Building Your Own Home For Dummies

by Kevin Daum, Janice Brewster,

and Peter Economy

Building Your

Own Home

FOR

DUMmIES

‰

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by Kevin Daum, Janice Brewster,

and Peter Economy

Building Your

Own Home

FOR

DUMmIES

‰

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Building Your Own Home For Dummies

Published by

Wiley Publishing, Inc.

111 River St.

Hoboken, NJ 07030-5774

www.wiley.com

Published by Wiley Publishing, Inc., Indianapolis, Indiana

Published simultaneously in Canada

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About the Authors

Kevin Daum, from Alameda, Calif., is founder and CEO of Stratford Financial

Services, an INC 500 real estate finance company. Under Kevin’s guidance,

Stratford maintains a 100-percent approval rate on its custom home financing

projects. Kevin has provided financing education for more than 20 years. He

has underwritten loans for national institutions and managed real estate

financing for entrepreneurs and celebrity clients, including Pat Sajak, Pat

Boone, Dana Carvey, Phil Hartman, Jamie Farr, and Elvira, Mistress of the

Dark. He has facilitated more than 850 custom home projects and is a recog-

nized expert on the subjects of custom homes, real estate investment, and

real estate management.

Kevin speaks regularly on the subject of real estate finance. Kevin penned

and published the book What the Banks Won’t Tell You; How to Get the Most

Out of Your Mortgage (Grady Parsons) now in its second printing. He writes a

featured monthly column for Log Homes Illustrated magazine and writes regu-

larly for American City Business Journals. Kevin is actively involved with the

Young Entrepreneur’s Organization (YEO) and speaks on the subject of entre-

preneurship and the arts. In addition to his entrepreneurial ventures, Kevin

currently develops property and custom homes. He received his bachelor of

arts degree from Humboldt State University.

To schedule Kevin to present to your organization, association, or confer-

ence, call Stratford Financial Services at 800-727-6050. For more information

on the products and services provided by Stratford, visit its Web site at

www.stratfordfinancial.com or contact Kevin directly at kevin@

stratfordfnancial.com.

Janice Brewster is author of Log Cabins (Friedman/Fairfax) and Cabin Styles

(Publications International, LTD). She currently edits Timber Homes Illustrated

magazine and is former editor of Log Home Living. She has written articles for

The Washington Post, Cowboys & Indians, Catalina, Log Homes Illustrated,

Timber Frame Homes, and the National Association of Home Builders. Janice

received her bachelor’s degree from Mount Union College and her master’s

degree in magazine journalism from Syracuse University’s S.I. Newhouse

School of Public Communications.

Peter Economy, from La Jolla, Calif., is associate editor of Leader to Leader,

the award-winning magazine of the Leader to Leader Institute, and author of

numerous books, including Managing For Dummies (with Bob Nelson), Home-

Based Business For Dummies (with Paul and Sarah Edwards) (both published

by Wiley), and many others. He received his bachelor’s degree (with majors

in economics and human biology) from Stanford University and is currently

pursuing his MBA at the Edinburgh Business School. Visit Peter at his Web

site:

www.petereconomy.com.

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Dedication

This book is dedicated to all those information hungry consumers pursuing

the American dream of home ownership.

Authors’ Acknowledgments

Just like a custom home project, it took many people to make this book

happen. We consulted experts in every area to make sure we included cur-

rent, accurate information.

Kevin relied heavily upon the help and resources of the excellent staff at

Stratford Financial Services, particularly Dawn Exline, vice president of client

services. In addition Kevin wants to thank all the clients, builders, and archi-

tects that shared their experiences.

The authors also want to thank the following people for giving time, energy,

and knowledge for the success of this book. Ahmad Mohazab and the expert

team at Tecta Architects in San Francisco shared their knowledge and draw-

ings for many chapters. Dan Ridings of Stonehenge Builders in Lafayette,

Calif., spent hours of time providing technical information. Thanks go to The

Original Lincoln Logs LTD., John Stetson, and Aaron Rosenbaum for their con-

tributions of photos and Lorin George of Lorelco appraisals for her appraisal

contribution. Thanks to Bud Davis of B. Davis construction for the special

“Writing Place.” Thanks to Scott Peloquin of BenefEx Benefit Consulting and

Troy Collins of McKinley Financial for their experience in the financial area.

Thank you to Charles Bevier, editor of Building Systems Magazine, for sharing

his expertise.

Kevin, Peter, and Janice are also appreciative of all the people at Wiley

Publishing, Inc. including Tracy Boggier, Joyce Pepple, Alissa Schwipps,

Chad Sievers, Melisa Duffy, and Holly Gastineau-Grimes.

On a personal note, Kevin wants to acknowledge Mark Levy for his coaching

as well as Tim Chrisman, Lisle Payne, and Dennis Erokan for their constant

support and encouragement. He also wants to thank his friends and Forum at

the Young Entrepreneur’s Organization (YEO), which made this opportunity

occur in the beginning. Finally Kevin acknowledges the love and support of

his wife Deanna, son Spencer, and his parents Hal and Nancy Daum who

showed him how to always put his clients’ needs first.

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Publisher’s Acknowledgments

We’re proud of this book; please send us your comments through our Dummies online registration

form located at www.dummies.com/register/.

Some of the people who helped bring this book to market include the following:

Acquisitions, Editorial, and

Media Development

Senior Project Editor: Alissa Schwipps

Acquisitions Editor: Tracy Boggier

Copy Editor: Chad R. Sievers

Technical Editors: Bob Gammache, (Carteret

Mortgage

www.nva-mortgage.com) and

Dwayne Ganzel

Editorial Manager: Jennifer Ehrlich

Editorial Assistants: Nadine Bell, Hanna Scott

Cartoons: Rich Tennant,

www.the5thwave.com

Composition

Project Coordinator: Adrienne Martinez

Layout and Graphics: Jonelle Burns,

Carl Byers, Andrea Dahl, Joyce Haughey,

Stephanie D. Jumper, Jacque Roth,

Barry Offringa

Proofreaders: Laura Albert, Leeann Harney,

Jessica Kramer, Carl William Pierce,

TECHBOOKS Production Services

Indexer: TECHBOOKS Production Services

Publishing and Editorial for Consumer Dummies

Diane Graves Steele, Vice President and Publisher, Consumer Dummies

Joyce Pepple, Acquisitions Director, Consumer Dummies

Kristin A. Cocks, Product Development Director, Consumer Dummies

Michael Spring, Vice President and Publisher, Travel

Brice Gosnell, Associate Publisher, Travel

Kelly Regan, Editorial Director, Travel

Publishing for Technology Dummies

Andy Cummings, Vice President and Publisher, Dummies Technology/General User

Composition Services

Gerry Fahey, Vice President of Production Services

Debbie Stailey, Director of Composition Services

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Contents at a Glance

Introduction ................................................................1

Part I: Getting Started: The 411

on Custom Home Building ............................................7

Chapter 1: The Custom Home Process in a Nutshell ....................................................9

Chapter 2: Preparing for the Process ............................................................................23

Chapter 3: The Land Grab: Selecting the Perfect Site .................................................41

Chapter 4: Defining Your House Style ...........................................................................63

Chapter 5: Architects and Design: Time Spent Is Money Saved ................................83

Chapter 6: Engineering and Plan Approval:

Bureaucracy Made Somewhat Easy ..........................................................................109

Part II: All You Need Is Dough:

Financing Your Custom Home ...................................123

Chapter 7: Cash Is King: Using Debt to Your Advantage ..........................................125

Chapter 8: Knowledge Is Power: What You Don’t Know

About Construction Loans Can Hurt You ................................................................139

Chapter 9: Qualifying: It’s the Bank’s Way or the Highway ......................................161

Chapter 10: Show Me the Money .................................................................................185

Part III: Hammers and Nails:

The Construction Process ..........................................201

Chapter 11: All the King’s Men: The Contractor and His Cohorts ..........................203

Chapter 12: Excavation and Foundation: Getting a Solid Start ................................217

Chapter 13: Framing and Rough: So Much Goes Behind Those Walls! ...................231

Chapter 14: Heading for the Finish: So Much Detail .................................................251

Part IV: All the After Stuff .......................................275

Chapter 15: Home Sweet Nest Egg: Moving In and Managing

Your New Investment .................................................................................................277

Chapter 16: Refinancing: More Money, Cheaper Payments .....................................287

Chapter 17: Taking It Outside: The Art of Landscaping ...........................................301

Part V: The Part of Tens ...........................................317

Chapter 18: Ten Common Custom Home Mistakes and How to Avoid ’Em ...........319

Chapter 19: Ten Great Ways to Lower Construction Costs ......................................325

Chapter 20: Ten Common Stuck-in-the-Middle Problems and Their Fixes .............331

Chapter 21: Ten Helpful Custom Home Resources ...................................................337

Chapter 22: Ten Ways to Make Your Home Green .....................................................343

Index .......................................................................349

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Table of Contents

Introduction .................................................................1

About This Book ..............................................................................................1

Conventions Used in This Book ....................................................................2

What You’re Not to Read ................................................................................2

Foolish Assumptions ......................................................................................3

How This Book Is Organized ..........................................................................4

Part I: Getting Started: The 411 on Custom Home Building .............4

Part II: All You Need Is Dough: Financing Your Custom Home ........4

Part III: Hammers and Nails: The Construction Process ..................4

Part IV: All the After Stuff .....................................................................4

Part V: The Part of Tens ........................................................................5

Icons Used in This Book .................................................................................5

Where to Go from Here ...................................................................................6

Part I: Getting Started: The 411

on Custom Home Building .............................................7

Chapter 1: The Custom Home Process in a Nutshell . . . . . . . . . . . . . . .9

Where Do You Start? Preparing to Build Your Home ................................10

Money Makes the World Go Round — Paying for Your Home ................11

Asking yourself about affordability ...................................................11

Them that has the gold makes the rules: If you finance,

the bank will dictate process .........................................................12

Introducing the Custom Home Life Cycle ..................................................13

