Land, Money, and Red Tape

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In this section, we will present information about subjects that are not directly related to the design and construction of your home but that nevertheless can have a profound impact on your project.

BUILDING SITES

Land costs represent an increasingly large portion of the cost of building a house— roughly 24 %, on average. In many areas, the %age is significantly higher, due at least in part to government bureaucracy, land-use controls, zoning ordinances, and environmental protection policies. Many of these regulations are critical to assure quality of life in the areas affected, but unfortunately they often inflate land costs. You should study the regulations in the community where you plan to build, since they can have an important effect on your plans.

According to Frank Gary, former city planning director for Petaluma, California, and Boulder, Colorado, there are basically two zoning systems used in the United States. The first, referred to as a “cascade” zone system, permits all uses allowed in less restrictive zones, plus the uses specified for the zone in question. For example, single-family homes are usually considered the most desirable use for a particular site, followed by multifamily residences, commercial buildings, and industrial buildings. If you wanted to build a single- family home in an area zoned for multifamily homes, you could. But you would not be allowed to build a duplex or triplex in an area zoned for single-family structures. The second type of zoning is the “specific-district” system in which only those uses specifically defined in that particular zone are permitted. Uses permitted in less restrictive zones are not allowed. Thus, you could not build a multifamily unit in a “specific-district” area unless such units are specifically permitted there, regardless of whether they are permitted in less restrictive districts.

For both cascade and specific-district zoning, it's important that you check not only the lot you are interested in, but also the zoning on the surrounding properties. It would be disheartening to build your dream house and then learn that a waste dump was going to be created next door.

Some communities have “solar access” ordinances that protect homeowners’ access to the sun (so your neighbors can’t erect any structures that would shade your house), but such ordinances tend to be rare, so check out the situation carefully. Height restrictions might be of particular importance if you plan to build a solar home, or if there are attractive views you want to preserve.

Ask the building department for a list of all the agencies that will review your building permit. Give particular attention to flood control and seismic considerations, since either can make a lot virtually un-buildable. It would be a shame to purchase a lovely piece of land with a picturesque stream running across it only to discover that you can’t build on that land because it’s in a floodway.

In addition to restrictions imposed by local governments, many subdivisions have their own covenants that you must conform to if you wish to build there. Covenants typically cover aesthetic questions such as the type and style of permissible structures, the exterior finish materials that may be used, and what kinds of domestic animals are allowed. Many subdivisions have active architectural committees that review house plans before they may be built. If you have your heart set on building a large redwood dome home, and the lot you’re considering is in an architecturally conservative subdivision, better check to see if there is an active architectural committee before you buy the land.

Finding a Lot

If you’re new to the area, drive around and familiarize yourself with what’s available in buildable lots. Good real estate agents can be worth their weight in gold, since they should be well acquainted with restrictions that might apply to the piece of land you are considering. Keep in mind, however, that real estate agents work for the seller, and the responsibility to research potential problems with a site is yours.

When you find a lot that appeals to you, get specific in your research. Find out what the asking price is and how flexible the terms (if any) are. it's often possible to buy land for a little money down and have the seller carry the note for a specified amount of time at attractive rates of interest. There is little risk for the seller, since if you default on your payments, he or she will get the property back and you will lose whatever you have in it. If you plan to build out of pocket, having the seller carry a note might be an ideal arrangement, since it frees your cash for materials and other house expenses.

If you plan to borrow from a bank to build and don’t want to pay cash for the land, find out if the owner is willing to “subordinate” to the construction loan. This means the owner takes a secondary position to the construction lender, so that if you default, the lender gets paid before the owner. This is the minimum a lender will require; more often he or she will require that you own the land free and clear. In that case, you may be able to use the first installment of the construction loan to complete the land purchase.

If the price of the land is within your budget, it’s time to find out if the property meets other criteria. If the lot seems like a particularly good deal, we would urge you to brig a healthy dose of skepticism to the negotiating table. There are any number of things that can add significantly to the development costs on a piece of property, and even though the selling price may seem attractive, by the time the lot is buildable, you may have spent much more than you had expected to.

The following is a list of things to consider. If you’re concerned about losing the lot while you look into these matters, it’s possible to write a contract naming any or all of the following considerations as contingencies. In some areas, obtaining a building permit is itself contingent on meeting these criteria, and if this is the case in your building jurisdiction, making the land contract contingent on obtaining a building permit might serve as a blanket safeguard.

Property Location

The location of the lot, the pattern of growth in the surrounding area, and how the lot and your proposed construction project fit that pattern will all affect the land’s value. A single-family dwelling sandwiched between shopping centers will be less marketable than one in an attractive residential neighborhood.

The condition and arrangements for maintenance of streets and roads also affect property values, and in many areas you must be on a maintained road to get a building permit. In many parts of the country, it's possible for a lot to be in a subdivision and still not have legal access because maintenance requirements have not been met. Local governments can require that all buildable lots be on maintained roads.

Federal flood insurance regulations have been tightened considerably. In many areas, it's impossible to get a building permit or mortgage for a property in a floodway or floodplain.

Soils

Ask for a copy of any soils report that has been prepared about the lot. If none is available, check with local building officials to see if they will require a soils report before they issue a building permit. They probably will make such a requirement if other homes in the immediate area have had trouble with expansive or weak soil, a high water table, or other soil problems. Soils reports are expensive ($400 or more), so if there is an existing report, or if you can talk the seller into paying for one, you will save money. If there is a problem with the soil, the building department will almost certainly require that the foundation be engineered, increasing your costs.

Check to see if the lot you’re considering is in an area where bedrock is close to the surface. If your dream house is earth-sheltered or includes a full basement, you may have to blast away the rock before you build—not the most practical or cost-effective way to excavate a site. A high water table can also make below-grade living space impractical.

Water Supply

If there is a water line adjacent to the lot, find out what the fee is to hook up to it. If there isn’t a water line, look into the possibility of obtaining a well permit. The local driller can tell you how deep the wells are in the immediate area, which will give you a rough sense of the cost.

Building departments usually require some evidence of a water supply before they’ll issue a building permit, and usually a well permit or letter of commitment from the local water district suffices. A lender, however, often requires that the property already have a producing well (assuming there is no other water supply available), and most lenders specify how much water the well must provide. If your well produces less water than the lender specifies, you may be required to install a cistern or make other arrangements to assure a constant supply of water.

