When Building a Home, Should You be the General Contractor?
Being responsible for the construction of your own home is complicated, challenging and disruptive, but it can be rewarding on many levels. For those who feel capable of tackling the job of General Contractor (GC), here are some things to consider.
Before making the decision to be your own GC, take stock of your personal attributes. The following are some questions to think about:
- Do you understand construction principles?
- Are you detailed oriented and equipped to track the financial information associated with a large building project?
- Do have the time to devote to this project?
- How well do you manage people?
These questions are meant to stimulate your thinking, and get you started on an honest evaluation of your abilities, but they are not the only questions to consider. Take some time to visualize the step-by-step procedures needed to build a house, and how you fit into that process. After that exercise, if you feel prepared to manage the construction of your own home, congratulations, you are now the general contractor and on your way to saving a lot of money.
The General Contractor (GC)
Now that you are your home’s general contractor, that should become your ‘day job’. By taking on this role, you must devote the same amount of time and energy to the project as a paid GC. There is no room for shortcuts during the construction project just because you are in charge.
General Contractors provide many services and you should provide these services too:
- Be thoroughly familiar with all specifications in the blueprint
- Develop a pool of sub-contractors with the skills to cover all construction requirements
- Be familiar with applicable building codes, licenses, and other legal issues
- Understand how to deal with delays and other disruptions in the schedule
- Identify multiple suppliers for critical building components, and know lead times when ordering
- Examine work in progress to ensure specifications are being met
As with the questions to ask yourself regarding your personal capabilities, you should consider the specific job requirements of a GC, and make sure you can execute these requirements in a satisfactory way.
Because you are now both owner and builder, you have an additional responsibility that a typical GC does not have. You are responsible for making the financial arrangements that underpin the project. These arrangements require finding a construction loan, and securing a mortgage on the finished property. In the past, owner-builder loans were difficult to obtain, and traditional lending institutions like banks and mortgage companies were overly cautious when it came to lending money to owners who planned to be the General Contractor. Today these types of loans are still avoided by most traditional institutions, and the qualification process is still extremely difficult. However, the demand for owner-builder financing is on the rise, and there are viable lending options for people who want to build their own home, their way!
Money is the most common reason people choose to be their own GC. After all, saving the cost of the GC can amount to many thousands of dollars off the total cost of construction. According to Carl Heldmann, nationally known homebuilding author, owner builders can save 25% of the cost of building a house. Quality can be another reason a person chooses to be their own GC. There is a lot of truth to this approach because you, as the owner, will seek ‘perfection’ in every aspect of construction.
It is important to shop lenders as carefully as you do for sub-contractors. You need to find the best loan terms for your particular needs, and partner with a lender that specializes in owner-builder financing. You will also need to decide on the type of loan or loans you need. You must choose between arranging for two separate loans that cover construction and a mortgage, or finding a single loan that combines both construction financing and a mortgage (construction to perm financing). There are advantages to both, but it is most advantageous to obtain two separate loans. The reason for separating the construction loan from the mortgage is as follows:
- You get locked in on construction costs with a construction to perm loan, and almost always have to go back to the bank for additional financing before the house is complete. This increases the amount of your mortgage.
- You are in a stronger position to negotiate with a banker when you have a physical structure on the property rather than a set of blueprints.
- Lending institutions can charge a higher interest rate for the mortgage part of the construction to perm loan because many borrowers are willing to pay a bit more for the convenience.
- A construction to perm loan does not allow the borrower to tap into the sweat equity that gets created during the construction process and the borrower acting as the GC.
- The biggest advantage to combining the loans is that you are qualifying for both the mortgage and the construction loan in the beginning, so funding for both phases is assured. But this can lead to a higher interest rate on the mortgage.
Acting as your own GC requires a combination of skills and aptitudes, but the good news is that most people are capable of performing this role with some research and a lot of patience. Overseeing your own home as it comes out of the ground is an unforgettable experience, with many benefits. Of course there is that intangible sense of accomplishment, but there are many tangible benefits as well:
- You save a lot of money! Typically 15% – 25%
- Your home is built exactly as you intended
- You know which subcontractor to contact if some aspect of construction develops problems later on
- You minimized risks inherent with hiring a GC, such as significant time delays, cost overruns, contract disputes and questionable craftsmanship
6 Things You Should Know Before Buying Your Land
For most people, owning a parcel of land affords stability, permanence and a home. Whether you dream of living in the country away from traffic and congestion, a family-oriented place in the suburbs, or house right downtown, you will need some land.
Buying land with the idea of constructing a dwelling on it requires some research and more than a little smart thinking. It is easy to get carried away with the benefits of buying a piece of land and overlook the drawbacks. But, let’s take a quick look at the benefits before we dive into the other factors that might not be so grand.
The Benefits of Buying Your Land
A piece of land is like a blank canvas, sitting there waiting for the right person to build something magnificent. But there are also very tangible benefits to consider:
- Land can be a profitable long term investment if purchased at the right price.
