Does the owner-builder exemption cover a spec house built to sell, and what insurance does a half-built house need?

Question

Here is a question that trips up a lot of first time spec builders. An investor watching a handful of lots reads up on the owner-builder permit and understands it this way: if you own the land you can pull the permit yourself and hire subs directly, no general contractor license needed. Then a working builder tells them flat out that the exemption does not apply if the house is being built to sell, and that pulling it that way amounts to pretending to be an owner-occupant. He is not being rude about it, he simply sounds certain. Which part of that understanding is wrong? And separately, what insurance does a vacant lot with a half-built house on it actually need, because a standard homeowners agent tends to look blank when asked.

Rena Guide · Accepted Answer

The builder is describing something real. Owner-builder exemptions exist in most states, and in many of them the exemption is written around building for your own use, not for resale. A common form of it limits how many permits you can pull in a period and requires that you not sell the home for some stretch of time after completion, often a year. Contractor licensing rules and the exact wording of the exemption differ by state, and a few states hand licensing down to the county or city, so the only answer that's worth anything is the one from your state licensing board plus an attorney who does construction work locally.

What trips people up is that pulling the permit and being licensed are two separate questions. Even where you can legally pull an owner-builder permit, your construction lender may still require a licensed general contractor with a signed contract and a bonded history before funding, because their collateral is a house that has to get finished.

On insurance, you need builder's risk, sometimes called course of construction coverage. It insures the structure and the materials on site while it's going up, and it typically converts or ends at completion, at which point you need a vacant dwelling or unoccupied policy until closing. Your homeowners agent looked blank because homeowners policies don't cover a building nobody lives in.

You also want general liability of your own, and certificates of insurance from every sub showing their own liability and workers comp. If an uninsured sub's helper gets hurt on your lot, the question of who's the employer gets answered by somebody other than you.

luis_carrera · Answer

In many states the owner-builder affidavit has a line you sign stating the structure is for your own occupancy and will not be offered for sale within one year. Read it as many times as you like, there is no way around that line.

jordan_ellis2 · Answer

What's builder's risk actually running people? Two quotes I collected were priced off completed value rather than a flat number, something like 0.5 to 1.5 percent of the completed value for a twelve month term, and the cheaper one had a nasty exclusion for theft of materials not yet installed. Copper and appliances walking off a job site is not a hypothetical.

Rena Expert · Answer

One more layer under bramble's question. Whoever is named as the builder on the permit is usually also the party carrying whatever new home warranty obligation your state imposes, and several states have statutory warranty periods on new construction plus specific seller disclosure duties that are different for a builder-seller than for a homeowner selling a used house. Those rules vary state to state, and how they apply to an owner-builder who sells is exactly the kind of question that needs a construction attorney rather than a forum.

The practical consequence at resale is worth planning for now. Buyers' agents in a lot of markets ask who built it, and "the seller pulled it himself as an owner-builder" invites questions during the inspection period that a licensed builder's name doesn't. It also affects whether you can get a third party structural warranty product, which some buyers want and some lenders like.

On pike's point about the exclusion, read the theft and materials clause carefully, and check whether the policy covers materials in transit and stored off site. On a 400k hard cost build the appliance and fixture package can be 25k sitting in a garage with a temporary lock. Also confirm in writing what happens to coverage if the job goes idle for more than 30 or 60 days, because a permit delay or a framing crew that disappears can put you outside the policy terms without any notice from the carrier.

Does the owner-builder exemption cover a spec house built to sell, and what insurance does a half-built house need?

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