Sewage Disposal

Building departments and lenders require adequate sewage disposal. If no sewer line is available, you can usually build a conventional septic system. If, however, soil conditions make such a system impermissible, you should examine a number of alternative systems, including composting toilets, incinerating toilets, specially engineered septic systems, and “gray water” recycling systems. Many of these options make good sense, but lenders and building and health officials may hesitate to approve them. We would encourage you to explore the possibilities, but leave yourself enough time to plough through the red tape you’re likely to encounter.

Septic systems generally must be kept a minimum of 100 feet from any well or water course, and that distance can increase to 200 feet if there is fractured bedrock or a high water table on the lot. Give some thought to how you can arrange the house, septic system, and well on the lot without endangering your own or a neighbor’s well or pond. It’s always preferable to locate the septic system downhill from the house, but if this arrangement is impossible, “lift stations” (devices designed to pump sewage uphill) can be installed.

The test used to determine whether the soil is appropriate for a septic system is called a “percolation” or “perc” test (a procedure that measures the rate at which soil absorbs water). A perc test isn’t difficult to perform, and there may be places on the property that test out better than others. it's often in your interest to do your own perc tests before buying the land. Rent or borrow a post-hole digger and dig three holes 30 to 36 inches deep in the area that you plan to use as a leach field (the portion of septic system that allows water from the main septic tank to leach out into the soil). Fill these holes with water and keep them full until they are saturated and the rate at which the water drops in them has stabilized. Then time how long it takes the water in the hole to drop an inch. The result is known as a “perc rate.” In some areas, a perc rate of 1 inch in anywhere from 5 minutes to an hour is acceptable. In other areas, the rate can be slower or faster, as long as the size of the leach field is adjusted accordingly.

Utilities

Call the local utilities and find out what it costs to get any services you will want (electricity, gas, phone service). One owner-builder bought a beautiful mountain lot and discovered some months later that running electric lines to the site was going to cost over $4,000! Find out, also, how long it will take from the time you order the service until it's actually installed. One woman was shocked to find that it would be at least two months before the local utility could connect the temporary electricity at her rural lot. In order to start work on her home, she had to buy a portable electrical generator.

A phone may seem unnecessary on a building site—until the first time one of the tradespeople working at the site makes an unauthorized decision because he or she didn’t want to drive to a phone and talk things over with you. Even if you plan to be on site most of the time, a phone can be invaluable to call for supplies and information. It can also be a godsend in case of an emergency. Contact your local phone company early if you plan to have a site phone.

It is a courtesy to your subcontractors and neighbors to rent a portable toilet in all but the most remote areas. For the rental fee, usually around $60 a month, most companies clean and empty the toilet every week.

Demographic and Economic Indicators

A home’s value is affected by the condition of the local community. Factors you should investigate include population growth or decline and the reasons for it; employment/unemployment figures; and how many homes in the area are vacant. You should also consider how convenient your specific building site is to local schools, churches, shopping facilities, recreation areas, and public transportation.

Resale considerations dictate that you keep the house within 15 to 25 % of the value of the average home in the neighborhood. You will also find the house easier to sell if it's conventional looking, since it will presumably appeal to a broad spectrum of consumers. Of course, if you are reasonably sure that you will not want to sell the house for the foreseeable future, this becomes less of a concern.

Trees, Terrain, Views

Mature trees can add as much as 25 % to appraised land value. Although they can also add to construction costs, since you will have to build around them, the aesthetics and increased property value are well worth the trouble.

Hillside or otherwise difficult lots can be the most valuable in the long run, if they are developed thoughtfully. A major advantage to south-sloping lots is that they are oriented toward the sun (which is always in the southern sky: southeast in the morning, southwest in the afternoon). This makes solar heating easier.

Very steep lots can be a problem, however. Development costs may be prohibitive, and slippage of the soil can make a property unsuitable for building. If there’s a question in your mind, request a geologic report before buying. One indication that there may have been slippage in the past is the phenomenon of “pistol butt” trees — trees with dramatically bent trunks. If all or most of the older trees on a hillside have a pronounced pistol butt at the base of the trunk, it's an indication that the ground shifted, and the trees compensated for the shift.

Miscellaneous

Make sure there is a recent and accurate survey of the property. One owner-builder fell in love with a piece of mountain property that seemed to be an unusually good deal. He asked the owner for a copy of the survey, and was directed to some stakes that had been driven into the ground on the property. When he insisted on another survey, he discovered that the stakes were inaccurate: The existing driveway was on the adjacent property. If he had built where he’d planned, part of his house would have been on the neighbor’s lot. Eventually, the sellers bought enough of the adjacent lots to include the driveway and the planned house site, but it took a full year to straighten everything out.

Ask if there is a title insurance policy on the property to assure that the title is free from any liens (claims by creditors). The policy should be updated before you buy the lot. Also find out if there are any easements or rights-of-way across the land.

It will probably take some time to do all the necessary research concerning the lot you want to buy. In the meantime, don’t put down more than 10 % earnest money, and be sure it’s held in escrow if you’re working with a real estate agent. It’s a good idea to check with your attorney before making any final decisions.

FINANCING

Historically, financing was one of the largest obstacles the aspiring owner-builder faced. Lenders are a notoriously conservative lot, and they generally prefer to deal with established, professional builders. A number of lenders are starting to show signs of receptivity to owner-builders, however. Some actually prefer lending to owner-builders, since they find that owner-builders are more committed to their construction projects than professional builders for whom the work is “just a job.”

Finding a Receptive Lender

If you have a good working relationship with a specific bank that makes construction loans, that’s the place to start looking for money. If you already have a track record of successfully managing loans and other relationships with this institution, you should find a receptive ear when you outline your project. If your banker is unwilling to make the loan, however, ask him or her for names of loan officers at other banks who might be more receptive and ask if he or she would be willing to write you a letter of introduction.

Other owner-builders are often a good source of names of receptive lenders. Ask around. If there is an owner-builder school in your area, it probably has a list of lenders they work with, or the school could at least put you in touch with some of their former students.

Many lenders prefer not to lend in rural areas. Lenders are mainly concerned with the marketability of the property, and building in a rural or remote area narrows the prospective resale market considerably. There are other lenders, fortunately, who have made an informal specialty of lending for projects on remote or difficult sites. If you’re building in a rural or relatively remote area, leave yourself more time to research your financing.

