DISPROVING the MYTH that BUILDING a CUSTOM HOME is DIFFICULT
Building a custom home tailored to your specific needs can be one of the most enjoyable and rewarding experiences of home ownership! Many people avoid the opportunity to GET EXACTLY WHAT THEY WANTbecause of the “perception” that he process is unaffordable, overly complex and fraught with disaster. To that end, this educational module is dedicated to disproving those myths.
The process of building a custom home can be broken down into the following areas:
- Matching your expectations to the capabilities of a builder.
- Defining your vision & architectural style
- The financial requirements of your builder and bank
- Contracts and how to protect yourself
- Understanding the Construction Process.
- Communication Protocols
MATCHING THE EXPECTATIONS OF BUYER & BUILDER
The buyer’s selection of the builder who will construct their dream home is “THE MOST IMPORTANT” aspect of the custom home process. It must be remembered that most custom homes take approximately 6 months to design and build, a time where it WILL BECOME your most important relationship outside of your marriage and family. Obviously, such a relationship must be rooted in trust…….a trust that the builder has the capacity to not only quantify your vision architecturally, but that they possess the construction experience necessary to build within the confines of your budget & time deadline. Appropriate questions to ask when interviewing your prospective builder include:
- DO THEY CONSIDER THEMSELVES A “PRODUCTION” OR “CUSTOM BUILDER?” Asking a production builder to BECOME your “custom expert” carries risk. First, don’t underestimate the danger of taking someone out of their comfort zone. Production builders are used to making all of the decisions with regard to amenity content and often get frustrated by clients who expect consultative design services. Concurrently, production builders often “DO NOT” have the systems and processes in place to make your interior amenity selection process enjoyable. Production builders and their subcontractors have pricing efficiencies because they stick to a portfolio of floorplans…..creating custom floorplans & pricing them right requires the ability to estimate well…..to estimate well you must have the experience of working with materials & processes often only encountered in the custom realm.
- HOW MANY HOMES DO THEY BUILD A YEAR? HOW MANY OF THESE ARE CUSTOM? A builder’s yearly production is a good indicator of their success within the market. That is not to say that there are not exceptional custom home builders that only build one or two homes a year…..but typically those that do…..can only afford to do so economically if they are building million dollar designs. For everyone else, most will tell you that they need to build 20 to 30 homes a year to maintain a stable subcontractor base and cover the overhead expenses necessary to provide great customer service. Just like there are many part-time realtors…there are also many part time builders. Seek out dedicated full time professional that are members of recongnized trade organizations like the Builders Contractors Association (BCA). Investigate their knowledge of Energy Star Construction & Green Building Processes.
- CAN I CONTACT YOUR LAST THREE CLIENTS TO DISCUSS THEIR EXPERIENCE WITH YOUR COMPANY? Anyone that dodges this questions should be avoided at all costs. Ask questions about about the builder’s level of organization and ease of communication. Ask about their experience with the builders “selection process” and the professionalism of the “purveyors” they interacted with? Ask about the “Level of Quality” and if they have had any “Warranty Items”…and if so…..How were they handled?
- ASK THE BUILDER TO WALK ONE OF THEIR CUSTOM HOMES WITH YOU? Meeting the builder at one of their homes provides them a great opportunity educate you on what makes them different! It is also a great opportunity to measure their level of enthusiasm for your project and to see how their personality meshes with yours….DO YOU MAKE A CONNECTION? For others, it is an opportunity to determine the builders expertise; to understand how their construction methodology differ from the competition and to judge their capacity to work with your vision!
HOW TO DEFINE YOUR VISION & ARCHITECTURAL STYLE
Defining what is most important to you about your new home IS CRITICAL to being able to explain it to others. In our experience, only about 10% of the public can and/or is comfortable working with purely CONCEPTUAL CONCEPTS derived solely out of conversation. The rest of us, need pictures to refer to….we need 3-D floorplans to modify…..we need stylistic examples to re-interpret. Ultimately, most find themselves BLENDING MANY DIFFERENT GREAT IDEAS with an end goal of creating OUR PERSONAL INTERPRETATION OF THE HOME MOSIAC.