- If you are interested in moving to the country, land prices can be much cheaper than in the city.
- Some people aren’t ready to build a house, but they know where they want to live; these people may buy a piece of land and hold it until they are ready to build.
- Having a large amount of land provides the flexibility to build special purpose out-buildings such as a large garage, a wood shop, or a rental unit.
Whatever your dream might be, selecting the right piece of land in the right location is crucial.
Factors to Think About – Before you Buy
It is impossible to overstate the importance of doing your research on a piece of property before you fall in love with it…and certainly before you buy it. Consider these factors:
- What is the surrounding environment? If you are moving to the country, is there a cow pasture next door? If you will be in the city, what is the traffic pattern like on Monday mornings?
- How about soil testing? Is it a buildable lot? One of the issues that everyone must consider when building a house is to ensure that the structure sits on solid ground. If the soil is too rocky or too soft you may not be able to get a building permit. The cost to remedy an unrecognized soil problem could put your project in jeopardy. Check with your local building department and make sure there is a soil test contingency in your sales agreement.
- Zoning requirements must be checked. Local authorities (city, county and state) should be consulted before undertaking a construction project, so it is important to understand their requirements before buying the land.
- What easement restrictions are needed or currently in place? If your land is accessed by driving across an adjoining parcel, it is very important that a legal easement is obtained and recorded.
- Public utilities should be checked out. What services are available for water/sewer, electricity, gas, and cable? It is possible you may need to drill a well, or heat with propane, if public utilities are not available.
- Get an appraisal. In any land purchase, it makes sense to get an outside appraisal by a professional appraiser. This will not only help to confirm the purchase price, but it might be required if you plan to borrow money to purchase the land.
A very good way to get a feel for a particular location and learn about its benefits and drawbacks is by renting a house in the area and living there for a few months. The added time will also give you an opportunity to secure the right type of financing as well as get to know the various sub-contractors in the area.
How Smart Does Your House Have to Be?
Technology advances are making our homes ‘tech savvy’ by allowing us to run our homes remotely from a Smartphone, PC or tablet. You can set up individual home automation components or you can tie all components together in a whole-house solution. But before you get lost in the host of products on the market you need to understand a little bit about the technology behind the systems.
Home Automation Technology
There are many competing home automation standards for both hardware and software that allow you to remotely control your home’s security system, lighting, climate control, appliances, and consumer electronics.
You will need to determine which platform you will use so that all your controls and automation sub-systems are compatible. One suggestion is to list your top home automation sub-system components, the ones that are the most important to you. Researching how well they perform on each platform will give you a head start in making your choice. Once you have narrowed your choices, you can check out the secondary home automation components on your wish list.
Some of the current home automation platform front runners include:
INSTEON: Uses both the existing home wiring (power line) and radio-frequency communication to add remote control and automation to home control applications of all types.
Z-WAVE: A wireless communications protocol designed for home automation and remotely control applications of residential homes and light commercial environments.
ZIGBEE: (Mesh network) Communication protocols uses small, low-power digital radios to create personal area networks that can transmit data over long distances by passing data through intermediate devices to reach more distant ones, creating a mesh network. ZIGBEE Certified Product Directory
X10: Communication protocol for home automation using power line wiring and brief radio frequency bursts for home automation signaling and control. A wireless radio based protocol is also defined.
Benefits of a Smart House
Beyond the cool factor, automating your home’s systems with remote monitoring and controls provides you with:
- added safety and security
- added visibility and awareness
- time saving and convenience
- lower utility bills and peace of mind
- ability to keep tabs on your children and pets
Have fun exploring your options – and don’t forget to ask your insurance agent if they offer homeowner policy discounts for installing a home automation system.
Green Homes and Sustainable Construction Practices
The buildings we live in protect us from nature’s extremes, but they also affect our health and the environment. Sustainable, or Green, Building is the use of healthier and more resource-efficient building construction, operation, and maintenance practices. Here are a few resources for the owner builder who wants to explore green building options.
ENERGY.GOV – Planning for Home Renewable Energy Systems: This article offers an excellent overview of sustainable energy options for residential construction and renovation. It includes links to more detailed descriptions of the different alternative energy options.
DSIRE.ORG – Renewable Energy Incentives and Policies in the Unites States: Each state and community has its own set of codes and regulations that you will need to follow to add a small renewable energy system to your home. DSIRE.ORG is the most comprehensive source of information on incentives and policies that support renewables and energy efficiency in the United States. DSIRE.ORG is funded by the U.S. Department of Energy.
EPA.GOV – Components of Green Building: This website offers extensive information about how green construction methods can be integrated into buildings for maximum benefit, ranging from reduced waste and lower operating costs to enhanced health and quality of life.
Green Home Designs & Floor Plans
Green Floor plans are available from a host of home plan sources. Too many to mention here. A quick search for Green Home plans or Sustainable Home Plans will yield plenty of options. There are also architects who specialize in green design.
