My how time flies. Spring is upon us once again. Some of you will start thinking of building that dream home on your own lot. You may have already started looking at house plans. You may have graduated from house plans to actually pricing materials, foundations, well & septic systems etc. If you are really serious about this, you may have already discussed "construction financing" with your Banker. Beware!!! For most of you, the traditional "builder loan" will cause nothing but aggravation, heartache & turmoil. Before you finish your project, you will probably run out of money. Even if your lot is paid before you start (which is rare), you will run short. The traditional builder loan comprises of 3 or 4 draws against a glorified line of credit (mortgage) secured by the building lot. At the first draw (stage), the lender will insist that the land mortgage be paid in full (if there was a mortgage on the lot). This advance is limited to 75% of the value of the lot as appraised by their appraiser. Out of this first stage, you should have enough money to complete the well & septic system, the foundation, the framing of the house. At every subsequent stage you will be at the mercy of a double edged sword. The lender's appraiser will be asked to provide the value of the work in progress and an estimate on the cost to complete the project. The lender can only advance up to 75% of the value of the work in progress and at no time will the lender advance if the amount of money left to be drawn will not fully complete the house. Let me explain with numbers: let us assume that the finished house will be worth $150,000 (including the lot value of $50,000). The Bank has agreed to lend you $120,000 (CMHC insured). At the first stage, the lender will lend out 75% financing ($37500) on the lot. Let us also assume that the lot is paid. With this money you build a foundation, frame the house and install a septic system & well. Total cost to you is $37500. Let us estimate now that the value of work in progress is $80,000. The lender sends out the appraiser who estimates $80,000 as work in progress but in his opinion, the remaining work (according to your plans) will cost $50,000 to complete. If you add up the

$80,000 already completed and the $50,000 to complete, the sum is $130,000. The maximum loan approved by the Bank was only $120,000. So the Bank will ask you to put in the difference ($10,000) yourself before they will issue the next dollar. If you have the money ($10,000) to bring to the project, you will probably get money today, but at your next draw, you will run into this problem again. Let's say you find the $10,000, then the Bank will advance 75% of the work in progress ($80,000 X 75% = $60,000, minus what they have already advanced [$37500]). This new money ($22,500 + your input $10,000) must now go towards the rough electrical, rough plumbing, windows, doors, backfill, roof etc. At the next stage, the value of the work in place will probably amount to $120,000. The appraiser attests to that amount & estimates that the cost to complete is $40,000. Again the arithmetic shows that you will be short of cash (ie $120,000 {work in progress} X 75% = $90,000 + $40,000 {to complete} = $130,000). The approved loan amount was only $120,000, you need to inject another $10,000 of your own money before the Bank will advance a dime. And to make matters worse, at each advance, the lawyer will be asked to withhold 10% of the draw amount to accommodate the "Construction Lien Act". And supposing you decide to continue, and you have the missing $10,000, the last advance will be based on 100% completion of the unit, inclusive of landscaping. This last draw will also be subject to a 10% hold back for the Construction Lien Act. The whole process is nerve wracking, convoluted, and complicated. If at all possible, it is this writer's opinion that you should not attempt to have your own house built, even though your original number crunching would indicate that the value of money is better served by building your own place. If I can't dissuade you from building, next week we'll investigate the usage of off-site security to build. A much cheaper, worry-free method.