What you need to know before building a home

What you need to know before building a home

This custom home in McLean features high quality finishes. (Ricky Carioti / THE WASHINGTON POST)

The construction of a customs house is often the misunderstood segment of housing search. In other words, a high percentage of potential home buyers begin to think that they want to build an individual home, but then buy an already built home or work directly with a contractor to change a home to change.

The reason for the confusion is that most potential home buyers have the basic sequencing wrong. They believe that they will be able to find and buy a perfect piece of land, then hire an architect to design their dream home, then bring the architect's plans to a handful of builders eagerly declaring the project, and then choose the builder with the lowest bid. The reality is that the order is usually reversed. That is, a home buyer selects a builder at the end, and then they identify the property and build the house. The process is usually faster, smoother, and cheaper for the buyer. Here is the reason:

Let's start by identifying a quantity that you want to buy. To achieve this, it is important to understand the market for builders / new building materials. In our local real estate market (DMV), you've probably noticed a lot of new buildings. While the construction is in part "custom" projects, where a real estate owner hired an architect and a builder to build a house on his property, the vast majority of these projects are "spec" houses. A special house is a house where a builder / developer buys a lot and then designs and builds a new home based on "speculation" that he can sell to a consumer.

If the real estate markets are strong (as they are now), you will see increased home activity. Builders and developers are investing enormous amounts of energy and resources to identify the best properties to build a home. When they find a potential lot, they are ready to quickly create a clean, cash written offer with limited contingencies and closing conditions tailored to the needs of the vendor (short or long term, rent, etc.). They try to make it easier for the seller to accept his offer. There is a saying among builders that they earn their money by buying lots (as opposed to the final sale of the finished house). The better the lot, the lower the risk for the client. If the plot is good enough (and the builder has a good reputation), the builder may pre-order the new house before construction.

How does a client identify and calculate the lots he wants to buy? Everything starts with the selling price. The sale price is the price at which a contractor expects to sell a new home on this property. From the sale price, the builder lifts the hard and soft costs of the construction / sale and the profit margin that they want to achieve. (Hard costs are the direct costs of physical erection, soft costs are the "unincorporated" costs, which include book costs, architectural fees, permit fees, engineering fees, real estate commissions, etc.) What is left is how much builder can do for that Pay.

If a neighborhood does not have new buildings, there is a higher risk for the builder, as there is no precedent for the selling price. On the other hand, if a quarter have several newly built homes that have been sold in recent years, there is a lower risk for a construction company, as they have supporting data with relevant, comparable sales. The more new homes are sold in a neighborhood, the more this neighborhood is "turned around" and the less risky this neighborhood is for a contractor.

Suppose that a quarter of 200 homes originally built in the 1960s and 1970s have achieved a dozen house sales of $ 1.6 to $ 1.8 million in recent years, with an average closing price of 1.7 Millions of dollars. House sales of $ 1.6 million appeared to be lower as it was one of the first homes to be turned on a busier street. The sale of $ 1.8 million was younger, but on a relatively larger property and a relatively larger house.

A specialist looking at this information can assume that the selling price is $ 1.7 million. The contractor could also assume that the cost of building this house will be $ 600,000 and the soft cost will be $ 200,000. The builder may want to make a profit of $ 200,000. With this bill, the builder could pay $ 700,000 for the lot. (Note: Our market has become so competitive among builders that the days of simple "1 / 3-1 / 3-1 / 3 rule" are over.) Under the 1 / 3-1 / 3-1 / 3- Usually the math was 1/3 for the construction cost (hard and soft), 1/3 for the lot and 1/3 for the profit.)

Okay, what does that mean for the buyer who wants to find his own property to build his dream home? This means that they have to compete with the builders to find a lot and write a competitive bid. The buyer faces a tough fight for several reasons.

First, buyers are at a disadvantage as it can be very difficult to find land with construction potential. The builders have often spent years writing letters, knocking and talking to potential sellers of lots. They aggressively seek to find and detain opportunities before they are open to the public. Builders kiss many frogs to find lots of interest to them.

A second drawback is that shoppers do not usually have the skills and resources to evaluate the potential of a lot and therefore move too slowly. When there's an opportunity to buy a lot, builders have a team of architects, engineers, estate agents, and staff doing the required due diligence. Buyers, on the other hand, often start putting their team together when the opportunity presents itself. In order to protect themselves, shoppers often require relatively long "learning times" in their purchase agreement so that they can put together their team and perform due diligence. Sellers of real estate usually do not want the risk of a long study time.