Convincing a Lender

Many lenders have had the experience of being left with a half-finished house to sell and would prefer not to repeat the experience. Since they are in business to lend money, not build houses, lenders are not equipped to act as technical consultants during a building project, and they understandably don’t want to spend much time helping owner-builders through crises. Once they have made the loan to you, however, they have a very real vested interest in having the house completed in a timely and efficient manner, and most will do whatever they can to expedite the process.

In some ways, it’s useful to treat your transaction with a lender as if you were applying for a small-business loan. From the lender’s point of view, you are an unknown entity: You have no track record at the activity you want to borrow the money for. You must impress the lender with your commitment to the project, the thoroughness of your preparation, and your ability to repay the debt.

Prepare in detail for your meetings with the lender. At your first meeting, you’ll want to have:

• A complete set of house plans and specifications, assembled with enough detail that it's easy to tell what the house will look like, how it will all go together, and what materials will be used to build it. If an engineered foundation is necessary, get the engineering done and the plans stamped. In many areas, the building officials require that all foundation designs be approved by a structural engineer.

• Detailed cost estimates. Construction lenders will check the accuracy of your estimates, and they may require that you change your figures to conform to theirs, if there is a conflict. Since your house will probably be custom-designed and custom-built, it's entirely possible that your estimate will be more accurate than the lender’s. One woman encountered this difficulty with her construction lender. When the house was built, it turned out that her estimate was correct—almost to the board—and the lender’s was way off. In order to get the loan, however, she had to modify her figures to more closely match the lender’s.

When preparing your cost estimates, make some preliminary contact with subcontractors. Quotes from subs and suppliers will carry more weight than cost estimates that you work up yourself.

• Proof of ownership of your land or a subordination agreement with the seller. Clear title to your land and the title insurance to confirm it's always a huge plus in the eyes of the lender. Many lenders will work only with owner-builders who own their lots outright. The advantage to the lender is that ownership gives you more equity in the project and thus increases your incentive to complete the project. (It might be useful to have an “owner equity” column on your cost-estimate sheets. Since bankers deal in dollars, figure out the actual dollar amount that you will save by doing all or part of the work yourself and show that figure in the “owner equity” column.)

• Evidence of a producing well or other water supply and an approved septic permit or other evidence of sanitation arrangements. Note that the septic system needn’t be installed at this stage, only designed.

• A demonstrable knowledge of the building process, utility requirements, zoning restrictions, subdivision covenants, and local building codes. Managerial, planning, and scheduling expertise are all useful on construction jobs, so if you can demonstrate that you have a history of these kinds of experiences in other areas of your life (if it’s a part of your regular job, for instance), it will also strengthen your case. Some lenders recognize the diploma from an owner-builder school as an indication that you are serious about gathering as much information as you can about the project, and that you have ready access to the kinds of help you will need as things progress.

• Financial information:

1. Proof of current income. Some lenders call your employer to verify employment, while others ask for income tax returns for the two or three previous years. If you are self-employed, you will have to provide tax returns.

2. Evidence of a good credit rating.

3. A personal financial statement of what you own and what you owe. The lender will be concerned not only about your current debt-to-income ratio, but also the stability of your job history. The lender is considering committing to a long-term obligation, possibly as long as 30 years, and he or she will be a good deal more comfortable if you seem likely to be gainfully employed 10 years down the road.

Because the lender may be concerned about your ability to complete the parts of the project you plan to do yourself, he or she may require you to qualify for a larger loan than you think you need. The lender’s purpose will be to ensure that, if necessary, you will be able to hire workers to do jobs you planned to do yourself. Actually, this is a good idea. Since you pay interest only on the money you draw from your construction loan, taking out a larger loan will cost you only a little extra for the front-end fees that are based on the loan amount. This may prove to be cheap insurance against future problems.

If a lender is very skeptical of your ability to build a house, consider offering a guarantee of completion. This could take a number of forms. Jim Patton, former director of the Durango Owner Builder Center, suggests putting together a package that includes evidence of completion of a house-building course at an owner-builder school; an agreement with a general contractor that if anything should happen to you, he or she would step in and finish the house; and insurance against acts of God, so that the house would be completed even if the wildly unexpected should occur. Also included would be a requirement that you contract for consultations with either your owner-builder school or a qualified contractor. Once construction begins, you would be required to submit to the lender and the contractor periodic statements of progress and expenses to date. If you’ve fallen behind the agreed-upon schedule, or if the budget is getting out of hand, the Contractor would have the option of stepping in and finishing the job.

The Mechanics of Conventional Financing

There are two parts to an owner-builder’s financing package: the short-term financing or gage loan, which you get after construction is complete. ‘l’ you would use the mortgage loan to pay off the construction loan. You would then pay off the mortgage loan over a period of time, often 30 years, in monthly installments.

In order to obtain a construction loan, you must first secure a commitment from a lender for a mortgage loan. The mortgage lender agrees to pay off the construction loan and provide permanent financing once the house is completed, assuming that (1) the house is completed according to the plans and specifications, and (2) your financial situation hasn’t changed substantially in the time it took to build the house. This agreement is also called a “permanent commitment” or a “permanent take-out.”

Mortgages

To get your relationship with the mortgage lender off on the right foot, be straightforward about your background and financial history. There are many things, some of which are out of your control, that will affect your chances of getting financing from this lender. it's important that you talk to a person who has the authority to make at least a preliminary decision, and that you have a good personal interview with him or her.

There are so many types of mortgages that it would require another web site to cover them all. In most of the new types of mortgages, the homebuyer shares the risk of fluctuating interest rates with the lender. One word of advice: Avoid any adjustable-rate mortgage (ARM) that is “negatively amortized.” In such an arrangement, the principal amount of the loan actually increases for a period of time, which means you could make a number of payments on your mortgage and end up owing more than you did at the beginning of the loan! Other snares you should avoid are loans with interest rates that can float freely and loans that put no limit on how much your payment can increase each year and over the life of the loan.

Shop carefully for a mortgage and don’t be embarrassed to ask for clarification if there are points you don’t understand. The complexity of the current money market demands that consumers educate themselves thoroughly about the financing vehicles they’re considering. Don’t assume that all lenders are out to scalp you, however. A loan that ends in default is ultimately not any more attractive to mortgage insurers than it's to consumers. The competition for money is so intense these days, that lenders can ill afford to develop a reputation for taking advantage of their customers.