I have been involved in a few homes that started with the proverbial chicken scratch on a napkin. But in general it is useful to come prepared with a floor plan concept, along with “picture examples” of items that your would like to see incorporated into your home.
As in most things, a little study and preparation ahead of time will lead to huge time efficiencies down the road, resulting in a more enjoyable and empowering experience for you the buyer.
Questions to ask yourself when designing your home
- WHAT IS THE MOST IMPORTANT ROOM IN MY HOUSE TO ME? Answers to this question “REVEALS YOUR LIFESTYLE”…..and lifestyle determines the proper FLOW. A home is the personification of your lifestyle…..understanding your core values helps you and your builder derive floor plan solutions faster.
- HOW MANY BEDROOMS & LIVING AREAS DO YOU REQUIRE? Knowing this determines the square footage of the home…and ultimately square footage is the largest determinate of price. Builders know that 4 bedrooms plus a living room & bonus will require a minimum of 2000 sq.ft. to have rooms that are reasonably proportioned.
- DO YOU PREFER A SINGLE LEVEL or a TWO STORY FLOORPLAN? IF A TWO STORY, DOES IT NEED TO HAVE THE MASTER BEDROOM DOWN? In general, single levels are more expensive to build, because they require larger lots & have more concrete/foundation and roofing materials (none of the square footage is stacked) Two stories with all the bedrooms up are typically favored by families with younger kids (because you don’t have to run up the stairs when the babies crying). Two stories with the master down are preferred by families with teenagers….so that everyone can find their own privacy.
- HOW DOES THE KITCHEN, DINING AREA & LIVING ROOM FEEL? There are two distinct demographics in this department…….Those that like a very open concept and those who don’t. Do you like to entertain informally or in more formal settings? When you are cooking, do you want to be a part of the action occurring in the living room or do you prefer to have this activity hidden?
- HOW IMPORTANT IS THE SIZE OF THE GARAGE? There are many reasons why you would buy a house and often ONLY ONE why you wouldn’t. If the garage won’t fit the family vehicle, or store the toys then you have missed the mark.
- HOW IMPORTANT IS THE SIZE OF THE YARD? Families with young children often like the idea of having space for the kids to play within the protective confines of the backyard? Younger & older couples without kids often prefer the convenience of smaller / no maintenance landscaping….so that they can leave for a week without worrying about cutting the grass.
- HOW IMPORTANT IS THE INCORPORATION OF LIGHT? Do you like vaulted ceilings, 9’ or 10’ plate heights? Do you want any oversized windows?
- ARE THERE ANY HEIRLOOM FURNITURE PIECES TO DESIGN A ROOM AROUND? Piano’s, China Hutches, Tables, Entertainment Centers, Bedroom Sets can require rooms of specific dimensions.
- HOW IMPORTANT IS ENERGY CONSERVATION? “Energy Star”, “LEEDs”, “GREEN BUILDING” requires an expertise on the part of your builder that is beyond the capacity of some. These construction methods involve the synthesis of advanced concepts and the use of quality materials often from sustainable sources.
- WHAT ARCHITECTURAL STYLES DO YOU APPRECIATE? Keep it simple here, referring to examples that you find on-line or pictures of houses that you appreciate in your local area. Often, buyers will find they enjoy a blending of architectural styles both inside & out. Some architectural styles can be more expensive than others. Examples of this would include:
- Those with steeper roof pitches – a 12/12 roof pitch (a 12” gain in height for every 12” of horizontal travel) is more expensive than a 6/12 because it requires more trusses, OSB sheeting and Shingles.
- Those with more roofing gables. Gables = additional trusses = additional cost.
