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House Build Diary 3 - Money, Banks, & Builders



You know you are serious about building when you start looking at selecting a general contractor (builder) for your house. You may check the reviews for several builders and talk to several before you get construction estimates. You want to make sure everything is included in the estimate because you will take it to the bank to get a construction loan unless you have the money to pay for it yourself. From my experience, I believe builders base their cost estimates largely on their past builds. They are usually more interested in construction and less in accounting. You want the mortgage to cover everything so that you are not forced to write personal checks during the build. In our TN build, I believe we were approximately $50,000 over budget at the end of the build. In our MD build, we were about $69,000 over budget. Many of these items were things the builder failed to include in the construction estimate or when he priced the wrong items such as lowest grade hollow core doors rather than acceptable solid doors. He did not check prices he just used what he had from a previous build with hollow core doors. This meant we had to pay the difference out of pocket. There are also times during the build when you find something that you really want and you can't add later. Then you may choose to go over budget.


In my opinion, you need to build the things you really want into the structure, and then you may choose to renovate later and make changes. For example, if you want high ceilings you have to build those in from the start because you can't easily change them later. If you want a basement you can't add it later. You can change a bathtub or a floor or other minor things later if necessary.


It is best to assume everything will be more expensive than expected because you can easily deal with having too much mortgage money but not with lacking enough. You should also have a fund for unplanned expenses. There will always be additional costs.


Building a house involves risk. You can spend a lot building a beautiful house and if you try to sell it you may get quite a bit less for it. The value of the house is not based on what you invested in land, labor, and materials. The value of the house is what someone else is willing to pay for it. That is why the way to protect your investment is to build a house that other people would want and for which they would be ready to pay. Usually the longer you stay in the house the more you see its value increase. If you build a new house you will probably get the best return on your investment if you stay in it for five to ten years instead of selling it soon after completion.


We used a builder for each of our builds. Most builders have a group of subcontractors they use and trust. They know the flow of the build and should be able to work through permitting and the bank may not loan you the money without a builder guaranteeing that he will build the house for the stated amount. From what I have seen there are basically two types of builders for custom homes (any house where you decide the house elements). There are the expensive builders who know how to make the house look good and they cost a lot. When I talked to a couple of the high-end builders my build was not expensive enough for them to consider.


The other builder type is the cheap builder. They can technically follow the plans and build you a house but they can and will build you an ugly and expensive new house if you don't direct them through the build. They will try to use cheap subs to do things, such as tile or kitchen cabinets, in which they have no experience and are just winging it. You need to catch this early and stop it and have competent people do the job. It is likely you and the builder will not be very happy with each other at times during the build but you have to protect your investment.


Along with builders, banks, and money come contracts. You need to make sure that everything you want is included in the contract and that the wording is as clear as possible. For example, there are sections in the contract for allowances which is where the homeowner selects items such as light fixtures, appliances, bathroom vanities, etc. that they want and they have a specific amount of money allotted for these items. If they want to spend more than is in the allowance they have to pay more out of pocket. During one of our builds, the builder claimed that labor for installation was also part of the allowances which is not the way this is supposed to work because the homeowner can know the price of items they want, but they have no way of knowing the price of labor. It needs to be clear that allowances do not include any labor costs. Builders tend to take old contracts and rewrite them for new builds. There may be incorrect addresses or items left in the contract that do not apply to your build. You need to carefully read the contract.


In the case of a teardown and new build, some banks will provide funding for the teardown and others won't. On our first build, we had to pay $15,000 for the demolition of the old house ourselves. The first bank draw was for the foundation when it was completed. Our second build included the demolition in the mortgage.






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