The type of mortgage you get will depend on your financial situation, the type of house you are building, the mortgage plans available in your area, and your personal preferences. The mortgage lender will tell you how much money you qualify for on the basis of the payment you can make each month. Lenders want to make sure that your monthly payment does not exceed a predetermined %age of your income, often between 25 and 30 %, after other obligations have been considered. One recent development that holds promise for owner-builders is a push to allow individuals who are building exceptionally energy-efficient homes to use a larger %age of their income for making mortgage payments. The rationale is that lower utility bills will leave more money available for mortgage payments. Check with your local lenders to see if they offer such a program. Construction loan, which is used to cover construction costs, and the long-term mortgage loan, which you get after construction is complete. ‘l’ you would use the mortgage loan to pay off the construction loan. You would then pay off the mortgage loan over a period of time, often 30 years, in monthly installments.

In order to obtain a construction loan, you must first secure a commitment from a lender for a mortgage loan. The mortgage lender agrees to pay off the construction loan and provide permanent financing once the house is completed, assuming that (1) the house is completed according to the plans and specifications, and (2) your financial situation hasn’t changed substantially in the time it took to build the house. This agreement is also called a “permanent commitment” or a “permanent take-out.”

Mortgages

To get your relationship with the mortgage lender off on the right foot, be straightforward about your background and financial history. There are many things, some of which are out of your control, that will affect your chances of getting financing from this lender. it's important that you talk to a person who has the authority to make at least a preliminary decision, and that you have a good personal interview with him or her.

There are so many types of mortgages that it would require another web site to cover them all. In most of the new types of mortgages, the homebuyer shares the risk of fluctuating interest rates with the lender. One word of advice: Avoid any adjustable-rate mortgage (ARM) that is “negatively amortized.” In such an arrangement, the principal amount of the loan actually increases for a period of time, which means you could make a number of payments on your mortgage and end up owing more than you did at the beginning of the loan! Other snares you should avoid are loans with interest rates that can float freely and loans that put no limit on how much your payment can increase each year and over the life of the loan.

Shop carefully for a mortgage and don’t be embarrassed to ask for clarification if there are points you don’t understand. The complexity of the current money market demands that consumers educate themselves thoroughly about the financing vehicles they’re considering. Don’t assume that all lenders are out to scalp you, however. A loan that ends in default is ultimately not any more attractive to mortgage insurers than it's to consumers. The competition for money is so intense these days, that lenders can ill afford to develop a reputation for taking advantage of their customers.

The type of mortgage you get will depend on your financial situation, the type of house you are building, the mortgage plans available in your area, and your personal preferences. The mortgage lender will tell you how much money you qualify for on the basis of the payment you can make each month. Lenders want to make sure that your monthly payment does not exceed a predetermined %age of your income, often between 25 and 30 %, after other obligations have been considered. One recent development that holds promise for owner-builders is a push to allow individuals who are building exceptionally energy-efficient homes to use a larger %age of their income for making mortgage payments. The rationale is that lower utility bills will leave more money available for mortgage payments. Check with your local lenders to see if they offer such a program.

In spite of how thoroughly you research your options, some things are out of your control. Interest rates are likely to remain high, limiting the supply of money available for home mortgages. There is even the slim possibility that there won’t be affordable money available when it comes time to retire your construction loan. When you qualify for your mortgage commitment, you qualify at the prevailing rate at that time. When your house is done, 6, 9, or 12 months down the road, rates could rise — hypothetically, at least — to a level where you no longer qualify for the mortgage.

In spite of such grim possibilities, we are not trying to discourage you from tackling the project. Rather, we urge you take the best precautions you can. Your best insurance is to plan your project with meticulous care, and if possible, plan a home that will cost you less than what you can qualify for. The comforting historical reality is that when extreme situations develop, the individuals and institutions involved usually manage to come up with a solution that leaves the owner with the house. Lenders don’t want your house; they just want their money back, and there isn’t a single instance we’ve been involved with where the owner-builder lost his or her house.

Construction Loans

Having secured a mortgage commitment, the next step is to convince a construction lender to give you a construction loan to build the house. Some institutions do both construction and mortgage lending, but more often you will have to shop elsewhere for construction money.

Traditionally, construction loans for single-family residences have been made for a maximum of six months. But lenders accustomed to working with owner-builders will often make the loan for as long as a year. It’s a good idea to make arrangements ahead of time for extensions in case you need them. Once construction starts, you’ll have your hands full.

You will probably have to work harder to convince the construction lender of your abilities than you did the mortgage lender. The letter of commitment that you get from a mortgage company contains a clause that states that the company will provide permanent financing “upon satisfactory completion” of the home. In essence, this means that the mortgage lender is under no obligation to providefinancing unless you complete the project in a timely and acceptable manner. If you fail this test, the construction lender could be left holding the bag—so this lender will want strong assurances from you before extending a loan to you.

As you look for a construction lender, familiarize yourself with the prevailing rates in your area so that you’ll know how good a deal various lenders are offering. Most construction loans are set up so that you pay interest only on the money that you actually use. Always check your loan agreement and make sure. Paying interest from the beginning on the total amount of a construction loan can break your budget in a hurry.

Once you’ve been approved for a construction loan, the lender will set up a checking account for you. All the funds for the construction of your house should be paid through this account. If you have some cash that you want to put into the project before you use the bank’s money, it’s best to arrange for the construction loan first, deposit your funds in the construction checking account, and draw on them until they’re used up, at which time you would begin to draw on your construction loan. If there is money left in the account at the end of the project, you will have paid a bit more than necessary in “front-end” costs when you took out the loan—but this should be far cheaper than using the entire loan and paying interest on all of it.

Many lenders don't want you to spend any money on your project until a construction checking account is set up, and then they want you to make all payments through this account. If you start spending money before the account is opened, they may refuse to extend a loan to you. The reason has to do with liens. Anyone who does work or provides supplies on a construction job has the right to file a lien against the property if he or she isn’t paid. This means that, if the claim is legitimate, this person is entitled to payment before the property can be bought, sold, or refinanced. The lien would have to be paid before you could retire the construction loan and get a mortgage loan. Naturally, construction lenders want to be as sure as possible that no liens are filed. If all the money you use has been funneled through the construction account, the lender has reasonable assurances that everyone has been paid, because the canceled checks provide evidence. To reinforce this evidence, you should also collect lien waivers from everyone you write checks to. The easiest way to do this is to have a lien waiver printed on the back of the checks, so when tradespeople endorse the checks, they indicate that they waive the right to file liens. Lien waiver forms are also available at office supply stores.

