LIME REALTY GROUP is pleased to bring you the first in a series of blog posts we want to use to help people understand the costs of building. Today, we’d like to discuss the concept of credit.
Now we’re all familiar with the term credit. More often than not, we think of credit cards or loans we can secure from a bank or a lending institution. Credit is offered and when we buy with credit, we do so with the understanding we will pay the institution we’re receiving credit from, back the money they initially spend in addition to a percentage called interest.
Credit plays a huge role in the building industry. It often determines the mortgage rate a buyer qualifies for from a lender. That rate can effect a lot of things, especially how much home the buyer can afford. But there’s an aspect of credit not normally considered when you think about building and it’s that cost, we want to discuss today.
A general contractor will hire sub-contractors to work on a client’s home. The sub-contractors usually submit a bid proposal and when the contractor accepts the bid, the sub is then under contract to perform the specified work and is entitled to the proposed compensation upon completion. Some sub-contractors require a deposit upfront to help offset their initial costs, but even with a deposit, the materials and labor are provided by the sub.
This is a form of credit the sub-contractor has extended the general contractor and indirectly, the GC’s client. They put out the initial money in materials and pay their employees to perform the work needed for the home.
Depending on how frequently the General Contractor pays his subs plays into how quickly they’re able to recoup the money they’ve invested in that job.
Because this is a form of credit, most subs will figure in a percentage to their price to offset the lack of funds between the time of their initial investment and the time they get paid for the work. This percentage is interest.
It’s easy to look at work being done and forget that this new home isn’t just an investment for the owner, but for the contractors working on it as well. They invest their time, money and resources in the hope of gaining a profit. When you think about it like that, it changes the way you view the people working on your project.
Next time, we’ll discuss Profit.
Remember, Lime is the clear choice in real estate in the Southern Utah Area.