How do you protect yourself when you plan to build?

kath0000March 2, 2013


We are looking to build a larger home in California and are about to purchase a finished, graded lot to start the project. We have a good idea of what we would like, the level of "upgrades" and the size of the home, etc. We have identified an excellent and experienced architect as well. We know what the lot will cost and have some estimates of the construction cost (and they vary like a ping pong ball's path). We've been doing a ton of research for the last 6 months and are ready to proceed.

My question is this. How do I protect myself from making sure we are not going to be caught in a situation where the cost may be WAAAAY more than what people are telling us? For example, 2 different builders and our architect told us we can "easily" build for $200/sf when I discussed the size of the home, the type of kitchen appliances, granite, fawcet quality, etc we would like.

Then we have spoken to a couple of builders who are like, "it can't be done under $400/sf, those people are crazy, they are lowballing you." My concern is that we buy the lot, design the home, and the people who say it's $400/sf are RIGHT and we are doubling our budget (and hence can't afford to build).

Is there anything more we can do to make sure we are not going to be caught in a situation where we own an empty lot but can't afford to build on it? Of course no one is willing to give us anything in writing till we give them plans, and we can't give plans till we enter escrow, get the detailed lot info, etc.

I am very concerned even though I feel like I have asked a LOT of people about this. It just seems like numbers are ALL over the place!


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There are some ways to benchmark your potential expenses, but, unfortunately, I don't think there's any foolproof guarentee of a final cost. There's lots of reasons for not being able to be specific about a final cost: changes in labor and materials expense, delays due to weather, errors, change of heart and mind, etc.

Thus, design and building a custom home is an act of faith (with as much prudence and discipline applied as possible--as you are doing), and a desire for something that cannot be fulfilled from the normal tract market.

Some financial benchmarks to consider:
--Cost of recently completed houses of comparable quality and complexity;
--Resale cost of comparables (almost always lower than new construction cost most everywhere);
--Reference checks on the estimates by preferred architects and builders

If yours is a tight or limited budget (or even if it isn't and you simply have a number as a target), so much will depend on the early design concept that is adopted (is it an economical idea or a complex, expensive one), and, thereafter, your discipline to stick to the concept and not "guild the lily" with every marketing gimmick shown on the TV home shows.

It's very easy to start in a straight forward way, and to add a ton of expense thereafter. The perfect example are these very threads which, if all suggestions are taken seriously, will so load up an initial design that it may be unrecognizable in term of concept and budget. So you will need to be very clear and disciplined in what you want, trusting your architect and builder to share your intent and work within it.

Using a $/SF number for budgeting is a very rough benchmark since there are so many variables that make each house different from others. Even in California, however $200/SF should provide a very livable home, while $400 should provide one of the houses in Architectural Digest.

Regardless of your budget, you will be wise to include a minimum 10% contingency amount to cover unexpected additions during construction. Said differently, it's a good idea to target a "not-to-exceed" a minimum amount equal to 90% of what you really want to spend.

Good luck on your project.

    Bookmark   March 2, 2013 at 8:04AM
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Go look at homes for sale in your desired area that have the amenities that you desire. Then 1.5 to 2x that price for a custom new build. That's ballpark. If that scares you to death, then you perhaps should look at some of those homes that are currently for sale seriously. $200 a SF sounds very low for CA unless something is being skimped on somewhere. If it's not the finishes, it's the more important stuff: the bones of the shell, the HVAC, the plumbing, the electrical. All of that stuff is WAY more important than the exterior stuff that on top of that.

    Bookmark   March 2, 2013 at 9:20AM
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I do not think that enough people pay attention to the reality of what GreenDesigns says above.

The house you want, with the size and amenities in the are you want, will cost 50 to 100% more if you want it custom built.

I believe that is wholly accurate.

I believe that a custom built house is a luxury good (what else would you call something that is a substitute for something equal, but which costs 50 to 100% more? that is the DEFINITION of a luxury good). It is an indulgence.

I know there may be exceptions, but IMHO if you literally cannot afford to overpay handsomely for the privelege of designing your own home, you just should not do it. Especially if paying 400 per sqft at the end of the day, intsead of 200 per sqft is literally financially untenable, and not just unpleasant.

Hope none of that sounds too harsh but I think it is only logical.