Associated Expenses

Both the construction and mortgage lenders will charge for a variety of things besides the interest on the loans. Often these costs must be paid in certified funds when loan arrangements are completed, so it’s important that you be aware of what they are. The following is an example of the costs you might expect to encounter:

• Title insurance policy. Construction lenders require title insurance to assure them that you own the building lot free of liens or other encumbrances. You pay for the lender’s policy, and it’s also a good idea to buy one for yourself because the lender’s policy covers only the lender’s liabilities, not yours. If a dispute should arise over the title, the lender would be protected but you could lose your investment. The fee for the second policy is usually nominal. When you finish the house and get your mortgage loan, the mortgage lender will require an update of the policy. Again, get a policy for yourself at this time.

• Front-end or origination fee. This covers administration and other costs the lender incurs in putting the loan together. it's usually 1 “point” or 1 % of the loan value.

• Appraisal. Both the construction lender and the mortgage lender will require appraisals based on the plans and specifications, and then the mortgage lender’s appraiser will walk through the house after completion to assure that it was constructed according to those plans and specs. Sometimes construction lenders have their own appraiser and include the cost of the appraisal in the origination fee, but more often you’ll pay for it separately.

• Credit report. The construction lender will require a credit report separate from the one required by the mortgage company. The mortgage company requires one at the time of application and an update when the house is complete to assure that your financial status hasn’t changed in the time it took to build the house.

• Recording fees. About $3 per page in many areas; this covers the cost of recording the documentation for the loans.

• Taxes and insurance. Your property taxes should be fully paid when you take out the construction loan, and you will be required to buy a “builder’s risk” insurance policy to cover the project until it's complete, at which time the policy will be converted to a homeowner’s policy. Your property taxes and homeowner’s insurance are included each month in your mortgage loan.

• Survey. A survey is done to assure that the proposed house will be on the lot you own, that it won’t encroach on any easements, and that the setbacks are correct. The survey is often not required until the foundation is poured or even later, but you would be wise to have it done before beginning construction.

• Construction loan interest. Some lenders have you pay the construction loan interest on a monthly basis as it accrues, while others let you wait until the project is complete. Often it's incorporated in your mortgage payment.

• Other costs specific to your situation or to the lender. This might include a real estate tax service, which authorizes the title company to send the annual property tax statement to the mortgage company so that they can include the appropriate amount in your monthly payment. (Title companies are organizations that search real estate titles to ensure that they are free of liens and that all easements are identified.)

• “Junk fees.” Lenders may charge for nearly anything the consumer will agree to pay. You may find you are being charged for document preparation, underwriting, etc. Remember the Golden Rule: “He who has the gold makes the rules.” But don’t hesitate to ask for a clear explanation of all charges.

Cutting Costs

Naturally, you will benefit if you can keep the size of your construction and mortgage loans as small as possible. Here are some suggestions:

• The most obvious way to cut financing costs is to reduce the size of the house. While this may not seem desirable, we think it merits consideration. You could build a small, expandable house designed with expansion in mind, so that you can enlarge it later. Starting small and expanding later has several advantages. If you do most of the work yourself, you may have enough equity in the property to get a home improvement or equity loan to continue the work. You will also have a place to live during the rest of construction.

• If you’re designing the house yourself, find out what the standard sizes are for the materials you’ll be using. For example, framing lumber comes in 2-foot increments (studs are normally 8 feet, 10 feet, or 12 feet long, for example), and sheet goods (plywood, insulative sheathing, etc.) come in 4-foot increments (4 feet, 8 feet, 12 feet, etc.). If you design your house with these dimensions in mind, you’ll have much less waste, so costs for materials will be lower.

• Some hardy owner-builders live in a temporary shelter on their land while they build their home. They can then apply the savings from rent or mortgage payments toward materials. The disadvantage is that it can be stressful to live primitively while working hard. It may also be illegal to live in a trailer, teepee, tent, or other shelter in some areas, so check the local regulations before you proceed with this plan.

Less Conventional Financing Options

If you can’t work out financing with a conventional lender—or if you don’t want to— you should consider various alternatives:

• Ask family and friends. There may be someone among them with enough cash and faith in your abilities to make the construction loan—or at least to advance you enough to significantly lower the amount you’ll need to borrow from a construction lender. If you take this route, keep the transaction businesslike. Sign a note so that your friend or relative will have recourse, should problems arise, and offer to pay a rate that is competitive with the rates they could get from other short-term investments.

• If you currently own a home, consider selling it and using the profits to finance your new home. You might be able to build the new home out of pocket or at least significantly reduce the amount you’ll need to borrow. One possible scenario, if you have the time and enough equity, is to sell your present home, put a small down payment on a piece of land and let the owner carry the note, then use the rest of the profit from the house sale to build.

• If you’ve seen any kit homes that appeal to you, see if the manufacturers offer construction financing or if they are willing to help you find financing. Some kit manufacturers finance only the actual construction of the house, not site improvements. Check into this and be sure that you are aware of all the costs involved.

• Look into local community bond issue funds or federal agencies such as the Veterans Administration (VA) or the Farmers Home Administration (FmHA). If you have the patience and stamina to wade through their paperwork, and if you’re qualified, you can sometimes save significant amounts. The VA requires very little or sometimes no money down on some loans. FmHA has a self-help housing program that might be worth exploring.

• If the chips are really down, boldness may be in order. One owner-builder started his project with cash he had and then ran ads in the newspaper offering good rates on an investment secured by real estate (the home he was building). He got so many responses that people were actually bidding against each other. He ended up with a very competitive arrangement and is now living in his house. Of course, there’s no guarantee that such a risky scheme would work for you.

Estimating Building Costs

Complete and correct cost estimates are critical to the success of any building project, but they are particularly important to the owner-builder, since you can’t recoup your losses on the next job. Professional estimators use several methods to arrive at an accurate estimate. As a preliminary “ballpark” figure, they will cite the average square-foot costs of comparable homes in the area. Since the chances are that you are considering a customized house design that has never been built before, the only way this method would be useful is if you’re buying from one of the few companies that are manufacturing customized homes designed on a module. In this case, you could get an idea from the manufacturer how much it has cost in the past to build the modules you choose.

