Project Paralysis

When you start the application process for a construction loan your builder (in our case the builder is my dad) has to complete a project analysis. This is a rough estimate and break down on the total cost to build your home. If this is a custom home that a builder hasn't built 50 times over then be prepared that your numbers will be off. When a builder has built something over and over again he has fixed costs, can buy in bulk etc.

You project analysis is submitted to the bank and a construction management company that works with your bank will review and verify that the numbers meet market value. Ex: If your builder gets hit by the mega bucks bus anyone else can build your house for the same cost. You can figure out the per sq footage cost to build in your area by taking the total cost of a house and dividing it by the number of sq feet.

A typical construction project will run over 10-15%. Instinctively you want to pad all of your numbers to include this overage. Unfortunately before the construction management company and bank can sign off on your project analysis it is then reviewed by a third party assessor and appraised based on comparable homes sold in the last year in your area.

On average the initial assessed value of a home will come in under what you are projecting it will cost to build it. If this occurs you will be asked to come up with the difference or find a cheaper way to build your house. This is one of the many ways banks mitigate risk. You can say you are going to build the Taj ma hal but you may end up building a hut with sticks and stones. A lot can happen during the building process.

We lucked out and our project was assessed at the amount we requested. Our loan officer said we were an anomaly.

Before we even started the application process my dad and I went to two different lumber yards in our area and had them price out all of the materials (sans labor) to build our home. Surprisingly there was a $10,000 cost variance between the two based on location.

Then my dad and I spent 3+ hours crunching all of the numbers to factor in labor. Depending on the line item labor can vary greatly. It can sometimes run 2 x more than the materials or sometimes the materials are 2 x more than the labor.

My dad had been out of the building game for 10 years so he did not have a crew of sub-contractors that he could recommend for our project. So we used Angie's List and referrals from friends to get bids for all of our major subs (HVAC, Electrical, Plumbing, Gas, Insulation).

Getting bids from sub-contractors is like seeing Halley's comet, petting a unicorn, finding a pot of gold at the end of a rainbow. Be prepared to be frustrated and shocked when no one calls you back or can provide you with a bid within a normal time frame. Yes I actually had to call one plumber 20 times before he provided me with a price. Note; We did not sign a contractor with said plumber.

Also be prepared to get bids that range in price from the reasonable to the astronomical. There is no rhyme or reason and paying more doesn't always mean the job will be done better. And sometimes a contractor will give you a bid based on your home plan but then when they find out you are building in an affluent town or they come out to "measure" they may double and triple the price. We have found that getting at least 4-5 bids on everything you need to sub out will give you options.

Don't be afraid of the numbers. If you build in some padding you can move around money if something runs over in one area. At the end of the day it really is all a numbers game!