It takes (more than) two to tango —

A quick guide to the players ...........................................................13

So many tasks, so little time — 50 steps to a custom home ..........16

Patience is a virtue — A true timeline for building your home .....18

Being an Owner-Builder: More Power to You! ...........................................19

Analyzing the truth about savings ....................................................20

Finding and managing subs ................................................................21

Financing implications ........................................................................21

Chapter 2: Preparing for the Process . . . . . . . . . . . . . . . . . . . . . . . . . . .23

Organizing and Documenting ......................................................................23

Building a workbook and portable file system ................................24

Calendar and communication — Your PDA is your friend .............25

Being the bean counter — Keeping track of your finances ...........26

Shopping and sharing — Collecting material information .............27

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Budgeting Your Project ................................................................................27

Looking at your finances and cash flow ...........................................27

Defining “dollars per square foot” .....................................................28

Using a budgeting template ...............................................................31

Hiring a Contractor .......................................................................................32

Understanding the contractor’s role ................................................32

Getting bids — Comparing apples to apples ...................................33

Evaluating a contractor’s 3 Cs — Cost, craftsmanship,

and compatibility .............................................................................34

Using expert interviewing techniques ..............................................35

Identifying Insurance Issues ........................................................................36

Liability policy .....................................................................................36

Workers’ compensation ......................................................................37

Course of construction policy ...........................................................37

Managing Your Expectations .......................................................................38

Planning a timeline — A custom home is forever

(So what’s the hurry?) .....................................................................38

Making hard choices — What you can (and can’t) afford .............38

Patience — Not everything must be perfect right away ................39

Making the process fun .......................................................................40

Chapter 3: The Land Grab: Selecting the Perfect Site . . . . . . . . . . . . .41

Knowing the Difference between “Land” and a “Lot” ...............................41

Location, Location, Location — Refining Your Lot-Buying Needs ..........42

Finding a Lot ..................................................................................................44

Surfing for turf .....................................................................................44

Engaging a real estate agent/lot specialist .......................................44

Doing the legwork on your own ........................................................45

Finding a lot when there isn’t one .....................................................45

Evaluating a Particular Lot — The True Value of Dirt ..............................46

Examining amenities and utilities .....................................................46

Zoning in on zoning’s limitations ......................................................47

Understanding setbacks and footprints ...........................................48

Size matters — Assessing the land’s value with the house ...........50

A tale of two lot buyers — How square footage impacts value .....51

Dealing with a Tear-Down Property ............................................................52

Accounting for demolition costs .......................................................52

Assessing neighborhood tolerance ...................................................52

Financing pros and cons .....................................................................53

Buying Your Land ..........................................................................................54

Understanding the purchase process ...............................................54

Using the bank .....................................................................................56

Finding other land loan alternatives .................................................59

Making sure the loan period is long enough ....................................60

Stop! Don’t pay off your lot yet! .........................................................61

Building Your Own Home For Dummies

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Chapter 4: Defining Your House Style . . . . . . . . . . . . . . . . . . . . . . . . . . .63

Getting to Know Your Style Preferences and Limitations ........................63

Educating your eye .............................................................................64

Discovering your local style ..............................................................64

Playing by community rules ..............................................................65

Tapping the wisdom of the pros ........................................................66

Considering Conventional Construction: Wood versus Steel ..................67

Enjoying the Warmth of a Log Home ..........................................................68

Two ways to skin a log ........................................................................69

Purchasing your log package .............................................................71

Highlighting Wood Inside — Timber Frame or Post-and-Beam ...............72

Considering a System Approach .................................................................75

Weighing your options ........................................................................75

Making a purchase ..............................................................................77

On the line ............................................................................................78

Unearthing Alternative Construction Methods .........................................79

Chapter 5: Architects and Design: Time Spent Is Money Saved . . . .83

Arming Yourself with an Architect ..............................................................84

Deciding whether you even need an architect ................................84

Finding the right architect ..................................................................85

Managing the architecture process ..................................................86

What does all this cost? ......................................................................87

Looking at Architect Alternatives ...............................................................89

Published floor plans — Picking a home from books or online ....89

Software programs — Designing your own plans ...........................90

Hiring a home designer .......................................................................90

Placing the House on the Lot .......................................................................91

Foundation issues ...............................................................................91

Which orientation is best? North, south, east, or west ..................91

Taking advantage of natural elements ..............................................93

Planning the Size and Shape of Your Home ...............................................94

Size matters — Figuring the right square footage ...........................95

Designing for resale — Create a house everyone wants to buy ....96

Exterior styles — Considering architecture examples ...................96

Designing Your Home’s Interior ..................................................................97

Ten general floor-plan considerations ..............................................97

Special considerations room by room ..............................................99

The Devil Is in the Details ..........................................................................103

Materials, hardware, fixtures, and finishes ....................................104

Make all your decisions now — Allowance is a dirty word .........105

Energy efficiency — Saving the earth (and your money!) ............106

Considering technology options .....................................................107

Table of Contents

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Chapter 6: Engineering and Plan Approval:

Bureaucracy Made Somewhat Easy . . . . . . . . . . . . . . . . . . . . . . . . . . .109

Understanding Plans and Blueprints ........................................................109

Prelims — Floor plans, site plans, and elevations ........................110

Working drawings: The how-to-build-it papers .............................111

Working with the Building and Planning Departments ..........................114

Submitting Your Prelims for Approval .....................................................116

Addressing grading, septic, and well issues ..................................116

Understanding design guidelines ....................................................117

Requesting variances and exceptions —

Don’t be Don Quixote ....................................................................118

Not so fast — Acquiring neighbor approval ..................................119

Gathering the Permits You Need ...............................................................120

Submitting and revising the working drawings .............................121

Picking up permits and paying the fees .........................................121

Part II: All You Need Is Dough:

Financing Your Custom Home ....................................123

Chapter 7: Cash Is King: Using Debt to Your Advantage . . . . . . . . . .125

Accepting the Need for Cash, Cash, and More Cash ..............................126

Breaking the Emotional Barriers — This Is Not

Your Father’s Depression .......................................................................127

Evaluating real estate within your net worth ................................128

Acquiring secured debt can be good ..............................................129

Getting on the same page — How banks evaluate risk ................129

Changing perspective — Home equity

isn’t a savings account ..................................................................130

Understanding the benefits of liquidity ..........................................131

Okay, So You Have All This Cash — Now Manage It ...............................131

Finding and working with a financial advisor ................................132

Diversifying your portfolio ...............................................................133

Exploring alternative investments ..................................................133

Turning Your House Into a Money-Making Machine ...............................134

More house for less cash — Benefiting

from leverage and appreciation ...................................................135

Protecting your investment by making it marketable ..................135

Understanding taxes — Many parts of a home project

are deductible ................................................................................136

Safely Deferring Financial Decisions Until the End

of the Construction Project ....................................................................137

Building Your Own Home For Dummies

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Chapter 8: Knowledge Is Power: What You Don’t Know

About Construction Loans Can Hurt You . . . . . . . . . . . . . . . . . . . . . . .139

Exploring Your Construction Loan Options ............................................140

Getting it done all in one — Benefiting from a single-close .........140

Construction-only loans — The double-close process .................141

Full documentation versus no-income-qualifier programs ..........142

Poor credit and odd-property options ...........................................142

Finding a Good Construction Lender .......................................................143

Choosing a broker or a bank ............................................................144

Testing a loan officer’s knowledge ..................................................145

Getting value added — Education and experience

are worth the money .....................................................................146

Private money — The last resort ....................................................147

The Loan Process from Start to Finish — When to Do What ................147

Deciding when to sell your existing house ....................................148

Applying on time ...............................................................................149

Getting the loan after construction starts .....................................149

Preparing the paperwork .................................................................150

Locking in an interest rate ................................................................151

Determining the length of your construction loan .......................152

Understanding All the Fees ........................................................................152

Paying points .....................................................................................154

Escrow and title are more than other loans ...................................155

My goodness . . . so many appraisal fees .......................................156

Insurance costs ..................................................................................157

Figuring all the little stuff .................................................................157

Letting the Lender Carry Your Burden .....................................................158

If someone offers you money, take it ..............................................159

No payments — Taking an interest reserve ...................................159

Chapter 9: Qualifying: It’s the Bank’s Way or the Highway . . . . . . . .161

Stepping Behind the Desk — How a Construction Lender

Views Your Project ..................................................................................162

Why some lenders may seem uncaring ..........................................162

Understanding risk assessment ......................................................163

How banks view your property .......................................................163

How lenders view contractors .........................................................164

How lenders view occupancy ..........................................................164

How lenders view spec projects ......................................................165

Recognizing What a Construction Lender Really Wants to See ............166

On your credit report ........................................................................167

On your tax returns ...........................................................................169

In your bank accounts ......................................................................171

On the appraisal ................................................................................173

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Building the Bank’s Construction Budget ................................................175

Figuring the land: Factor A ...............................................................175

Soft or indirect costs: Factor B ........................................................176

Hard costs (board and nail): Factor C ............................................176

The contingency: Factor D ...............................................................177

Calculating the interest reserve: Factor E ......................................177

Loan closing costs: Factor F .............................................................178

Totaling up the cost-to-build ............................................................178

Calculating the Loan Amount and Cash ...................................................179

Basing the loan on finished value — LTV .......................................179

Basing the loan on cost-to-build — LTC .........................................180

Calculating the cash needed for the project ..................................181

Solving Other Budget Problems ................................................................183

Landscaping and finish work can kill the project .........................183

Costing — What if I can build on the cheap? .................................184

What if I need more cash than is in my budget? ...........................184

Chapter 10: Show Me the Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .185

Managing a Self-Funded Project ................................................................185

Working with a Bank ...................................................................................186

Of course, you don’t get all the money upfront ............................186

Preparing for inspection ...................................................................187

Battling the bank ...............................................................................188

Understanding How the Voucher System Works ....................................189

Taking a Closer Look at the Draw Reimbursement System ...................190

Figuring which costs are which .......................................................191

Managing the flow of funds with percentages

and contingencies ..........................................................................194

