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To Build or Buy? Building is not for everyone and before deciding to do so, you probably need to examine several things in your life: What are your goals?
First, before you decide to build, have you looked at the alternatives? Have you looked at new homes that are for sale (commonly called spec homes)? Why don't you like any of them? Is it style or floor plan or is it mostly decorating concerns. If you concerns are mostly style or floor plan oriented, you need to be objective about your wants. Is the right home just not out there or are you considering building a home that is so unusual that resale may be a problem. If you want to build a home drastically different in style than those you see being built, exercise some caution. Styles of homes can be very different by geography and demography. A two-story home with a second floor master bedroom would be a poor decision in Sun City, Arizona, a retirement community. A metal roof may be the “in” thing in Tampa, but hard to sell in Peoria. If your decision is centered around superficial things like decorating, could you perhaps negotiate for decorating decisions on a home which is already under construction, thereby avoiding many decisions (and perhaps some bad ones). Spec homes are typically built to appeal to the masses. Many times builders will build generic-looking spec homes but will gladly build the same floor plan, customized with your colors and minor changes. This can be a very cost-effective way to get most of what you want for a fairer price. Builders know the exact cost to build certain “stock” models. Building a custom home from a floor plan they have never built before involves a considerable time investment in estimating job costs, the cost of the architect, etc. and one missed calculation can cost them thousands. Custom building simply costs more. Custom building could also mean that you would need to get your own construction loan. This may require a down payment by you of 20% or more before the process can begin. Builders building spec homes already have the construction financing in place, which can save you thousands. The timing of your next move may be a major consideration when deciding to build. You will have a considerable sum invested in your home after you move in. Window coverings, landscaping, decorating and other “personalizing” improvements typically cost 20% of the price of the home. If you resell your home in a relatively few number of years, a potential buyer may be looking at new homes a well as yours. Few buyers will pay you much of a premium for things landscaping, decorating, etc. They would rather buy a new home and put their own personal touches on it, given relatively little difference in price. If you think you will be moving in a few years, you may be better off buying an existing home (taking advantage of someone else’s investment in landscaping and decorating), and spending a lesser sum on re-decorating. Can you afford the time? Although the builder and his staff will manage the construction process, you will spend a considerable amount of time choosing your plan, features, appliances, brick, counter tops and so forth as well as meeting with the electrician, plumber, cabinet maker, painter, decorator, etc. You will also need to visit the job site frequently to make sure the details are to your liking. In addition, unless your new home comes fully decorated and landscaped, you will spend 1 to 3 years getting your décor and lawn to look like you want. The builder will undoubtedly want you to be available by phone during working hours in the case of a need for an unexpected decision, which needs to be made quickly. If you are considering sub-contracting the home yourself, think long and hard. Time issues, the potential for liability problems, difficulty in obtaining financing, lack of purchasing power and your own lack of knowledge can cost you much more than the fee you would pay a builder. Many people also think that they can save money by performing certain tasks themselves in order to save money. Most builders don't like the idea and most homebuyers are shocked at how little money they save. If you and your spouse had a brawl over the bathroom wallpaper before, don't even think about building. Although I have never been able to find the source of the statement again, I once heard that one-third of all divorces occur with 2 years after building a home. Bad odds. Don't overlook this consideration. The Major Mistakes Kind of like divorce, most of the problems buyers encounter when building a home revolves around poor or lack of communication. Little research, unrealistic expectations and lack of consideration for the future marketability of consideration for future marketability of the home are other frequent errors. The communication problem can be handled by following a few simple rules:
Do a little homework. Research neighborhoods. Ask lots of questions of lots of people about builders and neighborhoods you are considering. Give some thought to the size and type of home you are considering. The big-money mistake is over-building or over-personalizing a home. Many buyers think they will live in this house a long time… if not forever. In today’s world, that just simply isn't reality. We a mobile society. The average buyer moves almost a frequently as they buy a new car. Know the market. Choose a home and features in it, which are similar to other homes in the area in your price range. Failure to do this can cost a fortune in the long run. Never build a home without resale in mind. In fact, it should be a major consideration. Buyers can let their beliefs get in the way of building with resale in mind. For example, if zero-clearance fireplaces (for about $200.00) are the norm in you market and you opt for a masonry fireplace for $6,000 or more because if will last longer, don't kid yourself into thinking that your house is work $5,800 more to a future buyer. Not even an appraiser would side with you. A fireplace is a fireplace. There are certain things you may demand to have n your home and there is nothing wrong with having them. Just understand that some of these things won’t ad value to anyone but you. Decorating, swimming pools, oversized decks and patios, outbuildings, special plumbing and fixtures, extra insulation, upgraded flooring, wood trim, and excessive expenditures on lighting, flooring and windows top the list of re-sale money losers in most price ranges. Spend money where people will notice it and don't spend money where it won’t. Spend money the way you wish in order to enjoy your home the way you want it, but don't expect to get paid extra for it when selling. Know your market and avoid over-building. The old rule that says it is better to build the smallest house in the neighborhood than the largest is absolutely true. Know what our home should cost before you talk to a builder. Comparison shop. If you are thinking of building a 2000 sq. ft. home, which is going to cost $200.00 and the other homes of similar size in the area are priced at $180,000, something is wrong. Find out why! Is the builder just trying to gouge you or are you cramming too much into your home for the area. Check lot prices. As a rule, the lot should be less than 15% of the price of the home (including lot) that you are considering. Only under rare circumstances should the lot be 20% or more of the total cost. If the lost cost is out of line you may be building in the wrong place or building the wrong house for the neighborhood. One of the most frustrating things buyers and builders face is time constraints. Your contract should specify a closing date and time and possession date and time. If you need to be in the home by a certain date, make certain the builder knows it. Your contract should also include a penalty for lateness. If construction isn't complete, the builder should pay. After all, you have planned for mover, switched utilities, started your insurance on a given date and if you can't move when planned it can be a horrible inconvenience. If your home is complete before you are ready to close, don't attempt to move in before closing. Builders’ insurance on your home is called Builder’s Risk. Most Builder’s Risk policies are void if the home is occupied by a buyer or their belongings. Also, your homeowner’s insurer will not usually insure a home you do not yet own. The bottom line is that if you don’t own the house but are living in it when it burns, you run the risk of having no coverage for the contents or the home. Using a real Estate Agent (or Not) Because most people don’t build a home often and are not familiar with the process and the perils that building can create, many buyers a benefit from having an agent involved as the negotiator and peacemaker. Some don’t. There are so many opportunities for misunderstandings in the building process that some buyers feel more comfortable having a middleman involved. After all, if the builder isn’t doing his/her job and you can’t get action, who are you going to call? An attorney that will probably escalate the situation instead of trying to help work it out? The attorney has no interest in trying to work things out. He gets paid the same no matter the outcome. The Realtor, however, may loose a commission if he or she cannot get problems worked out. Agents will typically steer buyers toward better builders and better neighborhoods. Agents don’t want to be nagged by buyers about their less-than-perfect building process and to be sure, agents don’t want to dogged by problems from buyers who bought a poor-quality home. A knowledgeable agent can help the buyer avoid over-priced homes. As a prospective homebuyer, you may have difficulty determining what homes have actually sold for in given neighborhood. Through Multiple Listing Services agents can pull up recent sales to be used as a measuring stick against the home you are considering. Agents can also give you guidance as to whether the proper paperwork in place before signing a contract. Remember, the builder isn’t trying to get you the best deal nor make the process easy for you. The builder is in business to make money. The fiduciary nature of a real estate gent’s job is to make sure you get the best deal and keep you away from potential problems not