    Bookmark   March 2, 2013 at 12:12PM
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How do I protect myself from making sure we are not going to be caught in a situation where the cost may be WAAAAY more than what people are telling us?

Get a fixed price contract and do not yield to the temptation of extras along the way. It's the dim sum that breaks the bank!

    Bookmark   March 2, 2013 at 1:17PM
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virgilcarter said:
"Even in California, however $200/SF should provide a very livable home, while $400 should provide one of the houses in Architectural Digest. "

I completely disagree with this statement. I am in a desirable town in the LA area and $400 is more of the low-mid end of the scale. CA is a large state with lots of micro-markets, Virgil's assumption would be very dangerous to the OP if they happen to live in my area.

Buying is much cheaper than building in most areas. Also don't assume that CA has cheap labor. The American boss or business owner does not pass that savings onto the customer.

    Bookmark   March 2, 2013 at 2:31PM
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I am a custom home builder, but I also build apartment communities for my own investment. You might consider employing an approach almost every apartment developer uses: buy an option on the land which gives you a period of time to perform due diligence on your costs. There are variations, and every situation with each land seller is different, but the basic outline is something like this. You first agree to the sale price of the property. Then you might pay 0.25 to 0.50 percent of this sale price for each month over the period of time you have the sole right to exercise your right to purchase the property. This money is non-refundable, but it would apply to the purchase price should you decide to buy the land. During this period you have your architect design your home plans to a preliminary stage. These preliminary plans would consist of basic floor plans and exterior elevations. They would be enough for you to receive several preliminary builder bids that should get you within 10-15 percent of actual final costs. Find out how long your architect needs to complete his/her portion of the work, add anywhere from 4-6 weeks for bids, and you arrive at the period of time to "lock up" the property in the option agreement. For example if the property price is $200k and you decide you need 6 months to investigate the home's design and cost, you might pay, upfront, $3,000 using a rate of $500 per month. The architectural fees for something like this will vary by the complexity of the project and the architect you select. Don't be surprised if your total outlay for this type of approach is in the $8k-$12k range. Look at it as the cost of doing your homework and being safe.

    Bookmark   March 2, 2013 at 3:08PM
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Great suggestions from ohbldr.

    Bookmark   March 2, 2013 at 6:53PM
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It's ALWAYS more expensive than you think. Especially in high cost of living and high bureaucracy areas. CA is exactly that. I suspect that a $100 a square foot home here would be a $200 a square foot there. That is, livable, but not at all a custom home. Probably granite, because every builder is buying containers from China, and some low quality engineered wood and site built "custom" cabinets, vinyl siding and windows and the minimum amount of insulation with the cheapest HVAC that they can get away with.

A higher quality true custom home here would be around $200 SF +. We're a low COL location. So, I'd bet that what you want is at least $400 a sf if you want higher quality.

Start with your specifications right now. Once you get an idea of how much 3000 square feet of hardwood and 1500 square feet of basic tile costs, plus labor, plus what fixtures and cabinets and HVAC and everything else that you need costs, then you are better informed to decide if you can afford what you want. Don't forget that there are grades of everything, and that the more complex the layout of everything, the more costly the labor for it will be.

    Bookmark   March 2, 2013 at 8:19PM
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With construction costs, probably much depends on where you are in California. Do you have a real estate agent who might be able to dig up some information for you? Here's a blog piece but I suspect it might be pretty location-specific.

Here is a link that might be useful: Article on California construction costs

    Bookmark   March 2, 2013 at 9:06PM
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Even if the builder tells you what he is paying, that does not mean you will be getting a good build.
Here in Texas, as in California, most of the laborer s are illegals who cannot read or write. And their work ethic is very poor.
We have had so many builders sued by the city for building shoddy homes!
A friend was having his very nice home built by a well known company. He went out daily to inspect the progress. (He is a lifer in the Air Force, now retired).
The framing wasn't correct....boards off measurements by the dozens. The water pipes for the master bedroom ended up 2 feet that toilet would be sitting in the garage....
It is a good thing he went daily. The builder certainly wasn't going to tell him his 'very proficient, reliable workers' were just day laborers hired from the downtown corner where men hung out everyday hoping someone would stop by in their truck offering a job.
My friend got out of two building contracts due to poor workmanship. It delayed his plans on moving into a new home by 2 years.
I know there are some good, trustworthy builders.....they are just dang hard to find. Good clients can be hard to find, also.
Hope your project goes well and you and your builder still,have respect for each other at the end.