- Those with more rock on the front elevation. There are two types of stone…cultured/artificial and real. Cultured stone can cost upwards of $20.00 per sq.ft. or many times more than stucco and cottage lap siding. Real stone, is more expensive still and requires the skilled labor or a mason to fit and install.
- Courtyard Designs – require more windows, siding and concrete.
- Paint Grade or Stain Grade Trim Detailing? Paint grade trim is done with a material called MDF…a particle board. Stain Grade trim detailing requires “REAL WOOD” milled moldings combined with the artisanship of a skilled painter employing a time intensive staining process.
As in all things, at a certain point, your creativity will be limited by your budget. Setting realistic expectations in the beginning of the process is the key to being happy long term.
UNDERSTANDING THE FINANCIAL REQUIREMENTS
The financial requirements of building a new home can be broken down into two areas:
- Those required by your builder
- Those required by your lender
Expect your builder to require an EARNEST MONEY deposit = 5 to 10% of the project cost. A general rule of thumb, is the more custom the floor plan, the larger the deposit. Understand that the builders Earnest Money calculation is based on their perceived risk of being able to re-sell the home should you be unable to close for any reason.
When should a buyer expect to make a “NON-REFUNDABLE” earnest money deposit? Non-Refundable earnest money should only come into the equation WHEN YOU ASK YOUR BUILDER TO PRICE THE HOME. Understand, that in order for a builder to accurately price the home he will need a working set of BLUE PRINTS which require the talents of an ARCHITECT. The builder will use these “blue prints” to solicit bids from their various purveyors…….taking the sum of these quotes to arrive at a final price.
Note: It is an unreasonable expectation on the part of the buyer to ask a builder to start spending money designing their home without a “NON-REFUNDABLE” deposit. This money will be credited toward the total Earnest Money Deposit. Should the buyer decide subsequently to discontinue the transaction…..they can expect to receive a copy of the construction drawings. The amount of this first deposit can vary depending upon the complexity of the project, but in general is close to $2,500.00
WHEN IS THE BALANCE OF MY “NON-REFUNDABLE” EARNEST MONEY DUE? Upon the buyer’s acceptance of the FINAL PLANS, PRICING & SPECIFICATIONS of the home.
- Minor changes to the plans can be denoted via what is called “Red-lines” and should be initialed by both parties signifying agreement to the change. Major changes may require a RE-DRAW and will delay your second EM deposit until acceptance.
- Specifications should be outlined in detail………and if you have any hint of ambiguity with regard to what you think you are getting, INSIST ON WRITTEN CLARIFICATION.
- The pricing SHOULD NOT / CANNOT CHANGE once agreed to unless there is a WRITTEN CHANGE ORDER denoting the change and agreed to new price. DO NOT WORK with a builder who WILL NOT or CAN NOT GUARANTEE PRICE AT THIS POINT (otherwise known as an escalation clause)
- Make sure that you leave the meeting with a copy of ALL OF THE ABOVE with the builders signature on each document. At the end of the day, these are the MATERIAL FACTS that a court of law will refer to should there be a disagreement between parties. IS THERE A CLEAR MEETING OF THE MINDS? IT ISYOUR RESPONSIBILITY ALONG WITH THAT OF YOUR REALTOR TO MAKE SURE!!!
NOTE: A COMMON MISCONCEPTION
Many buyers are reluctant to consider the “CUSTOM BUILDJOB OPTION” because of the INCORRECT PERCEPTION that they will need to manage the construction process financially. In fact, 99% of the builders that NCC works with, prefer to secure the CONSTRUCTION FINANCING themselves, so that they ARE NOT BEHOLDENT to their client when it comes to CONSTRUCTION DRAWS. Concurrently, Builders who insist on carrying the construction Financing demonstrate a financial capacity that serves as evidence of their professional stature.
NOTE: Should a buyer decide to carry the construction financing …then certain protections should be put
Into place contractually and via what is called a “SURETY BOND” to protect the buyer from
The unethical allocation of“draw money” and/or the insolvency of the builder mid-course.
