Budget/Financial planning

K_Smith3May 7, 2013

Fairly new to the boards and thinking about building a home in a couple years. Any advice on budgeting and planning financially for building a house?

Also, is it possible to only sub-contract the work you need and do the rest yourself? Do construction loans allow for that? We are DIYers and are hoping to keep costs lower by doing more work ourselves, especially some of the finish work.

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With financing in my experience its best to have 20% down and make sure your credit your is great since you have so long before you are going to start you can work on this if your score is low. Most tract builders will want to write the contract to do the whole house at least mine and a few people I know builders did. Make sure you have plenty money saved because there will be overages.

    Bookmark   May 7, 2013 at 6:08PM
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It depends alot on where you live. In California we have found that banks are not at all likely to fund a construction loan if you are going to GC the project yourself. Those that do offer those kind of loans usually require that you or your partner are "in the business" so to speak.

My husband wanted to go the DIY route as well... his brother in Wisconsin just did this and it went beautifully and they saved quite a bit by hiring subcontractors themselves. They used a local bank for their teardown/build. But California, that is much more difficult. You would have to be able to pay cash for just about everything. So in the end we are getting a regular construction loan that requires a fixed price contract from a reputable and approved GC. Depending on the GC, some will allow you to do some very limited finish work I believe (crown molding, shelving, etc.). But the bulk of the build, and anything the bank would want to see completed needs to be done by insured contractors. At least that is the answer we are getting this year.

As for budgeting, I've just been asking alot of specific questions everywhere I go. ;) Still working on that one.

    Bookmark   May 7, 2013 at 7:36PM
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I know a lot of people who've done it completely themselves. Bought the lot, saved enough for foundation to dry-in, then slowly picked off the rest until they could move in and then finished as the could. Banks in the midwest are also pretty good about DIY construction loans, but they'll want you to stick to your schedule and they'll inspect each step along the way before releasing the next traunch of funding. We also have a number of builders who specialize in working with DIY folks.

    Bookmark   May 7, 2013 at 9:52PM
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Just about finished with construction of our new custom built home. I'd just offer a few important tips that I wish I had known prior to beginning this arduous process.

Plan to save enough to put 20% down. I think you may have a hard time getting financing on a DIY job, but you may want to consider hiring a builder to lay the foundation, frame it and get it under roof and then take it from there. Shop around some new construction lenders and ask. If you decide to build here are some things to keep in mind.

First, I would have much more heavily scrutinized the builders allowances for the various categories. ie. electrical, plumbing, flooring, cabinets and countertops, etc. Since this was our first built home, we had absolutely no idea how much materials cost or what the labor costs would be. Do a ton of research on the costs of various items (cabinetry, counter tops, flooring, light fixtures and plumbing fixtures are all big ticket items). Talk to subcontractors and find out generally how much it would cost for example to install the kitchen cabinets that you like in an estimated size kitchen. Look at the features, brands and models of items that your builder wants to put in your house. Is the grade he is offering satisfactory to you? If so, great. If not, it will cost you to upgrade. I say figure that out up front, negotiate the allowances upward and get the upgrades in the original contract/mortgage. Trust me-It will be less aggravating in the long run. Go online and price items to keep him in check. Of course, he is going to take a little cut on top of everything. He is in business to make a profit. Your job is to make sure it is not an unreasonable profit. You may find like me and I'm sure many others, that builders will try to get away with offering very skimpy allowances knowing full well that you will never be able to build what you want for that amount. They are absolutely counting on you going over in almost every category where custom homes are concerned. The allowances I got would have only allowed me to put very basic amenities (Builder grade stuff) in a very expensive large custom home. Unless you prepare and plan ahead, I would say it is probably that you will go over AT LEAST10-15% of the contract price in overages (both change orders and unforseen overages.)

My excavation allowance went over $4000 because we had a rainy month and it was muddier than usual.

My electrical allowance went over $3000 because we had to increase the number of recessed lights and electrical outlets in the house because in our opinion, the builder only put in the bare minimum to satisfy code. No dimmers were in the allowance so tack on $20 bucks for every dimmer switch we added. The list goes on and on.

We went over our initial contract price by 15% and that was with a good bit of pre-planning. I only wish I had done more. Keep in mind that this overage money has to come out of your pocket on a monthly basis while the build is progressing. You must keep a hefty chunk of change in the bank because much of it is inevitable if you want the house of your dreams. If you negotiate all of the features and amenities you want up front, you can minimize the damage after breaking ground.

Also, Let the builder know that you are on top of things by visiting the site often ( I stopped by almost every day). If you stay heavily involved in the process, there will be less mistakes, less delays, and less chance you will get taken for a ride. Communicate with your builder! As far as the DIY angle...Some builders (mine included) don't mind if you do some of the work yourself. Others won't allow it until they are done with the contract. I built my own deck while construction was ongoing and saved myself over ten grand.
Good luck with your future build. It is smart that you are planning ahead. Sorry for the long diatribe but I got on a roll and couldn't stop :)

    Bookmark   May 8, 2013 at 10:59AM
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Sophie Wheeler

Don't count on any bank to be at all DIY friendly. If they are, they will probably want a high % down, like 40%. That's in addition to the 20% contingency that you need to have in reserve to take care of overages. So, unless you have 60% of the estimated cost of your home sitting in the bank, don't even think about a loan with DIY involvement.

