building. So, banks created the interest reserve account by adding up the estimated interest payments over a 12 month period and add this to the loan amount. If you do not want interest reserves added to your construction loan amount, you can ask to make your own monthly construction loan payment. Contingency funds are added to the loan amount just in case you need more money to build your new home. With all good intentions, construction loans tend to have cost overruns. The bank adds 5% to 10% of the cost breakdown and adds this amount to the loan amount just in case you have cost over runs or need better appliances. If you don’t need or use this extra contingency fund then it will not be added to your mortgage upon completion of your new home.
  13. When you apply for a construction loan, ask your loan officer to provide you a copy of the estimated construction loan budget. This budget is not usually meant for the customer but an experience construction loan officer should not have a problem providing this to you. The budget is created from your costs and includes every cost within the loan including land balances, closing costs, interest reserves, contingency and bank fees.
  14. Construction Loans are most often 'Story Loans'. In other words, the lender needs to know what exactly you want to accomplish, why you want to do it, and how you intend to accomplish it (e.g. what is your 'story'), before they can recommend a program and approve your loan. For instance, if you intend to live in the home after the project is complete (owner-occupied), your options, rates, and even potential lenders may be very different than the same loan to an 'investor' who intends to immediately resell the property.


Tips


  • The Most Important Elements of a Construction Contract
  • Construction loans are a little more paperwork intensive than purchase money loans. Every construction loans has a part known as the builder’s package.
  • A Builder’s package includes items such as; a builder’s statement or resume which includes things like previous experience references and credit and banking references, a line item cost breakdown, a materials list and last but not least a construction contract.
  • Guidelines for construction loans require a borrower to enter into a written contract with a builder/contractor.
  • A line item cost breakdown is an integral part of a construction contract and such it should be referred to at all times. It is common for a homeowner to change some specification or other and it is highly recommended that a firm change order be written in these cases.
  • A Construction contract is a written agreement between the borrower and the builder for services to be provided by the builder for a stated consideration.
  • A properly written and customary contract contains:
    1. A clear statement outlining the responsibilities each party will perform.
    2. The date of the contract, the scheduled dates for commencement and completion of construction of the project . An event date, rather than the actual date, is sometimes acceptable.
    3. The amount of payment the builder is to receive for each stage of construction, as well as under what conditions it will be received, such as passing inspection etc... If the property is located in a state that charges sales tax, the contract must specify whether the amount includes state sales tax.
    4. Proper reference to a completed and signed Line item cost breakdown and list of materials..
    5. A payment method that is compatible with the line item cost breakdown and the disbursement procedures of the investor.
    6. Provisions for possible changes to plans or specifications by appropriate change orders. Since most construction loans have a contingency provision a cost over run may be paid for using that provision.
    7. Full identification of all parties and definition of all names used in the contract (contractor, owner, subcontractors and architect).
    8. Architect's responsibility, if any.
    9. Signatures of the borrower and contractor.


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