Paying the subs ..................................................................................194

Dealing with deposits .......................................................................195

Using the draw system to pay for your log or

kit home deposits ..........................................................................195

Acing your finals — Final completion and final funds ..................196

Figuring Out Who Gets the Money — You or the Contractor ................196

Using Credit Cards Responsibly Can Buy You a Trip to Europe ...........198

Part III: Hammers and Nails:

The Construction Process ...........................................201

Chapter 11: All the King’s Men: The Contractor

and His Cohorts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .203

Working with Your Contractor ..................................................................203

Fostering good communication — A meeting a day

keeps the anger away ....................................................................204

Maintaining a productive work environment ................................205

Building Your Own Home For Dummies

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Change orders — Dealing with indecision .....................................205

Keeping a happy and healthy relationship with your

contractor .......................................................................................206

Managing Your Time and Money ...............................................................206

Executing contracts ..........................................................................207

Scheduling the project ......................................................................209

Controlling the funds — How to manage the checkbook .............209

Introducing Other Important Players .......................................................210

Dealing with suppliers ......................................................................210

Working with subs — Each one is an expert .................................211

Preparing for building and bank inspectors ..................................212

Managing Disputes ......................................................................................213

Avoiding mechanic’s liens — The contractor’s weapons ............213

Using legal remedies — Arbitration and attorneys .......................214

Chapter 12: Excavation and Foundation: Getting a Solid Start . . . .217

Surveying and Site Preparation .................................................................218

Using your survey .............................................................................218

Preparing your site before the first shovelful ................................220

Dealing with trees ..............................................................................220

Clearing and grading .........................................................................221

Constructing retaining walls ............................................................222

Providing drainage ............................................................................223

Marking the build site .......................................................................224

Spot-check — Surveying and site preparation ..............................224

Preparing for the Utilities ...........................................................................225

Connecting water ..............................................................................225

Hooking up to the sewer ..................................................................226

Installing septic systems ..................................................................226

Bringing in electricity .......................................................................226

Piping in gas .......................................................................................227

Spot-check — Utilities .......................................................................227

Pouring Your Foundation ...........................................................................227

Excavating the site ............................................................................228

Installing the foundation ..................................................................229

Spot-check — Foundations ..............................................................230

Chapter 13: Framing and Rough: So Much Goes Behind

Those Walls! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .231

Things to Consider Before Framing and Rough Work Begin .................231

Questions to ask your contractor ...................................................232

Establishing a schedule ....................................................................232

Trusses and I-beams: Yes or no? .....................................................233

Looking at What’s Involved in Framing Your House ...............................234

Understanding the framing process ...............................................234

Spot-check — Framing ......................................................................238

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Installing the Rough Systems with Ease ...................................................239

Rough plumbing ................................................................................239

Spot-check — Plumbing ....................................................................242

HVAC ...................................................................................................243

Spot-check — HVAC system .............................................................244

Rough electrical .................................................................................245

Spot-check — Rough electrical ........................................................247

Sheathing, Flashing, and Insulation ..........................................................247

Covering the framing — Sheathing and flashing with

your clothes on ..............................................................................248

Rolling out the insulation .................................................................249

Spot-check — Sheathing, flashing, and insulation ........................249

Chapter 14: Heading for the Finish: So Much Detail . . . . . . . . . . . . .251

The Icing on the Cake — Exterior Finishing ............................................251

Applying wall coverings ...................................................................252

Finishing an attached deck ..............................................................253

Up on the roof — Roofing and rain gutters ....................................254

Installing the driveway — Finish options .......................................257

Exterior lighting .................................................................................258

Spot-check — Exterior finishing ......................................................258

Moving Inside — Completing Fireplaces and Walls ................................259

Fireplaces and hearths .....................................................................259

Drywall and wall textures .................................................................260

Spot-check — Fireplaces and walls .................................................261

The Finish Carpenters — Doors, Windows, Molding, Cabinets,

and Countertops ......................................................................................262

Doors and windows ...........................................................................263

Baseboards and moldings ................................................................264

Cabinetry and countertops ..............................................................265

Spot-check — The finish carpenters ...............................................267

All the Pretty Stuff .......................................................................................268

Painting ...............................................................................................268

Hardware and fixtures ......................................................................269

Flooring materials .............................................................................270

Appliances ..........................................................................................273

Spot-check — Painting, fixtures, flooring, and appliances ...........273

Part IV: All the After Stuff ........................................275

Chapter 15: Home Sweet Nest Egg: Moving In and Managing

Your New Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .277

Finishing Up the Custom Home Project ...................................................277

Getting your certificate of occupancy ............................................278

Obtaining the mechanic’s lien releases ..........................................278

Rolling the construction loan — Choosing a final loan

amount and program .....................................................................279

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Taking the Final Contractor Walk-Through ..............................................280

Selling the Old Home and Moving .............................................................281

Managing Maintenance and Repairs .........................................................282

The builder’s long-term responsibilities and warranties .............283

Dealing with construction defects ..................................................283

Should You Stay or Should You Go? ..........................................................284

Being aware of neighborhood trends ..............................................285

Two-year capital gains tax implications .........................................286

Chapter 16: Refinancing: More Money, Cheaper Payments . . . . . . .287

You Still May Want Another Loan ..............................................................287

Filling the need for more cash .........................................................288

Reconsidering how long you will stay ............................................288

Lowering your payments ..................................................................289

Three Things You Should Know About Refinancing ...............................289

You aren’t the bank’s customer .......................................................289

The banks view new custom homes differently than

existing homes ...............................................................................291

Rates and fees are only part of the big picture .............................291

Picking the Right Mortgage Program ........................................................292

A mediocre loan officer can cost you big time ..............................292

Home equity lines of credit (HELOCs) ............................................293

Adjustable rate mortgages (ARMs) .................................................293

Interest-only options .........................................................................296

Zero-cost loans can be expensive ...................................................296

Paying Off Your Home May Be Fiscally Irresponsible ............................298

The 15-year fixed myth .....................................................................298

The biweekly fallacy ..........................................................................299

Chapter 17: Taking It Outside: The Art of Landscaping . . . . . . . . . . .301

Designing Your Dream Landscape ............................................................302

Using a designer – yes or no? ..........................................................302

Revisiting your site plan ...................................................................304

Considering your wants and needs .................................................305

Dealing with your climate ................................................................307

Saving time and money by design ...................................................307

Getting your plan on paper ..............................................................308

Putting Your Plan in Action — Hardscaping ............................................309

Planning a patio, Daddy-o ................................................................310

Lounging on the deck ........................................................................310

The art of fencing ..............................................................................311

Building great walls ...........................................................................312

Adding water ......................................................................................313

Lighting the way ................................................................................313

Leafing Out — Softscaping with Plants ....................................................314

Planting trees after construction ....................................................314

Adding texture with shrubs .............................................................315

Bloom time — Annuals and perennials ..........................................315

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Part V: The Part of Tens ............................................317

Chapter 18: Ten Common Custom Home Mistakes and How to

Avoid ’Em . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .319

Chapter 19: Ten Great Ways to Lower Construction Costs . . . . . . . .325

Chapter 20: Ten Common Stuck-in-the-Middle Problems

and Their Fixes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .331

Chapter 21: Ten Helpful Custom Home Resources . . . . . . . . . . . . . . .337

Chapter 22: Ten Ways to Make Your Home Green . . . . . . . . . . . . . . .343

Index........................................................................349

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Introduction

s you read this book, you most likely have the seed of a dream taking

root in your mind. Your current home isn’t all it could be. You’ve been

daydreaming about a different place — one with more land, one by the water,

or one with a gourmet kitchen. You’ve trolled the open houses in your area,

but none of the homes really light your fire or seem to fit your lifestyle or

your family. You want something that feels more like you.

The only way to get a perfect house “fit” is to design it specifically for you. No

matter if your new home is a month away from completion or ten years down

the road, you need this book.

In our work, we’ve seen plenty of people like you tackle the process of build-

ing a custom home. For some, the process is challenging, but enjoyable. For

others, a custom home project becomes a nightmare that leaves them short

on cash and long on anxiety. We understand the process and what it takes to

move through it with as little stress as possible. In the pages that follow, we

provide you with the very best advice our many years of experience have to

offer.

No matter if your dream consists of a simple $150,000 house in the Midwest

or a multi-million-dollar mansion in California, Building Your Own Home For

Dummies is for you. This book can help you turn your dream of a custom

home into reality without losing your shirt or your sanity. With this book and

with some hard work and perseverance on your part, your dream of building,

owning, and living in your very own custom home can become a reality.

About This Book

Thousands of parts and hundreds of tasks go into a custom home project.

This book doesn’t tell you how to install a toilet or hang a door (other For

Dummies books cover those topics in detail), but it does tell you everything

you need to know about creating a custom home from scratch. Where do you

start? Who is responsible for what? How much will it all cost? These ques-

tions — and hundreds more — are what this book answers — and all in an

easy-to-use reference that you can take with you anywhere.

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We divide each chapter into sections, and each section contains information

about some part of understanding the process of building a custom home,

such as

 A comprehensive approach to financing your home project, before,

during, and after construction

 The types of custom homes that are available — from log to timber

frame to stick-built to modular

 A view from the loan officer’s side of the desk

 A complete look at the inspection process during construction and what

the inspector(s) will be looking for

 Thorough and helpful tidbits on how to successfully build your home

and still have money left over

The great thing about this book is that you decide where to start and what to

read. It’s a reference you can jump into and out of at will. Just head to the

table of contents or the index to find the information you want.

Conventions Used in This Book

We use the following conventions throughout the text to make everything

consistent and easy to understand:

 All Web addresses appear in monofont.

 New terms appear in italics and are closely followed by an easy-to-

understand definition.

 Bold text indicates keywords in bulleted lists or highlights the action

parts of numbered steps.

We also include spot-checks in the Part III chapters to guide you in conversa-

tions with your contractor and help you make sure the construction process

is going as planned.