    Bookmark   March 8, 2013 at 3:30AM
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I'm sure it depends on where in California you live but in the SF Bay Area $200/sqft would be all but impossible for a high end build. It may be technically possible to achieve by doing bargain basement finishes but I doubt it. I averaged about that several years ago on a remodel during the depths of the crunch when no one had any work.

If you're reading sites like this or Houzz and seeing people's fabulous interiors, you will blow past $400/sqft before you know it. A lot of it is driven by finishes.

Things to watch for:

- Allowances. The builder's idea of $5000 worth of faucets may differ from yours. They may be figuring Home Depot Moen and you may be figuring Newport Brass. You can (and should) drill down on this stuff yourself ahead of time. It's time consuming but worth it. e.g. go online and pick out all your plumbing hardware. How much does that cost? Did you remember to get all the supply lines, valves etc? If you're not super technical you may want to talk to a local plumbing store. They will charge you more but will make sure you're not missing anything. Same thing for appliances etc. Now you're starting to fill out allowance budgets.
- Did I mention that finishes can drive cost through the roof? e.g. tile and slab materials and install costs. Go to one of those giant tile/slab warehouses and talk to the staff there and get a sense for the cost. Same thing for masonry. Even fake stone is expensive. Don't get me started on trim work (crown molding, paneling etc). Cost for these various finish items can exceed 50% of your budget.
- Did you think about landscaping? It can run up to 30% of your budget depending on the site work required. Do you need engineered retaining walls?
- Builders and architects that don't include soft costs in their estimation. Soft costs are everything other than the cost to build the house. This includes design fees, permits, etc. In my area permiting alone can run $30-40k before you even dig a hole. You should go to your town hall and find out everything you need to know about building a house. What's the planning process? What are all of the fees? I've heard you should figure ~15% of project cost for soft costs.
- What about site work and engineering? This stuff is invisible but highly necessary in certain areas where there are hills, fault zones, etc. Don't trust line item numbers that have too many zeros. They are just estimates.

I don't want to sound discouraging but I want you to know people will stretch the truth to get your business and figure they can ease you into more later. A huge part of it is about self control yes, it just depends on your tastes.

    Bookmark   March 8, 2013 at 11:49AM
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In my opinion, there's is no way to determine whether building a custom home is the right choice for you and your family without putting up a significant (obviously this term is relative to your particular financial situation) investment that you will probably not recoup. The reason for this is that, as you've figured out, one decision always hinges on another and to make those decisions it takes money.

My advice would be to work with an architect on the house you want before purchasing the land. Once you finalize the house and finishes, start talking to some builders about pricing it out with the understanding that addition investments may be needed to get the lot ready for the house. Once you get some quotes from builders you should be able to get a picture of what things will costs (taking into account an extra 10% for contingencies) and whether it pays to starting looking for a lot (if the current one is no longer available) and taking the next steps.This approach should help minimize your finacial risk while you figure things out.

    Bookmark   March 8, 2013 at 12:37PM
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The approach SweetFish mentions may work in an environment where there are many similar lots available, but again it comes down to location. As soon as you introduce natural features to the landscape the equation changes. If there's a hill, fitting the house to the contour of the land becomes important. If there's a natural feature you wish to take advantage of (view of mountains, river, city lights) you may wish to orient the house towards it. Even in a development of identical rectangular lots you might orient a house differently depending on if the lot is on the north or south sides of the street, so as to make better use of sunlight.

It does seem worthwhile to understand in a general way what your requirements are before purchasing land, and working with an architect perhaps to determine if a lot that you might buy would allow you to accomplish those goals but developing a finished plan without having land seems like putting the cart before the horse.

    Bookmark   March 8, 2013 at 5:10PM
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Thank you all for the excellent comments. We don't have much choice in the land we buy (Orange County area), as open land is few and far between. There are 2 lots for an acre each and everything else is much smaller or has no view or faces the busy freeways. That said, we have been thinking about building for the last 7 years so we have spoken to a LOT of people in the are who have built. It seems like we have done our homework but I am just worried about the nebulous estimates at this stage. We are meeting with the architect on Saturday so I am hoping once a prelim design is available, we can start shopping it around, hopefully while still in escrow on the lot....

    Bookmark   March 8, 2013 at 5:55PM
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