As a portfolio lender, we've been one of the Northwest's custom home financing leaders for many years. Since the loans we make stay on our books, we're able to make our lending decisions based on common sense principles – not just guidelines put forth by Fannie May or Freddie Mac.
Because building a house from the ground up can involve more logistics than purchasing a “turnkey” style home, there can be more room for confusion. Let's clear things up! Here are a few frequently asked questions we get about the custom building process.
Building a house is more expensive than buying one.
This is a tricky question to answer, but in general, yes, it is cheaper to buy a house than purchase land and build one from scratch. Caveat: This will vary greatly depending on a variety of factors, including a buyer's flexibility with location, renovations they'd like to make on a pre-built house, and how long the buyer's planning on staying in either home.
Building a house gives a lesser return on investment than buying a house.
Not always the case! This also varies depending on a variety of factors, so it's difficult to do a true apples-to-apples comparison. There are lots of aspects to consider, but here are a few.
How “standard” are the features and layout of the home you're thinking about building? If you're planning on building a home on acreage and including a more obscure structure, like a standalone garage with RV parking, then odds are that you may not recoup your investment. Or if you work from home and build a large office space, or have a large swimming pool in the backyard. In general, any expensive feature or additional structures that makes your home and property more “niche” can limit the number of prospective buyers when it comes time to resale, which may result in you needing to lower your future asking price.
Another factor that will play a big part on your return on investment is the length of time you're planning on staying in the house. Appliances and modern home design, architecture, and materials are continuing to grow more and more energy efficient, which can play a BIG role in your overall heating, utility and energy bills. When you build a house, you'll pick out the appliances yourself. So if you're planning on staying in your custom built home for 10, 15 or 20 years, you could save a substantial amount by “going green.” (Bonus: some states offer rebates or tax incentives for environmentally friendly features, like solar panels. Consider checking with a green builder in your area for more details.)
I'll always save money if I do most of the work myself.
No. This line of thinking can be dangerous to your body, mind AND wallet. If you have time that you can allot to aspects of building a home, and you're familiar with the type of work, then by all means – pick up a hammer or paintbrush. But remember – time is money, and unfortunately the more a job costs a professional to do, the more of your time it's likely to take. Before you start tackling any aspects of building a home, put in some research.
HomeAdvisor's TrueCost Guide is a great resource that can help you quickly get a general idea as to how much a professional would charge for a job in your zip code. For example, how much would installing new countertops cost in your neighborhood?
If you're unsure as to whether you can tackle a project, opt for the professional route. In general, you'll spend more money hiring someone to fix any damage done by DIY-ing than you would have spent if you had paid someone from the start.
A good professional will also come with an understanding of building codes and requirements, knowledge that most amateur home builders would need to put in research hours to obtain. Another bonus of hiring someone – a general contractor will often provide warranties on the products and work he completes, either personally or through subcontractors. For example, if a toilet that a contractor installed doesn't work, most contractors would cover the cost for the repairs or reinstallation. The Wall Street Journal has an excellent article about topic in their news archives.
Paying a contractor a hefty down payment in advance is standard industry practice.
As you might expect, most contractors will ask for a down payment up front to secure your spot on their schedule or purchase materials for your job in advance. Depending on the job, subsequent payments are generally tied to job progress. However, asking for a large down payment is a big red flag. Down payment amounts and percentages will vary by contractor and job, but in general, look closely at down payments over 20-25% of the contract price.
To help protect consumers, many states have issued guidance, or even enacted laws surrounding this matter. Maryland's Home Improvement Commission states that homebuilders should “pay no more than one-third of the contract price as down payment.” California law states that home improvement down payments cannot exceed $1,000 or 10% of the contract price. Your local consumer agency or the agency that issues contracts' licenses can provide applicable limits in your state.
Down payment percentages are often negotiable. If you're feeling unsure, ask your contractor for more details and see if they'd be willing to establish payment schedules as certain milestones. Most importantly, before you hire a contractor, do your research. Read Forbes' How To Hire A General Contractor: Checklist And Tips for more insight.
Whether you're planning on building or buying (or are still undecided!), we'd love to talk to you about how we may be able to help. Contact your neighborhood loan officer today.