Surprise costs of custom-built homes

REThink Real Estate

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Nov. 15, 2012

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REThink Real Estate

Tara-Nicholle Nelson
Inman News®

Q: My fiancé and I reside in Georgia. He's been in Afghanistan since January and is due to return in 2013. We are looking to purchase our first home once he returns.

I'm making sure I get my credit report in order and educating myself about the process in the meantime. The area we live in really doesn't have many new homes, so we are really leaning toward building our own. Can you suggest some resources and things I need to know before deciding to build our dream home?

A: Congratulations on all the momentous life milestones you're about to experience. You're wise to get prepared as far in advance as possible and to do some serious research before you proceed down the path of trying to build a custom home.

I'm going to make some assumptions here, including the assumption that what you're actually contemplating is hiring a contractor to build a custom home for you rather than simply buying a newly built home in a developer's subdivision.

Personally, I like old and older homes; I like to live in neighborhoods that are more established, and I like the idea that any glitches or flaws in the home will certainly have made themselves known before the time I move in. No home is perfect, but with new homes, the home and the neighborhood often have to settle for a year (or a few) before any problems start to surface.

But to be clear, this is largely a matter of personal preference. There are many advantages to buying new, as well.

Understanding the financial and logistical hurdles

When you buy a resale home or even a new home in a subdivision, you're generally able to do the basic work of getting your credit and down payment ready, conducting a house hunt, and closing a single mortgage and purchase transaction in one fell swoop.

When you decide to build a new home, you have much more work ahead. You may need to find a lot that is suitable for building the sort of home you like and buy it. You may have to bring utilities to the lot and obtain permits to build on it. You will need to select architects, engineers and contractors to do the work. Finally, you'll need to have plans drawn up and undergo the building process and all that entails.

You might have to come up with cash out of pocket for the lot, as very few (if any) lenders will lend money to borrowers for a bare lot. Then, unless you have the cash to pay for the build out of pocket, you'll have to obtain a construction loan, which is a separate transaction that requires the lender to sign off on the plans, and often involves a much larger down payment requirement than a traditional home loan.

Construction loans also require the lender to sign off on your building plans and choice of builder upfront, and to be involved in approving and doling out funds for construction throughout the process. You'll have to obtain construction insurance, and be prepared to deal with your city building inspectors every step of the way.

I don't mean to paint an overly negative picture of the work involved with building a custom house from the ground up, just a realistic one. It requires much more time, work, and energy than buying an existing home or a new home in a subdivision, and some would say it's also more risky.

And that's a lot for a first-time homeowner to take on.

I would encourage you to ask other folks in your area on Trulia Voices about their experience in building a brand-new home to get a full picture of what the experience is like, warts and all. I also strongly recommend you read the classic book "Building Your Home: An Insider's Guide, Second Edition" by Carol Smith (Builder Books, 2005) to get a better sense for the complexities involved.

Get clear on if and why you'd rather buy new

Often, people simply like the idea of living in a home that no one else has ever lived in before, or the idea of creating a home layout, design, etc., from scratch, to their personal tastes and needs.

What I've found, though, is that the average layperson is less skilled at coming up with good ideas for a home's design than all the architects, builders, developers and designers who have worked on homes over the years.

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