the builder. If you don’t think your agent is doing this for you, fire them. Choosing an agent should be as important as choosing the builder. A referral from a friend is one way to select an agent, but not necessarily the best when buying or building a new home. You need to find an agent who specializes in selling new homes. Before discussing how to find the perfect new home agents, you should understand the nature of representation you can receive from an agent. Until recently, agents have always been agent of the seller: meaning the agent owed a fiduciary responsibility only to the seller, regardless of their ties to you as a buyer. Their job was to do the best they could for the seller… period. Many buyers felt they should be afforded an opportunity to have representation in a transaction just as a seller received. Most states have adopted laws that allow agents to act as buyer’s agents. The agent’s fiduciary responsibility can now be to the buyer or the seller, depending on the customer’s preference. On quirk here, in some states an agent whose company’s sign is in front of a property cannot act as a buyer’s agent. In others, the agent you are working with always represents you, regardless of who has the listing. Most states’ laws state that in the case of a buyer’s agent who is showing homes listed by his or her company, the agent must act as a dual agent or transaction broker. Dual agents must treat both the buyer and seller equally. They have equal fiduciary responsibility to both parties, although confidential information cannot be passed from the agent to ether party. They can give advice to both parties as long as they don not harm either party. They have no responsibility to either party. I call them the Messenger Brokers. All they can do is relay messages. They cannot give advice Getting Started You are sitting at the closing table preparing to sign the closing documents on your new home and part with every penny of your life savings in the form of a cashier’s check made out to the escrow company. The builder suddenly pokes his head in the room and presents you with a bill for $660 which he says is the amount over you allowance on your flooring due the extra labor in carpeting for your stairs, $200 for a garage door opener, $400 for three pair of window shutters and $90 for installing a couple of extra dimmer switches. Huh? The flooring company knew your house was 2-stories! All homes come with garage door openers, right? Every other house in the neighborhood has shutters. Why are they extra on yours? And the dimmers… you asked the builder if it would be a problem to add in the dining room and one for the recessed lights in the hallway. He said “no problem”. $90 is a problem!! Nine months after moving into your home, you noticed mildew growing on the baseboard in one closet. You open up the crawlspace cover and notice significant amount of standing water under your house. It is obvious that it has been there for a while. You check for plumbing leaks… none. You call the builder. He tells you that the problem isn’t his and you should call the plumber and have them install a sump pump. A new sump pump is only $400 installed. The water under the house isn’t his problem? It surely isn’t something you cau7sed. Shouldn’t he fix it? Your dream home is well under construction and you go shopping for flooring. The builder has given you an allowance for the entire home of $4600 including the goods, labor and tax. Once you begin shopping you realize that your allowance will barely cover the cost of the flooring itself, never mind the labor and tax. You double-check with the builder. Yep, he says, you should be able to floor the house for that. Sure, if you want to be re-carpeting in 2 or three years! What do you do? After living in your home for a couple of years, you notice you masonite siding is stating to swell severely and is holding water. You call the builder who tells you to call the lumber supplier who tells you to call the manufacturer. The manufacturer sends a representative out to look at your problem. He informs you that the siding used was #2 grade, not #1 and there is no warranty on #2 grade. Excuse me?!?! Nobody ever told you that your siding was #2 grade and not warranted. Cost to repair? $2,000. Building a new home rates in the Top 10 most traumatic events in a person’s life along other pleasantries like death of a spouse and divorce. Experiences like those above are the reason. Most homebuyers jump into building a new home without any research, without any knowledge and without any room for error. Building a new home does not have to be as traumatic as divorce. As with divorce, a little extra thought, a little extra planning, good communication and some extra work can prevent huge problems during your building process. Trouble Shooting Before you decide to build:
Most Common Mistakes:
Should you use a Real Estate Agent:
Looking a Neighborhoods:
Deciding on a Builder
Contracts and Negotiating
Choosing the floor plan and type of home
Choosing the right lot
Now you have started building
Just before closing
After you move in
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