By far the most accurate method of cost estimating is called quantity surveying. This involves a “takeoff,” or detailed itemization, of all the materials that will go into the house and a “takeoff” of the labor that will be necessary to make all those materials into a house. Overhead and profit are then added to the sum of these figures. For the owner- builder, overhead and profit are the equity you will have in the project when it’s finished. While no estimate is infallible, and indeed sometimes cost overruns seem to be the rule rather than the exception on construction jobs, absolute thoroughness and attention to detail are your greatest allies as a novice estimator. Literally try to list the prices of all the materials you will use in constructing the house, and then—using advice from tradespeople and other owner-builders—carefully calculate how much you’ll have to spend to hire out each construction task that you don't intend to handle yourself.

The healthy enthusiasm and optimism that owner-builders bring to their projects sometimes puts them at a disadvantage when they get down to the nitty-gritty of figuring out how much their dream house is going to cost them. Emotional attachment to desirable but nonessential items can spell disaster for a tightly budgeted construction project. We’ve watched owner-builders convince themselves, in the face of professional advice and lots of evidence to the contrary, that their budgets were sufficient to justify purchasing the hot tub or custom-built cabinets early in the project. You should make contingency plans that allow for the frills only if all the work up to that point has gone according to plan and budget.

The estimating process, while time-consuming and often tedious, is one of the most effective and comprehensive planning tools at your disposal. It will make it possible to shop for materials with increased confidence, and the expertise you gain will make it easier to convince a lender that you’re competent to build your home—you’ll know in detail what all the parts and tasks are. For this reason, even if you’re building out of pocket, we urge you to take the same care with your estimate that you would if you were presenting it to a lender.

Most office supply stores carry estimating forms, and construction lenders often have forms they use. Anything that helps you stay organized and keeps you from forgetting various items will serve the purpose. Ask around in your area and see what the contractors use. Table 6-1 presents a sample form.

Recognizing that doing a takeoff on your home is a long process, you should tackle it in short blocks of time rather than trying to sit down for 6 or 8 hours at a stretch. Your mind will get fatigued in a couple of hours, and you’ll be much more apt to make mistakes and get discouraged.

A careful examination of your plans and specifications, looking for inconsistencies and discrepancies, should be one of your first tasks. Specifications always take precedence over the drawings, so pay particular attention to them. Measure everything exactly as it shows on the drawings—do not approximate, average, or round off your figures. If there is a discrepancy between the dimensions you get when measuring the drawings and the dimensions that are written on the drawings, go with the written dimensions until you can check with the person who drew the plans. (If you drew the plans yourself, figure out where you made a mistake and correct it.) Similarly, if there are discrepancies between the drawings and the specifications, accept the specifications until you can resolve the discrepancies. Measure everything that you see in the drawings, and make sure it's all reflected in the specifications. Never leave something out because it seems insignificant. As a contractor we know says, “Take it all off.”

List materials and tasks in the order they will occur and keep the separate tasks separate to avoid compounding errors. For instance, as you start, figure the excavating work for the foundation separately from forming and pouring the footings; figure forming and pouring the footings separately from forming and pouring the foundation walls; and so on. This makes mistakes easier to isolate and will make comparing the cost of different materials and techniques simpler. If, for example, you decided to use concrete block for the foundation rather than poured concrete, you would only have to refigure the foundation walls.

Segmenting the project this way also makes it more psychologically manageable. it's very easy to lose your perspective when dealing with hundreds of details and large amounts of money. Pouring a concrete footing, framing a floor, or tiling a bathroom floor are much easier and less overwhelming to cope with than building a whole house.

Never round off your results until you finish the calculations for the task you’re estimating. Say you’re calculating the amount of concrete you’ll need to pour your footings. The footings are 8 inches deep by 16 inches wide, by a total of 130 linear feet. Eight inches is 2/3 of a foot, and 16 inches is 1 1/3 feet. If we multiply this out, we get 115.584 (.667 x 1.333 X 130) cubic feet of concrete. We need to convert this to cubic yards (concrete is measured in cubic yards), so we divide 115.584 by 27 (the number of cubic feet in a cubic yard), and we get 4.28 1 cubic yards. Having arrived at this result, you can now round up by 5 % or so to allow for waste or irregularities in the footing trench: Call it 4.5 cubic yards. But never round off your numbers before reaching this point. If you’d gotten lazy and rounded your 2/3 of a foot up to 1 foot, your calculations would look like this: 1 x 1.333 X 130 = 173.29 cubic feet. 173.29 ± 27 = 6.418 cubic yards. This is almost 2 cubic yards more than the correct answer. This is a gross example, but it illustrates the point. If you round things off before you get to the end of the operation, you’re apt to end up with a lot more material than you want or need.

As you proceed with your estimates, write down all your thinking as you go along. If you’re doing it right, someone else should be able to sit down with your figures and easily trace the path that got you to the bottom line. Use a printing calculator for your math and attach the calculator tapes to the estimate sheets so that you can refer to them. As you figure parts of the job, mark them off on the plans so you don’t figure something twice.

Most Common Estimating Mistakes

Following are some suggestions to help you avoid mistakes that are frequently made in preparing construction estimates.

• Many people fail to familiarize themselves with site conditions. There is a wealth of information to be had at your building site. Familiarity with your land and the surroundings can save you large amounts of time, money, and hassle.

As you walk around the property, visualize how things will happen. Are there rocks, outbuildings, trees, or debris that must be removed? Do you have the time, skills, and equipment to take care of the job or will you have to pay someone else? Is there room for large trucks to clear the utility wires? Is there a road or a place for a road large enough to accommodate big trucks? Is the ground hard enough to support heavy trucks and equipment? Think about how workers and materials will get in and out of the site in all kinds of weather. Remember that if materials can’t be delivered directly to the building site, you must move them or pay someone else to move them from where they’re dropped to where the house will be.

How deep are the wells in the area? Is a conventional septic system possible? Does the property include large trees that must be removed? (If trees must be removed, be sure to leave 3 or 4 feet of stump so that a tractor driver can catch them with his bucket and push them over. It can mean the difference between $40 or so per tree, and as much as $200 per tree if the trees are cut down to small stumps that have to be pulled from the ground.)

