The Right New Home with the Wrong Builders Mortgage Equals a Disaster

Building a new home? The financing on a property is an important consideration.  Make sure that you understand how funds are going to be disbursed under progress draws on your construction mortgage so that problems do not arise later.

Consider the recent decision of Evolution Homes Ltd v Zupanich, 2014 SKQB 38: http://canlii.ca/t/g3gqd.  Conflict between the two parties resulted in a contract that was ended early, and some litigation. While the case suggests that both parties were unhappy, I would speculate that this is because of the frustrated exchange between home builder and client once the first progress draw came in. 

It is important to note that this case is not at a conclusion.  This judge issued a ruling on a smaller issue before the matter moves along to trial.  This case is largely about a builder’s lien that was registered against title and if it could be removed at this time.  A number of the facts are still at issue. 

However, the facts described in this decision give some insight about what likely went wrong. Builders are generally sensitive about their progress payments, and rightfully so.  They have a lot of money, time and inventory invested into a property.  If they do not own the lot, they have a lesser level of control on ensuring they get paid at the end of the transaction.  Therefore, if the first draw causes problems, it’s a signal that it is going to be a frustrating build until the end of the project. 

I would think that most people would assume that if the project is 40% complete, that they would receive 40% of the mortgage money.  That isn’t necessarily the case. 

The appraiser in this case estimated that the project was 46% complete.  In this case, the builder wanted to have 46% of the contract funds after the draw.  In order to receive that level of funding, the builder required $411,268 ($491,268.50 less the $80,000 deposit). 

However, the lender used a draw calculation that is common for some of the larger lenders.  Based on that inspection, the following calculation was made (at para.9):

“46% complete draw calculation: 1,265,000 (appraised total replacement cost not including land value) x 0.54 (54% remaining to complete) = 683100.00 subtract from total approved mortgage amount $1,054,380=$371,280.00.”

The owners already owned the lot at the time that they entered into the contract.  They provided a further $80,000 in a deposit for the services to build a home on their owned lot.  But the high appraisal relative to the contract price, and the draw being based on work to be done as opposed to work completed resulted in a smaller draw than was expected.

Make sure that you have clear information from your mortgage professional about how the money will be funded, and that you and your builder are on the same page about those outcomes.