Tips for Borrowers
Dear New Customer,
Thank you very much for considering our flexible owner builder construction loan. We would like to share a few tips with you that will help you achieve home building success!
Collect all waiver of liens. After every payment to a contractor and supplier, have them immediately sign a waiver of lien. At the end of construction, the title company which orchestrates the closing of your permanent mortgage may require evidence your construction has been fully paid for. If you are missing any, they will require you to get them, which can delay the closing for the final mortgage. We have blank forms for you to copy and use. It’s always best to have a paper trail to substantiate your payments. If you pay a laborer or materials provider in cash, promptly get a receipt evidencing such.
Prevent theft of building materials. If possible, install a gate and/or a fence at the job site. Putting up “No Trespassing” signs or “Beware of Dog” signs may also be helpful. If you have an RV, parking it at the construction site will let passersby know that the construction site is being monitored. Consider borrowing a friend’s RV if you do not own one. Parking a spare car at the construction site may have a similar effect. Even an erected tent can be useful. Don’t let your lumber company deliver lumber until your foundation is installed and the framers can start the next day. Don’t let your windows and doors be delivered until your house is framed and they can be installed the same day. Lumber and windows are most vulnerable to theft.
Almost never remit a deposit to anybody. Before anyone does any work for you, get it in writing. A good contract will contain a complete description of all materials and services to be rendered pursuant to your blue prints. Along with the agreed price, payment should be paid upon completion and approval by the local building department. With the exception of custom order items, such as windows or cabinets, no one should be paid a deposit or for services not rendered. NEVER! Once you pay someone before any work is done, you forfeit all control.
Always pay your lumber or framing materials provider directly. Never pay your building contractor, carpenter, or other third party for framing lumber. If your builder or carpenter objects, you may want to consider other contractors. Framing materials represent the single most expensive component to your building costs and failing to pay for your materials directly may mean you have to pay for them TWICE. Although it doesn’t always happen, sometimes contractors fail to remit your payment to the lumber company or use your payment to pay down lumber purchases for other projects they are working on. If this happens, the Lumber Company will place a lien on your home for the unpaid building materials. Play it safe and ALWAYS pay for the framing materials directly!
Read the fine print. Although some estimates/bids/quotes may seem to include all materials or services for a particular element of construction, they may not. Make sure you fully understand all contracts before signing. Ask your contractor, “What isn’t included in this bid that I may need?”
When in doubt, hire a professional. Many of our borrower’s believe that the more they do themselves, the more they are going to save. Unless you have significant experience in a specific trade, we highly recommend that you sub-contract this work to a professional. Errors cost time and money. Additionally, subcontractors’ work comes with a warranty, yours does not. Consider also: the time you spend doing these things is time taken away from your normal earnings. And if you can only do these things on weekends, it’s going to take even longer to complete construction. The longer construction takes the more construction loan interest and loan processing fees you will pay which can offset any potential savings from using your own labor.
Do not just hire the least expensive sub-contractor. It is important that you hire well qualified tradesmen to assist with the construction of your home. If your state licenses building trades such as plumbers, electricians, or carpenters, make sure you see evidence of a valid license. It is also wise to make sure your tradesmen carry insurance for the work they are performing. If you do not already know of some well qualified individuals or companies, ask your material suppliers for referrals. Avoid using Craigslist or similar personal advertisement media to find laborers as they are usually not licensed and not insured. Lastly, do not be afraid to ask your tradesmen for references.
Do NOT open new lines of credit during your construction loan. Applying for new credit cards, increasing your credit limit, purchasing/leasing additional vehicles, and taking out personal loans can significantly harm your prospects for refinancing your finished home. Increasing your debt load through credit will result in increased monthly payments and increase your debt-to-income ratio. Lenders look very carefully at your debt-to-income ratio and even a fraction of one percent above underwriting guidelines can result in a denial decision for your refinance. If you find that you need additional funds to complete your home, seek a loan increase from us before utilizing your higher interest rate credit cards to cover the necessary work.
Pay all monthly billing statements on time. Late payments will affect your credit score. The lower your credit score, the harder it will be to get a final mortgage at a competitive rate. Additionally, your permanent lender will inquire about your payment history with us when evaluating your application. Any missed or late payments are Red Flags for end-loan financers which may result in a denial decision, regardless of your loan-to-value ratio, or debt-to-income ratio. Interest statements are mailed out on the 16th of each month and due by the 1st of the following month.
Stay in control of your building budget. Be careful not to over spend on building materials, such as, cabinets, floor coverings, and light fixtures. Keep to your building budget. After the house is built, there will be plenty of time for upgrades. The last thing you want to happen is to run out of construction money. It is very difficult to refinance your construction loan with a partially finished home.
Read the book we gave you, “How to be your own house contractor”. This book is a MUST read. It is full of helpful tips to save you time, money, and prevent costly mistakes. If you don’t have this book, request your copy here.
We wish you good luck, and if you ever have a problem, please give us a call. We are here to help you.
Fred L. Arnold, President
Owner Builder Loans, LLC