Today’s lending environment is dynamic and is best navigated using professionals with a DEMONSTRATED HISTORY OF PERFORMANCE in the lending industry. Just like you shouldn’t work with a builder or realtor that has just started in the business…..the same applies to lenders.
- Seek out recognizable “Lending Brands” in your local community. Don’t underestimate the power & importance of being able to physically sit across the table from your loan officer to get answers to your questions now!
- Remember, that email technology, text messagingand voice mail are wonderful communication technologies….but limit your ability to maximize your powers of perception and often creates a barrier to forming a PERSONAL RELATIONSHIP…..one that will be ONE OF THE MOST IMPORTANT relationships in your life for the duration of the construction process.
- Question the VALIDITY of any “PRE-APPROVAL LETTER”, seeking out a WRITTEN GUARANTEE of approval. After all, you will be releasing “NON-REFUNDABLE” earnest money to your builder based on a belief that you are qualified to purchase the home based on what you bank tells you.
- Understand that different loan programs not only have DOWN PAYMENT REQUIREMENTS but that they also have fees charged by the LENDER, TITLE, PRE-PAID INSURANCE and TAX RESERVES. These ancillary fees should be estimated by your lender in “A GOOD FAITH ESTIMATE” with a goal of PREPARING YOU FINANCIALLY for all of the costs associated with CLOSING YOUR HOME.
Below is an EXAMPLE of a “Settlement Statement”
- CONTRACT SALES PRICE $294,000.00
- 2008 HOA Dues 11/14 – 1/1/09 $39.34
- HOA SET UP FEE $300.00
- DEPOSIT or EARNEST MONEY $2,800.00
- PRINCIPAL AMOUNT OF NEW LOAN $235,200.00
- APPLICATION FUNDS $475.00
- 2008 Taxes (1/1/08 – 11/14/08) $670.23
- LOAN ORIGINATION FEE 0.75% $1,764.00
- LOAN DISCOUNT 0.25% $588.00
- APPRAISAL FEE $400.00
- CREDIT REPORT $16.75
- UNDERWRITING FEE $350.00
- TAXSERVICE FEE $80.00
- FLOOD LIFE OF LOAN FEE $18.00
- DOC PREP FEE $200.00
- APPRAISAL SERVICES $25.00
- INTEREST FOR 17 DAYS $630.02
- HAZARD INSURANCE PREMIUM 1 YEAR $338.00
- ESCROW HAZARD INSURANCE (3 months) $84.51
- ESCROW 2008 TAXES (2 months) $100.00
- ESCROW $-28.17
- SETTLEMENT of CLOSING FEE $340.00
- TITLE INSURANCE PREMIUM $378.90
- PUD $100.00
- COVERAGE ONE $120.20
- OVERNIGHT EXPRESS FEES $20.00
- 1ST ½ OF 2008 TAXES $385.70
- RECORDING FEES $78.00
- ACCOUNT SET UP FEE (boise city utility) $11.57
- Trash (Ada county) $32.67
- HOA transfer fee $300.00
- SUBTOTAL $300,647.49 $239,145.23
- BALANCE DUE FROM PURCHASER $61,501.77
- TOTALS $300,647.49 300,647.49
NOTE: As demonstrated above, calculating your ACTUAL CLOSING COSTS requires consideration of fees not just related to down payment. Ask your lender to review an EXAMPLE SETTLEMENT STATEMENT (like the one above) in detail with you.
CONTRACTS & HOW TO PROTECT YOURSELF
The Idaho Real Estate Commission & the Intermountain Multiple Listing Service produce forms updated annually for the benefit of its Realtor Members. The Purchase & Sales Agreements, Counter-Offers, AddendumsPROPERLY USED cover most of the variables one can encounter and provides the basis for forming a COHERENT POSITION should problems arise.