What You’re Not to Read

We’ve written this book so that you can easily find and understand informa-

tion about building a custom home. Although you may be stuck on a deserted

island and have plenty of time to read every word in this book, chances are

you’re not. So, we simplify it so you can identify “skippable” material. This

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information is the stuff that, although interesting and related to the topic at

hand, isn’t essential for you to know:

 Text in sidebars: The sidebars are the shaded boxes that appear here

and there. They share fun facts, but nothing that’s essential to the suc-

cess of your project.

 Anything with a Technical Stuff icon attached: This information is

interesting, but if you skip it, your custom house won’t fall down.

 The stuff on the copyright page: No kidding. You can find nothing here

of interest unless you’re inexplicably enamored by legal language and

Library of Congress numbers.

Foolish Assumptions

We wrote this book with some thoughts about you in mind. Here’s what we

assume about you, our reader:

 You’ve been sketching custom homes on napkins or doodling floor plans

during business meetings. You’ve looked at your current home with a

critical eye and have, at least once, sighed and muttered the phrase,

“Someday. . . .”

 You’re drawn to home-improvement stores, television shows, and books.

 You’re desperately looking for a comprehensive guide that demystifies

the home-building process by focusing on the information important for

you the homeowner to know.

 You’re willing to do some soul-searching in order to get your custom

home right. You (and any significant others you may have) have decided

that the only way to get the perfect home is to start from scratch.

 You don’t live in a “money-is-no-object” world. You want to make edu-

cated financial decisions regarding the budget and long-term financing of

your custom home.

 You want to be involved with the process but you’ll rely on professionals

to help you when you need it. Professional help may come in the form of

a financial advisor or loan officer, an architect or designer, a plumber, or

a landscaper. You’re willing to assess your strengths and weaknesses

and seek help when necessary.

 We assume that you’ll hire a contractor in some capacity, as most

people do. (We do provide some small tidbits of information if you want

to be your own owner-builder, but the majority of this book focuses on

building a custom home with a contractor.)

 You have the ability to keep an open mind and consider new approaches

and information, even when they seem at odds with what you’ve always

been told about the custom home and financing processes.

Introduction

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How This Book Is Organized

This book is divided into five parts. Jump in wherever you want! The follow-

ing sections explain what you’ll find where.

Part I: Getting Started: The 411

on Custom Home Building

Get up to speed on the basics of building a custom home. In this part, you

figure out how to get your project organized and how to find property to

build on. You start to envision your home and define its style. You get to

know the role of the architect or designer and obtain an overview of the plan-

approval process.

Part II: All You Need Is Dough:

Financing Your Custom Home

Your project won’t move from dream to reality without money. In this part,

you can find the lowdown on using debt to your advantage and the construc-

tion loan process, including inside information on qualifying for the money

you need to borrow. Read this part to understand why cash is king in getting

your new home built.

Part III: Hammers and Nails:

The Construction Process

No, we don’t expect you to build your own house with your own two hands.

But wouldn’t having some idea what those people are doing up on your roof

or in your laundry room be nice? Find out the roles of the general contractor

and the teams of subcontractors. Follow the construction process from exca-

vation to framing to mechanical system installations to finish carpentry and

beyond and use the provided spot-checks to make sure your contractor and

subs are doing what they’re supposed to do.

Part IV: All the After Stuff

Just because the house is finished, you’re not. Now it’s time to plant and

install your landscaping and, of course, move in. Also in this part, you see

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that money is still an issue — you need to consider how to manage the

investment you’ve made in your new home. Your construction loan is closed,

but it may not be too early to consider refinancing.

Part V: The Part of Tens

Like every For Dummies book, this part includes quick resources that provide

plenty of information in an easy-to-digest fashion. Above all, this part shows

that you aren’t alone. Gain wisdom from other homeowners’ trials and errors

in the list of most common custom home mistakes and problems. Discover

the best ways to lower construction costs. Use the list of best custom home

resources to answer lingering questions or help you uncover wellsprings of

useful information. We also provide an environmentally conscious list of ways

to make your project green.

Icons Used in This Book

To make this book easier to read and simpler to use, we include some icons

in the margins that can help you find and fathom key ideas and information.

These tidbits provide expert advice to help you save time and money in the

home-building process.

This icon highlights important information to store in your brain for quick

recall at a later time.

Avoid mistakes by following the sage words of advice that appear under this

icon.

Although this information may be fascinating, it’s not necessarily critical to

your understanding the topic at hand. Feel free to skip it if you must.

Introduction

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Where to Go from Here

The process of building a custom home isn’t linear. Not everyone starts with

the purchase of a piece of land, for instance. Some people go to an architect

first to help them create a floor plan. Others may jump right in with both feet,

and be halfway through construction before they realize they need to borrow

money in order to finish.

So, to reflect the nonlinear process of building a custom home, this book is

decidedly nonlinear as well. We organize it so that you can dip in wherever

you want and still find complete information. If you’ve already bought land

and met with an architect, but don’t know how you’re going to pay for the

project, for instance, go to Chapter 7 to read up on financing. Not clear who

does what on the job site? Flip to Chapter 11 for information on general con-

tractors and subcontractors.

If you’re not sure where to go first, you may want to start with Part I. It gives

you all the basic information you need to understand the process of building

a custom home. From there, you can skip to sections that cover the subjects

that seem most fuzzy to you now. Rest assured that when you’ve finished that

section, you’ll have a better grip on home-building reality.

Building Your Own Home For Dummies

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Part I

Getting Started:

The 411 on Custom

Home Building

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In this part . . .

reating a custom home may be the biggest, most

exciting project you have ever been involved in

(yes, even more exciting than when you figured out static

electricity in third-grade science class). As excited as you

are though, you don’t want to rush into it. In this part, we

give you a general overview of what you’re getting into.

We also show you how to get organized and help you

acquire land. Lastly, we help you decide on the type of

home to build and walk you through the design and

permit process with architects and designers.

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Chapter 1

The Custom Home Process

in a Nutshell

In This Chapter

 Getting ready for the custom home process

 Considering the finances

 Figuring out who the players are

 Understanding all the steps and time involved

ost people at some time in their lives desire owning a custom home.

Some people are attracted to the thought of designing and creating

something big from scratch. Others want to live in a new home that meets

their specific needs instead of a house that looks like every other home on

the block. Some people begin the custom home process by accident when

they find a piece of land that inspires them.

More than 35 percent of new homes in the United States are custom homes.

That means more than 300,000 custom homes are built every year. For each

person building a custom home, five people are in the process of designing

one. So you’re in excellent company with many people dreaming about moving

into a home designed and built just for them. Because custom homes are so

popular, tons of resources are available to help you through the process.

But, like Rome, your new home won’t be built in a day. The custom home

process is lengthy, emotional, and expensive, without much consistency to it.

Face it; custom homes require custom work and plenty of it! This work makes

building a custom home challenging, and yet that extra work is what makes

your project unique to you. You may feel overwhelmed at times, but by trust-

ing in the experience of the professionals you engage in your project and

keeping this invaluable book by your side, you can have a manageable pro-

ject that delivers the custom home you have been dreaming of.

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Where Do You Start? Preparing

to Build Your Home

Believe it or not, the custom home process really has no standard starting

place. There are some logical entry points such as finding land, but most

often people start with a designed house they’ve had in mind for a long time.

Where you start isn’t important; what is important is for you to make sure

that you have taken all the necessary steps to give yourself the best chance

for success. The following list includes some questions you need to consider

before committing time and money to this project. We discuss some of these

issues extensively in other chapters (which we reference for you here).

 Where do I want to live?

 How long do I want to live in this house?

 How will I find land? (See Chapter 3.)

 How much money do I have to spend on this project? (See Chapters 7, 8,

and 9.)

 How much extra time do I have to put into this project? (See Chapter 2.)

 How do I find the right resources to design my house? (See Chapter 4.)

 How do I find the right resources to build my house? (See Chapters 2

and 11.)

 Is my marriage/relationship strong enough to survive this process?

(See your clergy or shrink.)

Don’t make the assumption that any one person can give you all the informa-

tion you need to prepare for this process. Contractors have one perspective

on the process, and architects may have a completely different perspective.

Do your homework and interview as many people as you can who are or who

have been involved in the process. By talking to professionals and consumers

and asking them to share their experiences, you can begin to get a clearer

picture of the process ahead.

Kevin recommends to all his clients that they get organized before beginning

the process. Sit down and assess how much time you can put aside each

week to focus on the project. Consider making a specific day each week your

day for working on custom home stuff. Also clear a space in your office or

den to be “Custom Home Central.” This way you always know where to find

what you need for your project. (You can find other organizing tips for your

project in Chapter 2.)

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Chapter 1: The Custom Home Process in a Nutshell

Money Makes the World Go Round —

Paying for Your Home

We talk a lot about money in this book and with good reason. Custom homes

require plenty of it. Your new home will probably be the most expensive item

you have ever purchased. In fact, it may be the most expensive item you’ll

ever buy in your entire life. Custom homes cost more than production or

tract homes because the materials aren’t bought in quantities and the labor

hired includes individual craftsmen. The results are worth it, however, and

will last lifetimes.

Many people find it a challenge to get past the large checks they’re writing. If

you decide to use an architect, even the first check to the architect will prob-

ably exceed the biggest check you’ve ever written. The key to success with

money in a custom home project is putting it in the right perspective. If your

project costs $500,000, then what each piece costs isn’t important as long as

it equals $500,000 or less.

When you buy a new car, you don’t argue over how much you spent for the

alternator or the exhaust system. You look for the car to meet the price of

your overall budget. Use the same logic when buying your custom home.

Look for the best price on each item, but look at it in perspective to the

entire budget. You’ll do better on some items and worse on others, but if it

fits your finances, then you’re in good shape.