Buyers are rightly careful when they write an offer to buy a lot. Not all lots are the same and there can be hidden problems or challenges. Examples are setbacks (which determine how far from the property line can be built), storm reliefs, topography, soil quality, title problems, and the lack of public water and / or sewer connections. Some of these problems and challenges can cause additional costs or delays and prevent the construction altogether. For a buyer unfamiliar with these issues, it may take 30 days (or more) to assemble a team and get to a point where they can safely remove all eventualities and proceed with the purchase. An over 30-day downtime is an eternity in the highly competitive real estate world. An accomplished builder can often complete his due diligence within seven days or less.

Another downside to a buyer is what we affectionately call a "lack of vision." Honestly, it is difficult for a typical buyer to look at a lot (whether free or with a demolition home) and realize the potential. For example, most buyers are looking for a property that is completely flat. Some of the best plots in our opinion have a slight slope to the front of the house and then a slight slope to the rear line and from side to side. This plot tends to be better for drainage, allowing the house entrance to (or slightly above) street level, and may even allow for rambling on the main and lower levels. Some lots that seem to have problems with the topography (eg falling off) can actually be big lots. Builders can also do wonders when they rebuild walls and expand. When a buyer sees the potential, it is often too late – the lot has already been contracted by a contractor.

Finally, a buyer also has a disadvantage in financing. For a traditional mortgage, a lender asks the borrower to confirm that he will actually live as the primary residence in the property. If the buyer demolishes it, he can not give this presentation. This presentation limits a buyer to two financing options – all in cash or in mortgage lending. When buying a lot, money is king and allows the buyer to compete with builders. Mortgage lending can be more problematic because it is less attractive to the lot owner – it is riskier and the buyer will not be able to get to the final table with the necessary funds – and because the buyer already has a contract with him Construction worker.

The mortgage lending takes place in different forms, but allows the buyer to pay the lot and construction costs with a loan. The bank will allow the builder to draw the loan according to a drawing plan if certain thresholds for the building are reached. To grant a construction loan, the lender will want to make an assessment of the completed new home on the market today. For the assessment, the assessor must see the design, floor plans, features and specifications. And here is the Catch-22. How does the buyer receive mortgage financing if he has not identified the lot, the client or the design? You can not!

On the positive side, a buyer has a distinct advantage over builders and developers when he buys a lot. This means that a buyer can pay for much more than a client. As mentioned earlier, a contractor will include a profit margin in the price he is willing to pay a lot for. In other words, a buyer does not necessarily have to try to profit from building his house, and he can pay "above" market prices, but still achieve the goals of his family (happy home and location for many years). In our experience, a buyer who wants to build custom homes because he can save money by doing so often gets disappointed.

Given these pros and cons, we have seen that the most successful way for a buyer who wants to build a custom home is to first select the builder he will be working with and then work with that builder to find and approve the lot acquire custom home.

Buyers often fear that if they band together too early with a builder, they lose their bargaining power with that builder. While there may be some truth to it, it is also true that builders value loyalty, and they love it when a buyer is contractually committed to building with them because it removes "speculative" risk. Taken together, a good builder will reward the end user with cost savings.

To use a baseball analogy, the best builders try to beat and double singles with each project. If the contractor wants to achieve triple and home runs, the buyer will benefit. In our opinion, there are hundreds of ways in which a contractor can use a buyer to build a home, even if it is an "iron" construction contract. At the end of the day, you'll need to choose a builder you can trust (a well thought-out, well written contract is not a bad idea either). Builders with a good reputation, builders who introduce you to your previous clients (review references!), Builders involved in the construction process – that's what you want when building your new home. If you just look at the price, you make a big mistake. You should also pay attention to compatibility – building a house should be fun and fun. Choose someone you trust and work with.

Some people really enjoy the process of designing and building their home and most love to live in the house they have adapted for themselves. If you have not figured it out, building your own home requires a lot of work. There are hundreds (if not thousands) of steps and decisions to make along the way – setting a budget, finding the ticket, signing the lot, finding an architect, finding a builder, designing the house, making a selection choose a color colors, make change orders, etc. But if you continue to educate yourself, assemble the right team, and be realistic about your expectations, building your own home can be a very rewarding experience.

Steve and Hans Wydler are main brokers with Wydler Brothers Real Estate in the Washington area involved in Custom Building. You occasionally write a column about the market conditions.

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