When someone decides to build their home, they unknowingly volunteer to traverse foreign waters.
Let’s discuss some details that would best prepare someone who is considering beginning the construction of their dream home.
It’s not an understatement to claim that building a home requires financial savvy, means, and flexibility. Given this fact, it’s probably wise to start with the most critical point of new construction: the price of entry.
“This neighborhood must be a party because I can hear sirens every night…”
Many resources in this world are finite, or limited, and space to build is no different. We’ve seen a great increase in demand for land, which has driven up the price considerably in the last couple of years, but it may still be one of the most important decisions you make when choosing to build.
Be aware that discounted lots may not be located in desirable parts of town or may require a further commute from work and/or school than you’d prefer. Take a few test drives to and from work/school to your prospective lot before writing a check. In addition, when looking “out of town,” research the cost to bring power, water, and sewer to a property that is undeveloped.
MATERIAL & LABOR
“No, sir, we cannot build with Legos instead. That would not be cheaper.”
It shouldn’t be a surprise that COVID-19 has impacted the cost and availability of both materials and access to skilled laborers. In broad strokes, when the lockdown mandates came around, production of materials nearly evaporated, resulting in a dramatic spike in material prices such as lumber. Thankfully, we’re beginning to see a light at the end of the tunnel with prices hitting their peak in Q2 of 2021 and the expectation that they will continue to drop as the markets stabilize.
Unfortunately, the accessibility to talented sub-contractors has created a bottleneck in project speed that translates to a higher cost of doing business. Due to the nature of the industry, you may find some cost savings from choosing experienced builders as they have laborers on-call for projects like yours.
“What’s this going to cost me, really?”
Let’s not forget the overall cost of NOT having hundreds of thousands of dollars laying around. More often than not, we don’t know what we don’t know, so be sure to ask as many questions as you’d like. When you speak with a construction lender you will be provided with a breakdown of third-party expenses as well as a “cost to borrow” or origination fee.
Third-party fees consist of the cost to record with the title company (providing legal protection), the appraisal (to ensure your home is worth the money you are putting into it), and other small expenses for items like flood certifications and credit reports. Ultimately, you can expect to pay a few thousand dollars in administrative fees. Note that these fees are generally based on the construction plan, not the lender or borrower.
The financing bank will also want to ensure they’re compensated for providing the funds for a new build. Bear in mind, a construction loan poses greater risk for a financial institution than most other transactions, so you can expect to pay 1-2% of the loan amount for origination.
For example, if your total build will cost $400,000 but you’re only borrowing $300,000, the origination fee will be $3000-$6000 depending on the bank’s available terms.
Aside from the cost of building, it must also be the right time to build. Let’s focus on expectations. It could take weeks to find the right land and a great local builder, and another month to nail down the budget with plans/specifications—but life doesn’t stop and wait for you.
“The bank said I’m ‘a sure thing’!”
Before you start swinging a hammer, you’ll want to have your ducks in a row. Much like a home, you’ll want to start with a strong foundation. First, meet with a construction lender to review your financials and receive information on the lending options that are available to you. In addition to providing you with an idea of how much home you can afford, a pre-approval letter is essentially required to close a real estate purchase due to high demand and deflated inventory; the competition of buyers is stiff. A good lender should be able to analyze your financial picture and return a verdict for going forward swiftly (barring any idiosyncrasies, such as owning multiple businesses or inheriting millions from a Nigerian prince).
“How long could it take to throw some nails into lumber?”
A common misconception with residential construction is that a home can be nailed together over a weekend (as seen on HGTV). There isn’t an expedited method for constructing a home that doesn’t put you or your builder in jeopardy, so patience is key when undertaking a project of this scope. You wouldn’t want to find out that your builder valued time over accuracy on your new porch, would you? With that being said, the build time can vary from four to 12 months based on the scale of the build and the experience of the builder.
3. Build Options
Opting to build a custom home is similar to taking home a puppy. The idea is magical, but decisions made under pressure can result in long-term regrets.
PURCHASING SPECS ONLINE
“This floor plan doesn’t include the trees.”
We live in a time where you can access hundreds of new home plans online, which can pose either a great opportunity or a detrimental pitfall for a lot of families. This is no different than having 300 TV channels and “nothing to watch”—you can get lost in a sea of plans, material lists, and styles. Something to consider when viewing plans online is that the end result may not be the picture you see online. The sun may not always be setting behind the wheat field next to the home. Instead, the giant bay windows could be flooded by streetlights, or in the event your floor plan is larger than you anticipated, your family room could be staring right into the neighbor’s kitchen. On the plus side, due to the growing number of available options, you may be able to find a great plan with minimal cost compared to contracting a professional.