Asking yourself about affordability

Of course you have heard horror stories about custom home projects that

have gone seriously over budget. The projects go over budget for many rea-

sons, but usually the main culprit is that the potential homeowners didn’t

spend enough time determining what they could afford. Obviously, if you’re

building well below your means, then going over budget is easily rectified by

using your own cash. But running out of money is the No. 1 cause of custom

home disasters. Before you start the custom home process, you seriously

need to consider the following:

 What can you physically pay? Take stock of your cash on hand, equity

in real estate, and available cash from other resources. Make a firm deci-

sion how much money you’re willing to put toward the project. Chapter

7 can be a big help. You also need to get a rough idea of how much bor-

rowing power you have to help establish a limit for your budget when

added to your available cash. We provide tools and Kevin’s expert

financing assessments in Chapters 8 and 9.

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 What can you emotionally pay? Just because you have the money and

the borrowing power doesn’t mean you really want to spend it all. Think

carefully and discuss with your spouse what your limits are for making

payments and how much liquidity (or cash) you need in the bank to help

you sleep at night when all is said and done. Make sure you take into

account tax deductions and interest earned on investments when analyz-

ing your monthly cash flow. After you have found that emotional limit,

you can design your project to fit your comfort zone.

 What is your cushion and tolerance for risk? Like we say again and

again throughout this book, building a custom home is a complex

process. You need to consider many variables beyond your control, and

then realize that the project can go over budget even if you do every-

thing right. You can certainly get good solid estimates, but ultimately

you won’t know what this home will cost until it’s finished and you total

up the receipts. Make sure you have addressed the “what if?” issues

thoroughly. Talk about how you’ll cover things financially if the market

turns sour — devaluing your property — or the cost of materials rise.

Decide what safety money (such as your 401(k) or retirement fund)

you’re willing or unwilling to tap into.

The more you talk about financial issues related to your custom home project,

the more likely you are to resolve problems before they happen. Optimism in

a custom home project can get you into trouble every time. The best approach

is to examine every possible risk and make contingency plans for every poten-

tial problem.

Them that has the gold makes the rules: If

you finance, the bank will dictate process

Most people don’t have all the money for a custom home sitting in their bank

account. Even if they did, putting it all into the project wouldn’t be a good

idea, as we explain in Chapter 7. Like it or not, you’ll probably have a finan-

cial partner in this project in the form of a construction lender or bank. The

good news is construction lenders have the same objectives you do.

 They want to make loans for custom home projects. (That’s how they

make money.)

 They want the house to be completed on time.

 They want the house to be completed on budget.

 They want the house to be completed in a workmanlike manner.

Part I: Getting Started: The 411 on Custom Home Building

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Furthermore, the following tidbits can save you some arguments and frustra-

tions when working with construction lenders:

 They don’t believe a house is worth exactly what it costs.

 A larger loan makes you a riskier borrower, not a better customer.

 You aren’t entitled to any loan.

 They aren’t required by law to loan you any money.

 They dictate how the money is handled throughout the process.

Accept the fact that if you want to use a lender’s money, you have to play by

its rules. Most of these rules weren’t made arbitrarily. They’re designed to

protect the financial viability of the project and protect the lender in the

unlikely event of a foreclosure, which is the act of taking back the home in

case you default on the payments or the construction contract. The guide-

lines and procedures are based upon statistical and anecdotal problems and

failures that occurred with the lender in the past. Unfortunately, sometimes

you pay for the sins of those before you.

Put yourself in the lender’s shoes. If you were loaning a friend 80 percent of

the money to build his home, you would want a few protections in place and

a little control over the money as well, right? If you get to know how lenders

see the project, which we explain in detail in Chapters 8 and 9, you can easily

navigate the approval process as well as the funding process (see Chapter 10).

This approach can make for a smoother, happier custom home project.

Introducing the Custom Home Life Cycle

The first step to beginning the process is looking at all the pieces and how

they go together. Your new home has a number of individual projects and

transactions necessary to complete it. Your new home also needs an army of

people with their expert work and services. This section breaks down in an

approximate order each person required to get through the process. Then we

outline each step necessary to go from land to landscaping.

It takes (more than) two to tango —

A quick guide to the players

The following list is a guide to all the individual players involved in the

custom home process. You may or may not use them all; their roles can vary

Chapter 1: The Custom Home Process in a Nutshell

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Part I: Getting Started: The 411 on Custom Home Building

depending on your region and your project’s scope. The order of need may

also change depending upon where you start in your process.

 Financial planner and/or certified public accountant (CPA): If possible,

start the custom home process by carefully assessing your finances; a

financial planner or CPA can help make sure you can afford this project.

 Real estate agent: You may need a real estate agent to help you find and

purchase a lot, as we discuss in Chapter 3. She also plays a role when it’s

time to sell your existing home.

 Loan officer: Your loan officer needs to be involved throughout the entire

process. You may need to start with a refinance or credit line to get liquid,

as we discuss in Chapter 7. You want to finance the land (see Chapter 3)

and do it consistent with the construction financing (see Chapters 8 and

9). Finally, you still may need another refinance after the project (see

Chapter 16). Your loan office can help you through these steps. Lucky

for you, Chapter 8 has good advice on picking the right loan officer.

 Developer or landowner: The land you buy has to come from some-

where. If you’re buying in a subdivision from a developer, you may deal

with a sales office. Or you may end up buying from a landowner that has

had the property for generations.

 Escrow officer or attorney: Your state determines who administers the

closing of your escrow, but either way, this person makes sure the title

papers and insurance are all ready for you to take ownership.

 Architect and/or designer: Architects and designers design and draft

plans for the house. Architects are licensed; they’ll coordinate technical

specifications for the house that may be beyond the scope of a designer.

The architect can also guide you through the permitting process. (Chapter

5 can help you decide if you need an architect, and Chapter 6 provides

the ins and outs of the permitting process.)

 Log or timber frame dealer: If you’re building a kit home (see Chapter 4),

you’ll work with your dealer for the design process as well as the pur-

chase of your materials package.

 Contractor/builder: You need to decide whether you need this person

or if you’ll rely on yourself to drive the construction of your new home

(see the “Being an Owner-Builder: More Power to You!” section, later in

this chapter, if you may want to be your own owner-builder). We give

you tools for working with your contractor in Chapter 11.

 Surveyor: This person makes sure you know where your land begins

and ends — a necessity for designing the house.

 Soils engineer: In many states, such as California, your foundation

depends upon the report issued by this person.

 Well/septic engineer: If you’re building in a rural area, you need this

person to design and certify your water and sewage systems.

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Chapter 1: The Custom Home Process in a Nutshell

 Planning department: Your house needs to meet your neighborhood’s

zoning requirements before you get permits. This department enforces

the zoning. (See Chapter 6 for details.)

 Design review committee: You can’t always build what you want. This

committee dictates what it wants to see in your design. (Look in Chapter

6 for more information.)

 Building department: Everything must meet code, and this department

checks your plans before issuing permits. (See Chapter 6.)

 Appraiser: The lender won’t approve a construction loan without an

appraisal estimating the finished value. (Check out Chapter 9 for more

information.)

 Insurance agent: Chapter 2 spells out all the insurance you need for the

project. This person provides the goods — he’ll be busy.

 Material suppliers: Sticks and stones all have to come from somewhere.

Some projects have many sources. (See Chapter 11.)

 Subcontractors: Each one is an expert . . . just ask them. Artisans and

craftspeople build each different system in your house. Chapter 11 tells

you how to work with them. Chapters 12, 13, and 14 explain what they do.

 Laborers: Somebody has to do the grunt work on the job. These guys

and gals work the hardest and get paid the least.

 Building inspectors: The building department checks up at various

stages of construction to see that you’re building in line with regula-

tions. (Look in Chapter 11 for more details.)

 Disbursement agents: The lender assigns someone to make sure you get

money when you need it or to solve problems with getting money from

the lender. (You can find more on these agents in Chapter 10.)

 Bank inspectors: The bank won’t give you money unless work has been

done. These people come out to the property monthly or at various

stages to make sure the work is complete. (Chapter 11 has more.)

 Landscaper: Usually the last part to go in but sometimes the landscaper

designs the landscaping at the beginning. This person makes the yard

green with your green. (Check out Chapter 17 for more info.)

 Mover: After all this work and trouble, the last thing you want to do is

make 20 trips with the minivan. Let the movers do the work for you.

(Turn to Chapter 15 for specifics.)

 Decorator: If you have any money left at the end, you’ll have plenty of

furnishings to spend it on. An interior decorator can help.

Although your architect or contractor may manage some of these relation-

ships, ultimately you’ll need to coordinate all these people in order to com-

plete the project. You’re going to meet many new people in this process, so

put on your best smile and get ready to shake a lot of hands.

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Part I: Getting Started: The 411 on Custom Home Building

So many tasks, so little time —

50 steps to a custom home

You’re probably wondering why the custom home process has so many

people involved. The simple answer: A custom home process has tons of

tasks that need to be done. Although each home-building process may have

some variation in the stages based upon factors such as location and

weather, for the most part, the process moves in a step-by-step fashion.

The following list shows how a typical custom home process moves forward.

The chapter references direct you to detailed discussions later in the book.

