have one perspective on the process, and architects may have a completely different one. Do your homework and interview as many people as you can who have been involved in the process. By talking to professionals and consumers and asking them to share their experiences, you can begin to get a clearer picture of the process ahead.
Money Makes the World Go Round: Paying for Your Home
We talk a lot about money in this book, and with good reason. Custom homes require plenty of it. Your new home will probably be the most expensive item you’ve ever purchased. In fact, it may be the most expensive item you’ll ever buy in your entire life. Custom homes cost more than production or tract homes because the materials aren’t bought in quantities and the labor hired includes individual craftspeople. The results are worth it, however, and will last lifetimes.
Many people find it a challenge to get past the large checks they’re writing. If you decide to use an architect, even the first check to the architect will probably exceed the biggest check you’ve ever written. The key to success with money in a custom-home project is putting it in the right perspective. If your budget is $500,000, then what each piece costs isn’t important as long as all the pieces combined total $500,000 or less.
Asking yourself about affordability
Of course, you’ve heard horror stories about custom-home projects that have gone seriously over budget. They go over budget for many reasons, but usually the main culprit is that the homeowners didn’t spend enough time determining what they can afford. Obviously, if you’re building well below your means, going over budget is easily rectified by using your own cash. But running out of money is the number-one cause of custom-home disasters. Before you start the custom-home process, you seriously need to consider the following:
What can you physically pay? Take stock of your cash on hand, equity in real estate, and available cash from other resources. Make a firm decision on how much money you’re willing to put toward the project. Chapter 8 can be a big help. You also need to get a rough idea of how much borrowing power you have to help establish a limit for your budget when added to your available cash. Make sure you consult with a financial adviser. We provide tools and Kevin’s expert financing assessments in Chapters 9 and 10.
What can you emotionally pay? Just because you have the money and the borrowing power doesn’t mean you really want to spend it all. Think carefully and discuss with your spouse what your limits are for making payments and how much liquidity (cash) you need in the bank to help you sleep at night when all is said and done. Make sure you take into account tax deductions and interest earned on investments when analyzing your monthly cash flow. After you’ve found your emotional limit, you can design your project to fit your comfort zone.
What’s your cushion and tolerance for risk? As we say again and again throughout this book, building a custom home is a complex process. You need to consider many variables beyond your control and then realize that the project can go over budget even if you do everything right. You can certainly get good solid estimates, but ultimately you won’t know what this home will cost until it’s finished and you total up the receipts. Make sure you’ve addressed the “what if?” issues thoroughly. Talk about how you’ll cover things financially if the market turns sour — devaluing your property — or the cost of materials rise. Decide what safety money (such as your retirement fund) you’re willing or unwilling to tap into.
Them that has the gold makes the rules: If you finance, the bank will dictate process
Most people don’t have all the money for a custom home sitting in their bank accounts. Even if they did, putting it all into the project wouldn’t be a good idea, as we explain in Chapter 8. Like it or not, you’ll probably have a financial partner in this project in the form of a construction lender or bank. The good news is, construction lenders have the same objectives you do:
They want to make loans for custom-home projects. (That’s how they make money.)
They want the house to be completed on time.
They want the house to be completed on budget.
They want the house to be completed in a workmanlike manner.
Furthermore, the following tidbits can save you some arguments and frustrations when working with construction lenders:
They don’t believe a house is worth exactly what it costs.
A larger loan makes you a riskier borrower, not a better customer.
You aren’t entitled to any loan.
They aren’t required by law to loan you any money.
They dictate how the money is handled throughout the process.
Accept the fact that if you want to use a lender’s money, you have to play by their rules. Most of these rules weren’t made arbitrarily. They’re designed to protect the financial viability of the project and protect the lender in the unlikely event of a foreclosure, which is the act of taking back the home in case you default on the payments or the construction contract. The banks don’t want to foreclose on your home — they’re not in the house-selling business. Worst of all, they don’t want to foreclose on an unfinished construction project, when the property is neither an empty lot nor a finished home, but something in the dreaded middle. The guidelines and procedures are based upon statistical and anecdotal problems and failures that occurred with the lender in the past. Unfortunately, sometimes you pay for the sins of those who’ve gone before you.