“We reviewed the requests you made and moved that wall 2 ½ inches to accommodate your trophy bass.”
Thankfully, there is an option for those of us who cannot scroll for days online reviewing plans: hiring a professional home designer to listen to your ideas and create a fully customized project. Delegating these types of tasks to a talented individual can yield an end result that is better than you ever imagined. In addition to this, you’ll have the ability to swap out materials such as windows and trim kits as you see fit. This produces a truly customized home—but not without a truly remarkable cost. Depending on location, you can expect to pay anywhere from $1000 to $10,000 for this service, and any modifications will run you an hourly rate. You very much get what you pay for.
4. Builder’s Experience
The person you put in charge of your build should not only have the tools, but also the experience to complete the project on time and within budget.
MATCH BUILDERS TO THE QUALITY OF THE HOME
“I excel at fence repair, how different can home construction be?”
Even before COVID created further obstacles, residential construction has always been a difficult industry to navigate. It’s wise to interview a few qualified builders to ensure the home you envision matches the projects they’ve successfully completed in the past. The build is contingent on the receipt of your loan proceeds, and it’s not in anyone’s interest to run out of funding three-quarters of the way through the project. So, choose wisely and don’t be afraid to get a second opinion.
EXPERIENCE SAVES TIME AND MONEY
“My brother-in-law built a shed once, can’t I just hire him?”
With experience comes benefits. A skilled builder can not only knock out a project quickly, but they can effectively manage resources, materials, and labor to produce a more accurate budget.
BUDGET AND CONTRACTS
“When the money is gone, so are the workers.”
All this hard work and research is for nothing if the builder and client can’t agree on a budget. When deciding on a builder, the bottom line isn’t the final word. You’ll want to dissect the budget and the builder’s contract to avoid being greeted with a scary phone call on month four. A lender will be able to analyze a budget with you to ensure there aren’t glaring omissions; however, I encourage you to read each line when it comes to the building contract. Terms to keep in mind are “fixed-price contract” and “cost-plus contract.” Even when reading “fixed price,” you’ll want to keep an eye out for any allowances that would allow the cost of a line item to increase. As you can imagine, “cost-plus” simply means that this is an estimate and the experience of the builder will truly be paramount to come out under budget.
5. Choosing A Financial Institution
Here at Community First Bank, we offer financing for the land, construction, and even the mortgage, but not all institutions are alike. Let’s review.
COMPARING RATES AND TERMS
“Be sure to review apples to apples and ask every question that comes to mind!”
There is a lot to review when it comes to construction, but you also want to get a good deal. Some key terms to review with your lender, aside from the aforementioned origination fee, are “interest rate” and “repayment schedule.”
The interest rate during construction will generally be fixed at a rate higher than your mortgage, but the loan has historically been considered “cheap money” in the short term.
Your repayment schedule will determine what the bank will require of you while your home is under construction. For example, a bank may ask for interest-only payments during the construction process. These payments are considerably smaller than a traditional mortgage payment, allowing you to save funds as a contingency for overages.
CASH REQUIRED TO CLOSE
“This build will require blood, sweat, and tears…but not from you.”
The down payment is the amount of cash you need to provide to the bank prior to the start of your project. This requirement can range from 10-25% of the loan amount, but you can commit further funds to lower your overall mortgage at the end of the build.
RELATED PARTIES’ COOPERATION
“Teamwork. Is. Required.”
Your relationship with the builder and lender is vital to a smooth transaction. An open line of communication will ensure your concerns, along with any changes in the project, are properly addressed before they have time to cause financial harm. For example, if the builder believes they can proceed with a step of the build but a previous request for funds has not been completed by the lender, you’ll end up with a standstill on your home that could add days, if not weeks, to the total construction. Repeat this occurrence multiple times over a six-month period and you’re living in an RV for far too long.
I hope this provides some insight into the process of home construction and bolsters your confidence when you start down this road. It’s an amazing experience to watch your home grow in front of you and ultimately receive the keys to a home that YOU designed.
RICK PULLEN, NMLS# 730843
Construction and Consumer Banker, Community First Bank
All bank products are offered through Community First Bank.
Community First Bank NMLS# 409021.
HFG Trust, LLC. is a wholly-owned subsidiary of Community First Bank. Not FDIC Insured. Not Bank Guaranteed. May Lose Value.