HIRE A PROFESSIONAL that can DEMONSTRATE A MASTERY of the provisions contained within the following documents:
- NEW CONSTRUCTION / PRE-SOLD PURCHASE & SALES AGREEMENT – There is a difference between this document and the one most Realtors use when purchasing existing homes.
- The difference between ADDENDUMS & COUNTER-OFFERS
- The BUYERS REPRESENTATION AGREEMENT
- The AGENCY DISCLOSURE PAMPHLET
- The GENERAL CONTRACTORS DISCLOSURE STATEMENT
- The SELLER PROPERTY DISCLOSURE STATEMENT
NOTE: Most will attest that an experienced REALTOR actively managing & recording the communication and agreements reached between buyer & seller is AN INVALUABLE INSURANCE POLICY!
- VERBAL AGREEMENTS ARE NEXT TO IMPOSSIBLE TO ENFORCE. Memories are imperfect, peoples perceptions of what was said and / or agreed to can be different. The only way to guarantee that you will receive what you are expecting, at a price & time that is acceptable to you the buyer, is to CLARIFY IN WRITING all:
- Quality Expectations
- Amenity Content
- It is important that conversations had over the phone (or in person), and your interpretation as to what was agreed to, are reiterated via email correspondence so that there is a written record of the discussion. Decisions finalized must be recorded via an ADDENDUM to the PURCHASE & SALES AGREEMENT including modification to the price.
UNDERSTANDING THE CUSTOM / BUILDJOB PROCESS
- (WEEK #1) – “Meet & Greet” between the buyers, builder & real estate professional. At this meeting it is important to arrive with a general idea of the goals to be achieved in terms of budget, room count, garage and lot size, and any other special amenities that are essential to the project. Balancing the “MUST HAVES” and the “LIKE TO HAVES” with the realities of your budget is what will be discussed, and it is the builders goal to leave this meeting with a clear understanding of your goals & priorities.
- (WEEK #2) – 2ND MEETING – The builder will propose a “Preliminary Design, estimate of square footage and definition of amenity package to be included within a “PRICE RANGE”. The final price can only be determined once we have a working set of architectural drawings/blue prints. To move past this point, your builder will require a “NON-REFUNDABLE EARNEST MONEY DEPOSIT” of $2,500.00 and expect to enter into a purchase & sales agreement that is “CONTINGENT” upon the buyer’s approval of the final plans, pricing and specifications.
- (WEEK #3 & #4) – Two weeks is usually enough time for the architect to produce a set of construction blue prints & for the builder to submit for bid to their various purveyors. (More complicated/specialized plans can require additional time….with an expectation set at the week #2 meeting)
- (WEEK #5) – “DISCUSSION & REVIEW OF THE FINAL PLANS, PRICING & SPECIFICATIONS” – Minor changes to the plan will be indicated on the blue prints as “REDLINE REVISIONS”…….major changes at this point may require a complete re-draw and thus additional time and another meeting. Upon the buyer’s acceptance of the final plans, pricing and specifications, the buyer & builder will sign the blue prints & list of specifications and deposit the balance of their “NON-REFUNDABLE” earnest money deposit with the builder.
- (WEEK #6 & #7) – The builder submits to the County/City for a building permit. This process can take as little as a few days to more than several weeks, depending on how much load the permit department has.
- (WEEK #8) – CONSTRUCTION BEGINS (Weather Permitting) – excavation, foundation & concrete work.
- (WEEK #9 & #10) – Framing & Roof – Upon completion of framing the home it is common to have an “ELECTRICAL WALK THROUGH MEETING” – At this meeting you and your agent will meet with the builders superintendant to identify the placement of electrical outlets, cable, TV, phone, surround sound wiring and to discuss in 3-D the LIGHTING LAYOUT. Any special requests (i.e. additional ceiling fans, dimmer switches, can lights) will be added to the plan at this time, with any additional charges and subsequent increases in home price noted on a change order/addendum.
