Take 2 years to build?

phil17September 16, 2012

We are going the owner-builder route for a new house, and are planning to do a certain amount of the work ourselves. Sure, there are some cost-saving factors, but it is as much about the pride, satisfaction, and enjoyment we get from being materially involved. (We have done extensive renovations on our current house ourselves.)

Due to jobs and kids - and because we are not in any hurry - our plan has been to complete the build in 2 years. The problem is that this doesn't seem to work with construction loans. I have talked with a number of banks/credit unions, and they all say they want the project done in 6-8 months, but will extend the loan up to a year if absolutely necessary. None of them are willing to do 2 years.

Surely others have been down this road before - how do you finance a construction project that takes more than a year?


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I can't answer your question about mortgages, but another thing to check is insurance. It turns out that it is hard to get insurance for an owner-builder, depending upon how they look at your role in the build. Customarily, it is the contractor's responsibility to provide insurance. I'm building my own house, and we were able to get insurance, but- Guess what? They will only insure you for a year!

    Bookmark   September 16, 2012 at 6:15AM
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I think a lot of OB's with significant DIY work are cash based. I don't work at a bank but the concept seems like a high risk loan - what if you got sick at 18 months and the house sat there 1/2 done? What would you be able to sell it for at that point? Not much...

    Bookmark   September 16, 2012 at 7:20AM
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Thanks for the heads up on insurance, @flgargoyle! I'll have to check that out. I did check on permits - in my area they are good for 3 years.

David - yeah, I understand the risk aspect. We're actually in pretty good financial condition, though. We could put 30-40% down and still have a cash cushion. (Or alternately, get solidly into the construction before starting to take draws.) In the scenario, if we got halfway into construction and something bad happened, the land by itself would still be worth more than what the bank had lent out. But hey, I don't make the rules. :-)

Also worth noting that we could definitely afford to hire out all the work. This just ruins the fun of it for us.

Are there any alternate ways to finance a build that I may have overlooked? (Aside from a rich uncle, that is.)

    Bookmark   September 16, 2012 at 12:15PM
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A private lender may be able to accommodate your desire to stretch out the construction period. However, the higher-than-bank rates will cut into the savings you're planning with diy.

    Bookmark   September 16, 2012 at 1:15PM
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All you need is cash. 100% cash. And a VERY understanding municipality and insurance company.

Owner builders find it extremely difficult to find financing in the first place, and you want to stretch the timeline out even beyond a typical extended owner build timeline. That puts you in the highest risk category, as most DIYers overestimate their skills and underestimate the costs and timeline to begin with.

From their viewpoint, land with a half finished house on it is actually worth less than one that hasn't had any construction begin on it. A half finished house is an attractive nuisance to the neighborhood kids and a big risk for some type of injury to occur on the property. And, by the time the bank gets around to actually doing something with the project, it will more likely need demolishing than it would need finishing as it would have sat so long. That is NOT a risk even a private lender would be willing to take unless his nickname is Knuckles and you pay an exorbitant vig every week.

    Bookmark   September 16, 2012 at 1:53PM
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Permits also expire and they may require you to be a licensed contractor with the state in order to build.

    Bookmark   September 16, 2012 at 6:24PM
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We also did a great deal of work ourselves on our build. We were able to get a construction loan from a local bank that had a longstanding relationship with our family. The original period for our construction loan was 1 year, however they did give us two six month extensions and we ended up converting to a perm. mortgage in just under 2 years.

While we didn't need any draws during the end of the process to finish all of the trim/finishing work, the mortgage couldn't be converted to a conventional loan until everything was complete for the appraiser and underwriters. All door, window and baseboard trim needed to be complete and installed, all bathrooms needed to be complete, even though if it were our choice, we wouldn't have finished all of them (not needed) immediately. The appraiser was required to take photos of all of the rooms to prove that they were substantially complete for the underwriter. While our construction loan was with a small local bank, the perm. mortgage was immediately sold off to US Bank and the local bank needed it complete enough to pass underwriting standards.

Some things that I wanted done immediately such as mudroom lockers, built ins around the fireplace and other optional things had to wait and be put it in a different priority order in order to close out our loan. We will now finish those built ins on our own schedule.

As a side note, my husband also had to take a test and become a licensed electrician in order to do a lot of the work on our home due to our state (Iowa) laws. He also has a PhD and will probably never use the electrical license again, but it was one of the hoops we had to jump through!

Basically in order to make a diy build work, I think you need to find a local bank that is willing to take the construction loan on, keep it in house, and work with you. Good luck!

    Bookmark   September 16, 2012 at 10:30PM
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Thanks for sharing your experience westiegirl!

    Bookmark   September 17, 2012 at 3:09AM
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I think it varies greatly depending on your relationship with your bank and perhaps insurance company. My parents were GCs on their own house, doing quite a bit themselves. It was a leisurely that ran into some delays, and took almost 3 years. They paid a boatload in interest, insurance, and property taxes, so keep that in mind (the assessed value, at least here, increases greatly not long after the build begins). But my parents have a long history with the bank and insurance company, and I wonder how frequently this arrangement is possible.

A general note about being one's own GC: I looked into it intensely for the past year, and I've come to the conclusion that for most people, it is not worth it. Consider instead finding a GC who is patient and willing to let you be extremely involved. Then you can have real ownership over every decision, you can do lots of the work yourselves, but you can have an expert to recommend what type of I-joists for the floors, what type of framing for the roofs, what type and brand of insulation, what local subs to use, etc etc etc. My parents, in their build, constantly turned to a GC they knew, and had they not, I think their build would have been much, much more of a headache. Depending upon your arrangement, a GC knowing a couple of less expensive subs and having decent discounts with suppliers can nearly pay for his fee, and having a GC can get it done within the year that banks are looking for.

We are working with a GC, but I designed my house (with help from folks on here) from scratch, made almost all the decisions myself, and will do a decent amount of the work myself. I think I'll have plenty of pride and satisfaction in this build. Just a thought!

    Bookmark   September 17, 2012 at 9:37AM
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I have talked with a number of banks/credit unions, and they all say they want the project done in 6-8 months, but will extend the loan up to a year if absolutely necessary.

That's very generous for a diy build.

Despite a long history of doing renovations as a licenced renovator, when I built my first home the second tier lender insisted I employ an experienced homebuilder as manager. As a licenced builder--one or two homes at a time--I still build with cash. Once the house is complete, the bank is happy to lend you money!

    Bookmark   September 17, 2012 at 1:15PM
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DIY and the bank deadline looming will be extremely stressful. I would only attempt DIY home building with cash.

    Bookmark   September 17, 2012 at 2:28PM
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Construction loans carry a much higher interest rate than conventional mortgages so it is always better to build your house as quickly as reasonably possible. Any savings in DIY will be eaten up by the interest expense in carrying the loan. I did all the staining, painting, and clean-up on the job, but it didn't slow down the timeline. Of course, I was at the site at daybreak and continued until sunset. Still, our house was complete within six months. I'd go with the pros and leave any DIY for smaller projects. Just my opinion, but then, maybe I am worn out from all that job site cleaning and painting!

    Bookmark   September 17, 2012 at 10:40PM
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