If you’re like me, there’s nothing like home shopping to inspire an insatiable desire to build. Every home that is currently standing has been built by somebody else. To the extent that the home is unique, it’s unique because someone else made it that way. No home I have ever walked into – and this includes some really pricey ones – has ever screamed “home.”
Building a home is the only way to satisfy all of your unique needs, but it’s also not a path without potholes. Here are three of the most significant things to consider before calling up that college buddy who just got a degree in architecture.
Financing is complex
Financing a completed home is reasonably straightforward. It has an objective value, and when you decide to buy you know pretty much the interest rate you’re going to get. Building a home is different. A home build is financed in two phases – a building loan to cover the cost of land and construction and a traditional loan to cover the completed home. That means you’re going to pay two sets of closing costs, one for the construction loan and one for the traditional mortgage. It also means that you won’t get the interest rate that’s available now. You’ll get whatever the going rate is when your home is completed – somewhere between six months and a year from now.
The value sometimes isn’t there
Right now, home prices are still relatively low, and as shadow inventory – the thousands of bank-owned homes that aren’t currently for sale – flood the market home prices might go even lower. In many markets, that means that it’s actually more expensive to build a home than it is to buy one – a fact that can complicate the process when it comes time to convert the construction loan to a traditional mortgage. The value used to calculate that mortgage is going to be based on an appraisal, and if you’ve spent $200,000 to build a house that appraises for $150,000, the bank is only going to loan you 80% of the appraisal, or $120,000. That might mean that to keep the house you have to come up with cash to cover the difference.
Builders aren’t always gentlemen
If I were a woman, I would totally marry a guy who does construction. That’s how cool I think it is to swing a hammer for a living. My admiration notwithstanding, however, it’s important to remember that a house, like a person, holds most of its vital organs inside its skin. Because builders are usually the only people who see inside that skin there are loads of opportunities to cut costs. One of the leading reasons to build is the idea that a new home won’t come with all the defects of an older home, but unless you’re willing to spend an awful lot of time hovering over your builder – and invest the money in a high quality home inspection when he’s done – you still might end up with plenty of defects.