- (WEEK #11) – Plumbing, electrical, HVAC, siding
- (WEEK #12) – Exterior Paint, Electrical & Framing inspection, Insulation
- (WEEK #13) – Sheetrock
- (WEEK #14) – Sheetrock, garage doors, insulate ceiling
- (WEEK #15) – Interior Trim & Landscaping (weather permitting)
- (WEEK #16) – Interior Paint
- (WEEK #17) – Hardwood, Tile, Electrical Trim, Cabinets, Counter-Tops
- (WEEK #18) – Counter-tops, Hardwood final, Plumbing trim, Appliances
- (WEEK #19) – Final HVAC & Electrical, Carpet, Finish Carpenters.
- (WEEK #20) – Final Clean, Paint Touch Up, Hardwood, Final Coat
- (WEEK #21) – FINAL WALK THROUGH – The buyer & buyers agent will meet the builder on-site for a general orientation of the homes features & to discuss cosmetic flaws that require attention. It is recommended, that the buyer & buyers agent create a written list of items requiring attention prior to this meeting. In the event the buyer conducts a HOME INSPECTION, most builders ask that it be completed and the written results delivered to the builder prior to this meeting…..so that all items can be discussed and remedies scheduled in a timely manner.
- (WEEK #22) – CLOSING – The closing will occur at a Title Company. Typically, the builder will request to close with a Title Company & Escrow Officer of their choosing to simplify the closing process due to that Title Companies familiarity with the builders business practices. (A buyer may request to close with a Title Company of their choosing, but this must be agreed to when the purchase & sales agreement is signed) Your agent should schedule the signing of your loan documents at least 24 hours prior to the actual closing date indicated on the Purchase & Sales Agreement. It can take 24 to 48 hours to fund the loan after signing. CLOSING is defined to be when “ALL FUNDS HAVE BEEN DISBURSED” & “THE DEED HAS BEEN RECORDED AT THE COUNTY COURTHOUSE”. Remember that “SIGNING” does not constitute closing. Upon funding, the Title Company will call to notify you that the transaction is complete and you will receive the Keys to your NEW HOME!!
NOTE: THE ABOVE SCHEDULE OF EVENTS IS FOR GENERAL REFERENCE ONLY and CAN VERY DEPENDING UPON YOUR BUILDER, SPECIFIC CIRCUMSTANCES & COMPLEXITY OF THE PROJECT.
- Most reputable builders will supply a (1) year Home Warranty that covers most items outside of normal wear & tear. Every builder has a different process to handle incoming issues….but in general it is best to communicate with the builder via email on cosmetic items and with a direct phone call should an emergency arise.
- Cosmetic issues are typically addressed at the 3 month and 11 month benchmarks. This allows the builder to schedule multiple subcontractors to visit the home if necessary and is minimally intrusive to your families schedule
- Some builders offer EXTENDED WARRANTIES beyond the standard 1 year, but are typically more limited in later years.
Communication between the Builder, Buyer & Realtors is critical to the success of any transaction. Following COMMUNICATION PROTOCOLS can at times feel cumbersome, but is necessary so that there is the proper checks and balances for the protection of all of the parties involved.
- Conversations had, Questioned answered, Decisions made, between builder and buyer should be reiterated via email to your REALTOR to ensure absolute clarity & direction.
- Decisions resulting in changes to the plan AND/OR price must be stated in an ADDENDUM created by your REALTOR. Changes to your plan SHOULD NEVER be communicated to a subcontractor of the builder or an employee of a subcontractor….because they may create an expectation contrary to that of your BUILDER.
- NOT KEEPING YOUR REALTOR in the loop, prevents them from LEVERAGING THEIR EXPERIENCE TO YOUR ADVANTAGE and can result in wasted time and expectations unrealized!
- Ask your builder to supply a list of names, addresses, phone #s, and email addresses of everyone involved in the construction process that you are expected to interact with. Often builders will assign one person to walk you through the SELECTION PROCESS providing advice as to amenity choices within the ALLOWANCE BUDGET while providing opinions (when asked) as to color coordination.