1. Decide you’re ready to tackle the custom home process. (See Chapter 2.)

2. Meet with financial experts and get organized. (See Chapter 2.)

3. Prepare cash flow with financing on your existing house. (See Chapter 2.)

4. Find land and make an offer. (See Chapter 3.)

5. Obtain land financing. (See Chapter 3.)

6. Close escrow on the lot. (See Chapter 3.)

7. Get surveys and soil reports. (See Chapter 3.)

8. Get well and septic approvals if required. (See Chapter 6.)

9. Interview and pick an architect, if applicable. (See Chapter 5.)

10. Create the house’s preliminary design. (See Chapter 5.)

11. Get zoning and design review approval. (See Chapter 5.)

12. Pick all your fixtures and materials. (See Chapter 5.)

13. Submit the plans for building approval. (See Chapter 5.)

14. Make the required plan changes. (See Chapter 5.)

15. Put the plans out to bid with contractors. (See Chapter 2.)

16. Interview and choose a contractor. (See Chapter 2.)

17. Apply for a construction loan. (See Chapters 8 and 9.)

18. Get an appraisal based on future value. (See Chapter 9.)

19. Get final approval for permits and pay fees. (See Chapter 6.)

20. Close escrow on the construction loan. (See Chapter 8.)

21. Set up disbursement account. (See Chapter 10.)

22. Set up communications with contractor and subs. (See Chapter 11.)

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Chapter 1: The Custom Home Process in a Nutshell

23. Prepare the building site for work. (See Chapter 12.)

24. Grade and/or excavate the property. (See Chapter 12.)

25. Trench for foundation, water, and sewer. (See Chapter 12.)

26. Pour the concrete for foundation and let cure. (See Chapter 12.)

27. Frame the exterior. (See Chapter 13.)

28. Frame the interior. (See Chapter 13.)

29. Install the windows. (See Chapter 13.)

30. Install the fireplaces. (See Chapter 13.)

31. Install the rough HVAC. (See Chapter 13.)

32. Install the rough plumbing. (See Chapter 13.)

33. Install the rough electrical. (See Chapter 13.)

34. Install the roof. (See Chapter 13.)

35. Install the outer sheathing. (See Chapter 13.)

36. Apply the exterior siding or stucco and paint. (See Chapter 14.)

37. Install the drywall. (See Chapter 14.)

38. Install the cabinetry and millwork. (See Chapter 14.)

39. Install tile, counters, moldings, and finish carpentry. (See Chapter 14.)

40. Install the doors. (See Chapter 14.)

41. Paint the interior and finish woodwork. (See Chapter 14.)

42. Install the plumbing fixtures. (See Chapter 14.)

43. Install the electrical fixtures and hardware. (See Chapter 14.)

44. Install the flooring. (See Chapter 14.)

45. Request the final loan disbursement. (See Chapter 15.)

46. Request final inspection and receive certificate of occupancy. (See

Chapter 15.)

47. Roll to permanent financing. (See Chapter 16.)

48. Install the landscaping, including deck, pool, spa, and so on. (See

Chapter 17.)

49. Sell your old house. (See Chapter 15.)

50. Move in. (See Chapter 15.)

Figure 1-1 shows photos taken through a number of stages to give you an idea

of what a home in progress looks like.

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Part I: Getting Started: The 411 on Custom Home Building

Courtesy of Aaron Rosenbaum

Patience is a virtue — A true timeline

for building your home

Asking how long it takes to build a custom home from start to finish is a bit

like asking the question “How long is a piece of string?” The obvious answer

of course is “It depends.” So many factors can affect the time frame that the

overall project can stretch from six months to six years. Kevin often has clients

who come to his office asking if they can move in by Christmas, to which he

always responds, “Absolutely, as long as you don’t care which year!”

Over the years we’ve seen patterns for the time it takes to complete each

phase. The main point is to be flexible. You want to have a house you love for

the rest of your life rather than years of regret because you rushed everything.

Here are some typical rough timelines for the process based on Kevin’s 20

years’ of experience.

 Land acquisition: This step depends upon the availability of land in the

area you desire. Land is hard to find, so pinpointing the exact time is diffi-

cult. Most of Kevin’s clients look for land for three to nine months before

finding something they like. Purchasing the land, including the escrow and

due diligence periods, can take anywhere from 30 days to six months.

Figure 1-1:

A house in

progressive

stages of

construc-

tion. From

site prep

through

foundation,

framing,

and exterior

work, this

home took

more than

eight

months

to build.

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Chapter 1: The Custom Home Process in a Nutshell

 Home design and approval process: This stage mostly depends on how

picky you are and your financing considerations. Local government effi-

ciencies can play a factor as well. Figure at least three months. The

design and approval process requires that everything goes perfectly and

you can quickly make your choices. Kevin has projects that have taken

more than two years to get through this phase.

 Construction: This stage covers the project’s scope and the availability of

labor. You can use the construction lenders as a guide. Most lenders pro-

vide 12-month construction loans. Smaller houses or kit homes (homes

where all materials are supplied as a kit, such as log homes) may go up in

six to nine months. Large detailed mansions may need 18 months.

 Landscaping and move in: This one is all up to you. After the house is

complete, you can relax, although you may be required to finish land-

scaping in some neighborhoods within a year of completion. Most finish

within six months.

Being an Owner-Builder:

More Power to You!

When you talk about building a custom home, people often assume you’re

planning on pounding hammers and nails yourself. Hardly anyone does the

actual construction on their own custom home project. Many people, how-

ever, do consider acting as their own general contractor. Still, doing so is

such a large undertaking that only about 20 percent of all custom homes are

managed by owner-builders. In many of these cases, the owner is a contractor

or already has some amount of construction experience. This factor isn’t nec-

essary, but it can make a big difference in the ultimate success of the project.

Even though the primary motivation for considering becoming an owner-

builder may be saving money, the real issues to consider are time and man-

agement experience. This project will be one of the largest undertakings of

your life, even with a contractor. Consider the following questions in explor-

ing the owner-builder subject:

 How is my security at my current job?

 Do I have extra time and a flexible schedule?

 Can I make more money at my job with the time I spend on the home?

 Do I have a good understanding of the construction process?

 Do I have extra time to train myself on the process?

 Am I good at managing people and projects?

 Do I have a good eye for quality of construction?

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Part I: Getting Started: The 411 on Custom Home Building

 Do I have access to good resources?

 Am I good at problem solving?

 Am I good with multitasking and constant change?

 Am I well organized?

 Am I good at managing finances and budgets?

 Will my spouse and kids stay with me if I mess up the project?

If you honestly answered no to any of these questions, then you probably

need to hire a contractor (see Chapters 2 and 11). Most owner-builders are

gambling that they can do a job equal to or better than an experienced,

licensed contractor, thereby saving the cost of that contractor. Although an

owner-builder may end up saving money, you need to weigh the risk of that

gamble against the money you might save. If you’re wrong, it could cost you

far more money than you planned to save in the first place.

One option if your answers were somewhat mixed is to hire an owner-builder

consultant. One company called Ubuildit (

www.ubuildit.com) offers expert

consulting and procedures to guide you through the construction manage-

ment process. The company charges you consulting fees and offers you prod-

ucts and services that are marked up, but the costs can be significantly less

than a contractor’s fees. Ubuildit is a good alternative for saving money and

shortening the learning curve; however, you still need to have the time and

the management skills to make for a successful project.

Analyzing the truth about savings

The biggest motivation for being an owner-builder is the supposed savings.

Ordinarily, a contractor makes money from charging a percentage on top of

the cost of labor and materials used in the project; this fee or markup can be

anywhere from 12 to 35 percent depending upon what and where you’re

building. Generally, more established contractors work on higher margins

where younger contractors with less experience may work for less.

Where materials are concerned, the discount suppliers such as Home Depot

have made construction supplies available to the consumer at contractor

prices, which can be real savings if you’re satisfied with the selection avail-

able at these stores. If you’re building with more elaborate materials and fix-

tures, the contractor may have access to wholesale pricing that allows him to

make some money without you having to pay more. In some cases he may be

working on a lower margin and may be able to save you some money on

items with a high retail markup.

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Chapter 1: The Custom Home Process in a Nutshell

With labor, you’ll be subject to the prices and availability of the subcontrac-

tors in the marketplace. If the market is busy, pricing will reflect a direct

supply-and-demand relationship, pushing prices up. If you have no preexist-

ing relationships with any subs, you’ll end up paying the full price for their

time. If they’re unable to work into your schedule, you may have other costs

that come from delays on your project while waiting for the subs to become

available.

Finding and managing subs

Hiring and managing subs is the hardest part of being an owner-builder.

Meanwhile, a contractor has the advantage of having long-term regular rela-

tionships with subs. An experienced contractor has spent years finding

framers, plumbers, carpenters, and others whom he trusts to be timely, effi-

cient, and good craftsmen. If they’ve worked together for a long time, they

know how to work together, and the contractor will know when to ask for

favors.

Hiring each sub is a new experience in negotiation, management, and quality

control. Overcommunicate with everyone on the job to keep it running

smoothly. Keep your eyes open. You probably won’t know if you picked the

right sub until she is finished and she has been paid. (Check out Chapter 11

for more information about working with subs.)

Financing implications

One other challenge with being an owner-builder is the financing. Most con-

ventional construction lenders frown on owner-builder projects. They have

three basic reasons for being concerned:

 The bank is afraid the project might not be managed effectively causing

it to exceed the allotted time frame and budget.

 The bank wants to be sure your job and income won’t be negatively

impacted by the time demands of this project.

 In case of foreclosure, the bank doesn’t want to have to find and hire a

contractor to finish the home.

For these reasons, many banks who lend to owner-builders do so with stricter

requirements than for regular construction loans, such as loaning less money

relative to appraised value or requiring full income documentation. Others

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Part I: Getting Started: The 411 on Custom Home Building

allow owner-builder financing only if you’re a general contractor, or at the

very least they require someone with construction experience as a site super-

visor. Private sources for owner-builder construction loans are available, but

they can be expensive and don’t generally have permanent loans attached

like the single-close loans we recommend in Chapter 8.

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Chapter 2

Preparing for the Process

In This Chapter

 Creating organizational systems

 Building a budget

 Selecting a contractor

 Purchasing insurance

 Making an enjoyable experience

ny time you undertake a multistepped project, you have a greater risk

of something going out of control. The good news is that you can pre-

pare yourself for the chaos and craziness that is bound to happen in your

construction project.

In this chapter, we help you set up some simple systems for managing the

people and tasks involved in the custom home process. We walk you through

a short analysis of your finances so you can create a budget. We take you

through the decision process of selecting a contractor and also help you to

understand your insurance needs for the project. Finally, we provide you with

several tips on how to keep the project a happy experience.

Organizing and Documenting

The custom home process is chock-full of enough paperwork and procedures

guaranteed to give bureaucrats chills. Now is the time to be honest with your-

self. Are you truly an organized person? If so, this section is simply a series of

reminders and ideas for you to embrace. If not, don’t get intimidated by the

challenges ahead of you. Find someone in your family who is organized or

even hire someone to help you prepare for the large organizing task ahead.