• Excavation work is very difficult to estimate; this is probably an area where you will need professional help.

Once the excavation is done, where are you going to put all the dirt? Will it have to be hauled off? Needless to say, hauling dirt around costs money, and it’s quite possible there will be no room to store a big pile of earth on a small lot. Will blasting be necessary? A license is required in most areas to handle explosives, so this is not a do-it-yourself operation. Will you be building on solid, undisturbed earth or a landfill? Building codes require that you compact the dirt in a landfill or sink caissons (concrete piers) down to solid earth.

• Underestimating “incidental” costs can cause serious problems for novice home- builders. These include such items as tool rentals and purchases; loan costs; insurance; permit fees; septic, structural, and /or soils engineering fees; road building and maintenance; storage sheds for tools and materials; a site telephone; a portable toilet; sales taxes; keeping sharp saw blades on the site; all those unplanned trips to the lumberyard; and construction cleanup.

• If you have the money or can qualify for it, estimate for the highest possible quality materials and labor. it's always possible to downgrade the specifications if that becomes necessary, but you’re in trouble if you have cost overruns at the beginning of the job, and your estimate is for a bare-bones house. Lenders are also more comfortable if they know that you can cut back without damaging the marketability of the house.

• To repeat: The most common mistake we see owner-builders make in their estimates is not taking enough time to become thoroughly familiar with their project. The result is that they leave something out of the estimate. One person forgot the footing drainage system; another didn’t allow for any door hardware; and another didn’t investigate the subsurface conditions of his lot thoroughly enough and had to blast through bedrock to run the water line from the well to the house. Throughout your project, you will be making up for inexperience by arming yourself with an intimate knowledge of your particular house. Spend as long as it takes to know that building inside and out and to get a clear idea of your options at each stage of the process.

• Always develop contingency plans and leave yourself a cushion to take care of the items that are inevitably overlooked. Once you’ve done as thorough an estimate as you’re capable of, relax and enjoy your project. Of all the people we’ve watched build homes as first-time owner-builders, not one has failed to complete the job. The ones that ran into trouble were, to a person, the ones who didn’t think it was necessary to plan carefully and took a “design as you go” approach to the project. But even all of them eventually finished and now live in the homes they built.

CODES and PERMITS

Nearly any contractor you talk to will have at least one story to tell about an unreasonable building inspector. But in fact, the building inspector is often an invaluable ally and source of information to the novice builder. it's in your interest to cultivate a positive, cooperative relationship with him or her early in the project. Keep clearly in mind that building officials have the authority to shut down your project if they think there is a code problem with what you’re doing.

The Model Codes

In the United States, there are three building codes that most local building departments use as the models for their own codes. The Building Officials and Code Administrators International, Inc. (BOCA) publishes the Basic Building Code, used by some communities east of the Mississippi. The Southern Building Code Congress International, Inc. (SBCC) publishes the Standard Building Code, used mainly in the South. The International Conference of Building Officials (ICBO) publishes the Uniform Building Code (UBC).

We will discuss the UBC mainly, since it's the most widely adopted, but we urge you to find out what code is in force in your area.

Some local building departments adopt model codes in their entirety, and sometimes they make slight changes. Other communities write their own codes, usually based on one of the model codes. Whatever its origin, the local code determines what and how you can build, so you should get a copy (including the provisions for mechanical, plumbing, and electrical work) and study it. You will likely be impressed by the detail that is presented in the code book. The complete UBC covers all kinds of buildings besides residences, which is largely useless information for the owner-builder. Fortunately, the ICBO publishes an abridged version of the UBC that deals only with residential construction. it's considerably cheaper and less formidable than the complete UBC. Many building departments sell copies over the counter, and it's also available in some bookstores. If you have trouble finding it in your area, see ICBO’s “Dwelling Construction under the Uniform Building Code.” If another model code is used in your area, check to see if they have a similar residential version of their code.

In the words of the UBC, the purpose of the codes is to “provide minimum standard to safeguard life or limb, health, property and public welfare by regulating and controlling the design, construction, quality of materials, use and occupancy, location and maintenance of all buildings and structures within this jurisdiction and certain equipment specifically regulated herein.” Your house will almost certainly be built to higher standards than the local code requires, but in any event, you must be sure to meet all code requirements.

The codes primarily cover conventional construction techniques. If you are considering using unconventional materials or building methods in your home, you can anticipate some resistance from building officials. They will want assurance that your materials and methods will perform as well as the ones listed in the code. Section 105 of the UBC states that “the provisions of this code are not intended to prevent the use of any material or method of construction not specifically prescribed by this code, provided any alternate has been approved and its use authorized by the building official.” As long as you can convince the building officials in your town that your plans are safe and effective, you can probably get your technique or material approved.

If you feel the building department is being unnecessarily conservative, Section 204 of the UBC also states “In order to determine the suitability of alternate materials and methods of construction and to provide for reasonable interpretations of this code, there shall be and is hereby created a Board of Appeals consisting of members who are qualified by experience and training to pass upon matters pertaining to building construction.” This gives you recourse if you can’t get any satisfaction from your building inspector. According to the code, the Board of Appeals consists of other building professionals who may be more sympathetic and better able to assess your situation than the building department.

One owner-builder, Bruce Gandrud, is a classic example of how one can work success fully with local government. Gandrud wanted to build an adobe home in Boulder, Colorado. It would be the first adobe home in the city. Boulder building officials were predictably skeptical about the suitability of adobe to the local climate. But Gandrud discovered that the state of New Mexico has written an excellent amendment to the UBC that covers adobe and other earthen structures. This gave him a precedent to present to the Boulder officials. Earth homes are common in many parts of the world with much wetter climates than Boulder’s, and investigation revealed that there were numerous ways of designing and building adobe structures for such climates. Gandrud had to make some design compromises to win approval from the Boulder officials, but his adobe home is now finished, and he and his family are happy with the results.

Permits

Regardless of whether you’re building an unconventional house or a standard structure, you will have to get a building permit before you begin construction. The procedure for obtaining a permit varies from one building department to the next, but to give you an idea of what’s involved, we’ll describe what one building department requires.

Permits in the sample area are good for 18 months, and you may not suspend or abandon work for a period exceeding 180 days, or you will have to renew your permit in order to begin work again. You must also renew your permit if the house isn’t completed in the 18-month period.