    Bookmark   May 8, 2013 at 1:26PM
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Just talked to a local bank this week and they told me that they had no problem with owner/builders, required 20% down for all construction loans (land counts towards this in equity). Even mentioned something about DIY labor up to 5% of something. So it's something they were familiar with.

We're not planning a full DIY, but we will be GC'ing it ourselves and doing some of the work (hardwood flooring, cabinet build/install).

I spoke to a few banks last spring when we were planning on buying our land and they also assured me that owner/builder was ok.

    Bookmark   May 8, 2013 at 11:17PM
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Holly, where DO you get all your scary statistics? lol.

Our bank allows 10% DIY. No rate hike. Nothing crazy. DH is painting, installing hardwoods and installing kitchen cabinets and doing some tile. It is saving us a ton.

Just FYI but I know a few people who have done some DIY on their build and none of them had 60% of their cost just lying around in the bank. If that was the requirement, Holly, hardly anyone at all would be able to build a home.

I do like you though Holly (even though I think you are man?), you're a complete and total curmudgeon and it gives me a chuckle every time I read your posts. NO ONE BUILD EVER! YOU ARE ALL COMPLETE IDIOTS! lol.

    Bookmark   May 8, 2013 at 11:36PM
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There are a lot of OB (owner builders) here on the forum and I've learned a lot reading posts and reaching out.

In my area there were five banks that would do a construction loan: 2 required me have a GC on staff, 1 required I deposit the 20% cash with them for the down payment, 1 required the 20% cash but would refund if I came in under 20% of the budget meaning retroactive credit for sweat equity, and 1 bank allows for OB with no strings so I went with them.

I'm getting ready to break ground this month and have posting my escapades over on my blog listed below. Our bank requires 20% down but 15% can be from sweat equity which means only 5% cash.

However, I had to do ALOT of planning and work to put together accurate numbers for the estimated budget and very detail description of materials. The bank needed it but more so for the appraiser to give them as much information as possible to help justify the build price.

We are doing a lot of the work ourselves and negotiating big time for discounts as we are the GC. Some places will give discounts, others wont unless you have a contractors license. For example, I got Lowes to bundle roofing, flooring, and stone veneer that was as cheap as contractor only pricing ... and I was able to use credit card for rebates.

Cash is king. I'm paying cash for the trades I'm not doing and then submitting for reimbursement from the bank against the construction loan. That way I save thousands and the bank only needs a receipt (they also will inspect the house when I submit for large $$ - foundation, framing, appliances...)

Good luck and do your homework :-)

Here is a link that might be useful: Lot59 Blog

    Bookmark   May 10, 2013 at 1:16AM
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@buzzyng -- are you OBing on your own, or with the assistance of a "help you build" type of company?

PS -- Thanks for the blog link! I enjoyed reading it!

    Bookmark   May 11, 2013 at 3:59PM
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@carsonheim - Glad you enjoy as I'm just trying to give back from all that I have learned from others. I"m updating tonight as I have lots of catch up to do.

I am an OB. I talked with several 'help you build' companies and it wasn't worth my time/money. I am able to get as good of deals with materials/subs as going through one of those places. I am going to pay a builder that built my current house an hourly rate to come out as a construction consultant to spot check during the process. Those 'companies' do work for people but I am a research nut and would rather spend my time learning than paying.

Here is a link that might be useful: Lot59 Blog

This post was edited by buzzyng on Mon, May 13, 13 at 11:15

    Bookmark   May 13, 2013 at 2:08AM
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Thanks so much for all the input. Very glad to hear that it is possible if you find the right lender. I guess I should have also included our location, we would be building in Western Pennsylvania, about an hour north of Pittsburgh.

Would it be better to have 20% cash for down payment or the land paid off as equity..or both?

We would definitely have a builder for the foundation and framing, probably plumbing and I absolutely do not want to do the drywall ourselves. Most of the things I would want to do are: hardwood floors, tile or vinyl, trim, install appliances and cabinets, deck/porch, paint...IF possible we would also want to do the siding, roofing (pitch has to be 6/12 or less) and electrical.Yes, we have experience with these.

Signal13- We would most likely either be living at the site (ideally find land with small house or put a cheap trailer on it temporarily) or with family nearby while building so I would definitely be there everyday.

Buzzyng- Love your blog! And hope you don't mind my asking but is the bank you went with a local bank or national chain?

    Bookmark   May 14, 2013 at 12:19PM
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@K_Smith3 - sorry for delayed response. Didn't notice you had asked a question.

Local bank as none of the big banks would touch us ... even though we had 800+ credit, no debt.

I hope you have been able to make progress as we are finally humming along

Here is a link that might be useful: Our Building Blog

    Bookmark   July 25, 2013 at 4:50PM
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