One good resource is the National Association of Professional Organizers at

www.napo.net. You can also check out Wiley’s Organizing For Dummies by

Eileen Roth and Elizabeth Miles.

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Building a workbook and

portable file system

To start with a difficult project like you’re thinking of undertaking, you need a

central place to store all the original paperwork you’re about to accumulate.

Because each transaction creates its own set of paperwork, you want to get

organized or else you’ll end up drowning in all that paper. A typical construc-

tion project usually generates enough paperwork to fill a two-drawer file cabi-

net. You not only need to store all this paperwork, but you’ll also need to

easily retrieve it throughout the process. Use the following suggestions for

setting up categories for your filing system:

 Architecture and design

 Contractor communication

 Contracts

 Financing

 Invoices

 Land purchase

 Materials information

 Paid receipts

 Permits and approvals

 Subcontractor communication

 Warrantees

Many people start out with a single notebook and find out it fills up very

quickly. We recommend using a permanent and portable system instead.

Utilize the following efficient, step-by-step method for having pertinent infor-

mation at your fingertips whether you’re at home, in your office, or at your

construction site:

1. Create a loose-leaf binder with dividers for the categories in the previ-

ous bulleted list.

2. Decide after looking at each document whether you may need it at the

site. If so, make a copy.

3. File one copy in your file system at home.

4. Place the other copy in your binder in the corresponding category to

the home file system.

5. Review your binder each day, adding the necessary documents from

your file system.

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More and more people in the construction industry are using e-mail for com-

munication. People collaborating on your project can easily pass along and

share invoices, designs, pictures, and memos via e-mail. The great thing

about e-mails is that they’re easy to store without taking up any space in your

file cabinet. If you use Microsoft Outlook or Lotus Notes, you can set up dif-

ferent folders for all the subjects and people you communicate with. This

way you can easily reference prior communication and share it if needed. If

you don’t currently use e-mail, take the time now to figure it out. Doing so can

make your custom home project run more smoothly. (Check out Outlook 2003

For Dummies by Bill Dyszel, published by Wiley, for help setting up and figur-

ing out how to e-mail.)

Calendar and communication —

Your PDA is your friend

Keeping your project on schedule is a major project in itself. You and your

contractor need to coordinate all the actions in a construction project. For

example, your electrical systems can’t be installed until the framing is com-

plete, and the house can’t be framed until the foundation is installed. With

so many people dependent upon the time frame of others, you need a simple

way to keep track of everything, even if your contractor is managing the

schedule.

Proactive communication is probably the single most important factor for a

successful custom home. Make yourself easily available with a mobile phone

so your contractor or architect can reach you when she needs you. Be pre-

pared to respond to messages promptly (otherwise, if your crew runs into

a snag, the project could sit in limbo while your contractor waits for you to

check in and return messages — costing you time and money). If you’re a

recluse or shy when it comes to dealing with people, you may need to adjust

your lifestyle and contact-management approach until your project is

completed.

Staying in close contact requires you have immediate portable access to

phone numbers for your contractor, architect, loan officer, and other key

players. For those of you electronically minded, you can utilize great techno

tools to help you. A personal digital assistant (PDA) is a small handheld com-

puter that can store all your phone numbers as well as your calendar. PDAs

cost from $100 to $500 and can transfer information back and forth from your

computer, which helps if you’re communicating by e-mail or managing your

calendar electronically. Both Palm (

www.palm.com) and Microsoft (www.

microsoft.com

) make software that is compatible with most computers. You

can take time to figure out how to use these devices by reading Wiley’s Palm

For Dummies, 2nd edition, by Bill Dyszel, or Pocket PC For Dummies, 2nd edi-

tion, by Brian Underdahl.

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A number of phones are also available today that combine the functions of

PDAs with a fully functional mobile telephone. They’re pricier and bulkier

than regular mobile phones, but they allow you to combine the functions of

two units. Check with your local cellular phone provider for details.

If electronics aren’t your thing, we highly recommend a Franklin Planner from

www.franklincovey.com. They come in many sizes that can also serve as

your planning notebook. You can keep all your contact information, as well

as your calendar, with a pencil and have it ready whenever you need it. And

if you use a planner, your batteries will never go dead because — unlike

PDAs and other portable electronic devices — planners don’t use batteries!

Being the bean counter — Keeping

track of your finances

Even though you may have a contractor and bank involved, ultimately, the

job of managing the finances falls on you. You need to keep track of every

dollar spent as you go, or you could have a very unpleasant surprise — run-

ning out of money in the middle of the project.

We recommend setting up a separate bank account early on for everything

construction related. Setting up this account can help remove confusion and

allow for easier record keeping. Keeping a file for each vendor and tacking

down invoices and receipts in chronological order also makes life easier

when looking for something later. Loose papers become a nightmare when

you need something quickly. (See the “Building a workbook and portable file

system” section earlier in this chapter for specific tips on keeping the files

organized.)

Managing the finances is an easier task (just like keeping your schedule orga-

nized) if you’re computer literate. You could manage your finances with a

simple bookkeeping ledger book, but you can keep track of money in and

money out in all the different categories of the build smoothly and efficiently

with the help of an accounting software program such as QuickBooks by

Intuit (

www.quickbooks.com). QuickBooks offers a special construction ver-

sion designed for contractors that can serve your needs well. The version is a

little pricey at a few hundred dollars, but that’s a small price to pay for effec-

tive money management. Wiley’s QuickBooks For Dummies by Stephen L.

Nelson can guide you through the software quite nicely.

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Shopping and sharing — Collecting

material information

The biggest assignment you have in this project is . . . to go shopping! You

need to choose hundreds of items for this house, and the sooner you start

saving pictures and catalogs the better. (We provide a basic list of choices

to be made in Chapter 5.) Magazines, catalogs, and the Internet are your

best bet for finding hardware and fixtures.

Electronic storage of pictures makes for easier communication with your

architect and contractor. A scanner can be a useful tool for cataloguing pic-

tures from magazines to store on your computer. Then you can e-mail the

scanned images to your architect and contractor or burn the images to a

CD and share the disc with them.

Budgeting Your Project

A budget for a custom home project is a living breathing animal. It will grow

and shrink many times before the house is finished. Okay, it usually grows

more than it shrinks, but the point is that it changes — a lot! You do have to

start somewhere. This section can help you create a preliminary budget to

get started. (We also provide more specific budgeting help in Chapter 9

where we explain how a lender budgets your project. If you’re financing this

project through a lender, then the lender’s budget takes precedence over

yours, so you need to get the two in line as soon as possible.)

Budgeting at the beginning of the custom home process is a bit of a chicken-

and-egg process. You have to balance out the cost of the house with what you

can afford. The problem is that the house may require more money than you

have, which you can’t figure out until you design the house and so on. The

best method is to evaluate the two issues separately and then work to a

compromise.

Looking at your finances and cash flow

Chances are your lender will heavily influence your budget by determining

an amount to lend you. But just because the lender says you can afford a mil-

lion dollars doesn’t mean you’re comfortable spending that much money or

making those payments. The best way to create a budget you can live with

is to work with your certified public accountant (CPA), financial advisor, and

Chapter 2: Preparing for the Process

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loan officer to assess how all factors will impact your finances. Make sure you

discuss and take into account the following:

 Cash on hand

 Capital gains issues

 Current tax bracket

 Diversification of assets

 Intended length of time owning the home

 Long-term investment strategy

 Property appreciation

 Tax deductions for interest and points

Armed with this information, you need to arrive at a comfortable payment

that a loan officer or loan calculator can translate into a loan amount. You

can find a variety of these calculators at

www.mortgage-calc.com.

The mortgage information set out by these calculation sites is basic informa-

tion and doesn’t totally apply to construction loan qualification. These sites

can give you a rough estimate to work within preliminary stages, but you

need to speak to a loan officer that is a qualified construction loan specialist

to be assured you meet construction loan qualification. (You can find specific

information for construction loan underwriting and for finding a loan officer

in Chapters 8 and 9.)

After you have a loan amount, you need to account for the cash available. As

we discuss in Chapter 7, you need a good amount of cash to run this project.

You may not want to spend it all, but cash is your surest way of keeping a

custom home project running smoothly. Don’t forget to include money you

can take out of your existing house through a credit line or refinance. After

you have decided how much of your cash you want to spend without being

reimbursed by the construction loan on your project, add it to your loan

amount estimate for the total estimate of your custom home budget.

Just because you can afford a large budget doesn’t mean that the property

will support the amount you want to spend. Many other factors can impact

your budget later in the process, such as requirements of your property and

sales in your neighborhood. (We discuss these elements extensively in

Chapters 3 and 5.)

Defining “dollars per square foot”

Many different people use the “dollars per square foot” term many different

times during your home-building process. Interestingly enough, however, no

one uses a specific widely accepted definition. A real estate agent may state

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dollars per square foot as the sales price of the home divided by the square

footage, including the land. A contractor may or may not include items such

as permits or financing in his estimates of dollars per square foot. After you

have bids, the term actually becomes meaningless, but during the early

stages of your project, you need a common understanding of what it means.

To decipher your dollars per square foot quotes, you have to define dollars

and square foot the same way for each person you work with. Then you can

make sure everyone is on the same page in every relevant conversation. The

following sections outline the approach Kevin takes with his clients.

Step 1: Define square footage

First, create a definition for “square foot.” Square footage for this purpose

needs to include all living space enclosed by walls that is completely fin-

ished. Your definition of square footage needs to include the square footage

for the following:

 Bathrooms

 Bedrooms/closets

 Den

 Dining room

 Family and great room

 Fully finished basement

 Guesthouse

 Hallways and entryways

 Home theater and/or game room

 Kitchen/laundry room/pantry

Add the square footage together, and this total serves as your definition of

the total square footage. However, your definition of square footage doesn’t

include square footage for the following:

 Attached decks

 Garage

 Patios

 Unfinished basement

 Workshop buildings

Step 2: Define dollars

Now that you have a total square footage number, you need to define the dol-

lars necessary in the budget to define dollars per square foot. You don’t want

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to include all the construction costs in this dollar amount; many costs need

to be evaluated independently. The following are the costs that Kevin

excludes from this part of the calculation:

 Financing

 Hardscaping (unattached decks, pools, fences, and so on)

 Land

 Landscaping

 Soft costs (permits, plans, and fees)

So what’s included in your definition of the dollars? Mostly labor and materi-

als construction costs for all the living space we mention in the “Step 1:

Define square footage” section are included plus a few other construction

costs such as the cost of

 Attached decks and patios

 Driveways

 The garage

 Unfinished basement space

 Walkways

Take all your cost estimates and add them together to create a total dollars

number.