The building department requires you to submit the following in order to obtain a building permit:

• An application form, available at the building department.

• A soils report, if there is any evidence of expansive soils, high water table, or other problems.

• A copy of your deed recorded with the county clerk.

• Evidence of a water supply.

• Evidence of arrangements for sanitation.

• Proof of legal access to your site (if the property does not front on a county road).

• Two sets of construction drawings and specifications that illustrate all the proposed work in enough detail to clearly show compliance with building codes and zoning regulations. The set of plans must include:

1. A plot plan (a plan of the property with the house on it).

2. A foundation plan.

3. Elevations (front, rear, and side exterior views of the house).

4. A floor plan of each level.

5. Cross section(s) of the house.

6. Details of critical elements that clearly show sizes, materials, connections, and construction, if they apply to your project including (a) window details, if not shown on floor plans, (b) fireplaces and chimneys, (c) roof truss designs with stress analysis or name of manufacturer, (d) roof hips and valleys, decks, stair ways, and any other applicable elements.

If necessary, the building official may request other information to confirm the structural adequacy of the structure.

Inspections

As work progresses, you will be required to arrange for inspections by a building official as predetermined stages of the project are completed. You are required to have the inspection record card displayed in a conspicuous spot on the site at all times, where the inspector can conveniently make entries on it, and you must also have a copy of the construction drawings on the premises.

It is a good idea, and in many areas a requirement, to give the inspector at least one working day’s advanced notice of your request for inspection. You must provide the inspector with easy access to the work to be inspected.

The following are the inspections that are typically required by building departments. (Check to see what inspections are required by your local department.)

Rough Inspections

• The temporary electric construction pole must be inspected after all wiring installations have been made as required in the National Electrical Code, 1981 edition, Article 305, entitled “Temporary Wiring.”

• Trenches, footings, pads, and caissons must be inspected after the trenches are excavated and the forms erected, prior to pouring the concrete.

• Foundation walls and /or grade beams (continuous footings reinforced to act as beams) must be inspected after all forms are erected, prior to pouring the concrete.

• Damp-proofing of footings, foundations, and /or grade beams for basement walls must be inspected prior to backfilling.

• Any electrical work that is to be located under a concrete slab within the building must be inspected prior to backfilling and /or the pouring of the slab. If the meter housing is mounted on a pole, the building official must inspect between the pole and the house prior to backfilling.

• Any plumbing work that is to be located under a concrete slab within the building must be inspected prior to backfilling and /or the pouring of the concrete slab.

• Any gas piping that is to be located under a concrete slab within the building must be inspected prior to backfilling.

• Rough electrical work must be inspected prior to being covered and concealed. Inspection will be made of all walls, ceilings, floors, the service equipment panel, and the service entrance.

• Rough plumbing work must be inspected prior to being concealed in walls, ceilings, and floors. Waste lines, vents, and supply lines will be included. Whether or not it's required in your area, we recommend that you pressure test supply systems and drain- waste-vent systems (DWV) before closing the walls.

• Rough gas piping must be inspected prior to concealing in walls, ceilings, and floors.

• Rough heating and ventilation work must be inspected prior to concealing in walls, ceilings, and floors.

• Rough framing must be inspected after the roof, all framing, fire blocking, and bracing are in place, and all pipes, chimneys, and vents are complete. Note: The roof covering (shingles or other) must be on in order to pass this inspection.

• Insulation in walls, ceiling, and floors must be inspected prior to concealing in walls, ceilings, and floors.

• Lath and /or wallboard must be inspected prior to plastering or taping, and after all nails and /or screws are installed.

Many of these rough inspections can be done simultaneously, e.g., rough electrical, rough plumbing, rough gas piping, rough heating and ventilation, and rough framing. Inspectors appreciate not having to run back and forth to your site four or five times to make inspections they could make in one visit.

Final Inspections

Final inspections are usually made after work on the building and site is completed and the home is ready for occupancy. If all is in order, you will be issued a certificate of occupancy and may live in the house with the blessings of your building department. Mortgage lenders require a certificate of occupancy before they make the permanent loan on the property. In many areas, it's possible to get a temporary certificate of occupancy before the house is entirely complete, if the building official determines that “no substantial hazard would result from occupancy.”

The following inspections are often required to get a permanent certificate of occupancy. (Check to see what final inspections are required in your area.)

• An inspection of the distance between buildings and property lines, as well as rights-of-way.

• Final grading is inspected to see that there is positive drainage away from the house—the inspector is not concerned with whether the landscaping has been done. Your lender, however, may require that the landscaping be completed, since this affects the marketability of the property.

• The frame is inspected to demonstrate that all rooms and areas are complete in every respect.

• Electrical work is inspected. All fixtures must be installed and operational, and the service entrance and service equipment panel must be complete.

• All plumbing fixtures must be installed and functional.

• An inspection of gas piping, which entails an air-pressure test of not less than 10 pounds per square inch. The pressure must be maintained for at least 15 minutes.

• Heating and ventilation work must be complete in every respect and in compliance with the local code.

• Window glazing and insulation is inspected. Double glazing is now required by code in many areas, and the “Federal Glazing Act” requires safety glass in any doors intended for human passage, tub or shower enclosures, and windows located within 12 inches of a door and below the line of the top of the door.

Potential Problems

If you start work without a permit, you are liable for an “investigation fee,” in addition to the cost of obtaining a permit. The investigation fee is often equal to the cost of the permit, so the result is that your permit fee is doubled—and the inspector will keep a close eye on you for the rest of your project. If any work has been covered so that it can’t be inspected or is not in compliance with the code, the inspector can require you to tear it out and redo it. If concrete has been poured without an inspection, you could conceivably have to redo the foundation. it's your responsibility to know what is required of you and comply. Some jurisdictions, for instance, require separate permits for various parts of the job, such as plumbing and electrical work, and some even require that homeowners planning to do parts of the job take tests to prove minimum competency.

Any time an inspector is unhappy with the work you are doing, he or she has the authority to stop work on your project (sometimes called “red tagging” the job). If you think the stop work order is unjustified, you have the right to appeal it, but you may not proceed with work until the appeal is settled. Since this can upset all your careful scheduling and cost extra interest on the construction loan, it's always in your interest to establish and maintain an open, cooperative relationship with the building inspector.

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