Step 3: Calculating dollars per square foot

As soon as you establish the total dollars number, divide the total dollars

from Step 2 by the square footage number from Step 1 to establish your dol-

lars per square foot. Easy, huh?

Alternatively, you can take your total dollars construction budget minus

the excluded items from Step 2 and divide by the square footage number

to determine how much per square foot you have available to spend.

For example, if you have a budget of $350,000 for total dollars available and

your square footage is 2,500 square feet, your budget would be $140 per

square foot. You could then tell a contractor that you can only spend $140

per square foot for construction of the house not including land, soft costs,

financing, hardscaping, and landscaping, but that price must include the

garage, driveways, walkways, attached decks, and any unfinished space.

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Using a budgeting template

To put all this information together, Kevin’s company, Stratford Financial, sug-

gests a little template to make everything easier. You need to do your own

research to fill in the spaces for your project, but the following is a sample

preliminary budget for a typical custom home project that you can scratch

out on any napkin.

Funds available

Add your available cash and the loan amount for your total budget.

Cash $175,000

Loan amount $650,000

Total budget $825,000

Cost-to-build

Add all your costs together for your total cost.

Land $200,000

Soft costs (permits $40,000

plans and fees)

Hard costs $424,000

($160 per 2,650 Sq. Ft.)

Financing $35,000

Landscaping $40,000

Hardscaping $25,000

Total Cost $764,000

This template can give you a starting point for budgeting, but you do need to

educate yourself on each of these line items to get a real picture of your pro-

ject’s costs. (Check out the table of contents to see where we discuss each

topic for more information.)

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Hiring a Contractor

Most people building a custom home end up hiring a general contractor to

do the job. In fact, 80 percent of custom home projects have a general con-

tractor involved in some capacity. Many people find great comfort in having

someone with experience manage the job while they earn the money to pay

for the project. If you’re considering being an owner-builder and not using a

contractor, check out Chapter 1 to see if you’re truly up to the task.

Every contractor has a standard contract and practices she uses with her

business. Remember that you have the right to negotiate and compromise on

issues before entering into any contract. Of course, the contractor also has

the right to decline the job.

There is no set time to engage your contractor as long as it’s a minimum of

60 days before you start construction so she has time to get everything ready

for the build. Many people opt to engage a contractor much earlier in the

process so that the contractor is actively involved during the design process.

After you and your contractor establish a contract and you’re on your way,

you and the contractor need to work as a team to build your custom home. In

this section, we look at the contractor selection process. (You can find more

information on managing your contractor relationship in Chapter 11.)

Understanding the contractor’s role

In most cases, the contractor doesn’t handle the hammer-and-nail part of

your custom home project. Although some contractors may participate in

parts of the actual construction, his primary job is to manage the workflow

and project materials and make sure everything is happening in a timely and

workmanship-type manner. The following list includes your contractor’s

major responsibilities:

 Obtain the final permits

 Manage the production schedule

 Source and buy the materials

 Hire and manage the subs

 Keep the site safe and clean

 Manage the inspections

 Manage the budget

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 Keep the consumer informed

 Effect quality control

 Problem solve

Not every contractor will handle all these items. When you hire your contrac-

tor, discuss with her how much you’ll handle yourself directly and what she’ll

handle. Good communication is the key to making sure that you don’t waste

any time or effort doubling up on tasks.

Getting bids — Comparing

apples to apples

If you didn’t start the custom home process with a contractor in mind, you’ll

probably give your plans and specifications or specs to a few different contrac-

tors to get an estimate. This process is called putting your plans out to bid.

Finding contractors to bid on your project is as easy as asking friends and

your architect for referrals. If they aren’t providing names, you can drive

through the neighborhood and look for construction signs on houses being

built. The Internet is also a good resource. Simply type the name of your city

and the word “contractor” into a search engine such as Yahoo! or Google.

Dozens of referral sites pop up for you. If the building market is busy, you

may have to work a little harder to find contractors who can bid in your time

frame. You want at least three contractors to bid on your project if possible.

The trick is making sure you can compare the bids to each other.

The best way to compare the bids is by making sure your plans are as com-

plete as possible. In Chapter 5, we discuss doing all your design work and

material selection before the bid process. This extra work can delay your pro-

ject early on but is crucial for comparing truly accurate bids. For example,

you want to compare prices on the same kitchen sink model numbers to see

which contractor is charging a higher profit margin. Also, make sure the con-

tractor has included his fees in his estimate. He may or may not break out his

margin as a separate line item, but you need to know there won’t be any sur-

prise additions to the costs down the line.

Many contractors substitute an allowance for unspecified materials. So, for

example, if you haven’t picked your bathroom fixtures, one contractor may

offer you a $10,000 allowance. This amount may seem cheaper than a different

contractor’s $15,000 estimate, but you have no way of knowing if the quality

is comparable or who is taking a higher margin. Also, availability and the diffi-

culty of installing certain materials can impact the time and, subsequently, the

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cost of the project. The surest way to make sure that all bids are assuming the

same materials and labor necessary is to specify all the materials required for

the project before you put the plans and specs out to bid. Having all these

decisions clearly made in the beginning helps to avoid ugly misunderstand-

ings and surprises later in the project.

Evaluating a contractor’s 3 Cs — Cost,

craftsmanship, and compatibility

Do you want a quick and easy guide to help you pick the right contractor?

(Yes, of course you do, because you’re reading a For Dummies book.) Kevin

has been advising his clients for years to make their choice by examining the

3 Cs: Cost, craftsmanship, and compatibility.

 Cost: This one is obvious and, although important, it probably weighs

the least in your decision for picking a contractor. The cost comparison

becomes plain when the contractors return the bids. If you have handed

them complete, detailed plans and specs, you need a clear picture who

is working on the lowest margin or who has access to the lowest cost

labor and materials.

 Craftsmanship: This part is important in the long term. You want to

know that the house is built well and will offer you decades of enjoyable

living. Don’t confuse style and design with craftsmanship. A house can

have a horrible floor plan with fantastic artisan work.

What’s the best way to check on work quality? Look at other houses that

the contractors built. Ask the contractor for a complete address list of

homes he has built in addition to a list of references. Make sure you look

at houses built ten years ago as well as newer ones. Remember, just as a

car with 50,000 miles drives much differently than a new one, an older

home lives much differently than a new one. Don’t forget to talk to the

people living in the houses to find out what problems, if any, they have

experienced with their homes. Don’t be afraid to knock on the door of

homes built by the contractor that weren’t on the reference list.

Also, don’t forget to ask the contractor about his workmanship warran-

tees. Warrantees usually last for ten years, but can vary. See Chapter 15

for more on contractor warrantees.

 Compatibility: This “C” is the most important aspect to consider, and

yet the most difficult to identify. The hard part is first assessing who you

are so you can pick the contractor that will work best with your style.

For example, if you’re a micromanager that plans on being involved in

every aspect of the project, then you’ll constantly butt heads with a con-

tractor that also likes to micromanage his projects. You need a more

relaxed contractor willing to let you make the decisions or second-guess

his work. On the other hand, if you don’t have the time to be involved in

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the management, then someone with a relaxed attitude probably won’t

give you the sense of security you need — particularly if he is waiting for

you every day to make decisions. Figure out what sort of experience is

going to make you happiest and find the contractor that can meet your

needs.

References from people you know are great, but people have different tastes

and perspectives on quality and experience. Ask specific, open-ended ques-

tions about the experience that can paint you a clear picture of the contrac-

tor’s personality. Just hearing that “It was a good experience” doesn’t tell you

much without knowing the reasons why.

Using expert interviewing techniques

If you haven’t hired project managers before, then hiring a contractor will be

a completely new experience for you. Generally, the contractor is trying to

sell you on himself for the job because that is his business. At the same time,

you’re trying to sell the contractor into taking your project because the price

is right and you like his work or maybe the market is really busy right now.

With everyone so anxious to get going, the important issues, such as compat-

ibility, can get passed over — leading to tense problems and unmet expecta-

tions later in the project. You need to make sure you not only ask the right

questions, but also use effective methods to get the answers you want. The

following list includes some tried-and-true interviewing techniques that are

guaranteed to help you find the best contractor for your job:

 Let the contractor do the talking. If you’re doing more than 25 percent

of the talking, then you’re the one being interviewed. Let the contractor

explain to you why he wants this job. Have a standard list of questions

for each interview that allows the contractor to tell you what he’s like to

work with and what services he provides. (We provide just such a list on

the Cheat Sheet at the front of this book.)

 Let the contractor tell you what he wants. If you ask “yes-or-no” ques-

tions about his style and needs, he’ll surely try to answer based on what

he thinks you’re looking for. Instead, ask him open-ended questions about

his ideal project and the worst project he has ever had. Delve into details

about his likes and dislikes. You’ll be working with him for at least six

months on this project, and nothing is worse than an unhappy contractor.

 Give him problem scenarios. Anyone can run a project that goes per-

fectly smooth all the time. You want to know how he deals with problem

situations. Create stories of nightmare situations and ask him how he

would handle them. For example, what if the framer and the plumber get

into an argument, and one walks off the job before the job is finished? If

he quakes in his boots with the questions, you’ll know he doesn’t have

the strength to manage your project.

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This project is your home, and your lifesavings are at stake. Compromise is

okay to a point, but you need to have a good building experience to enjoy

your home fully when you finally move in. Don’t assume that contractors are

all the same. Pick the one that makes you feel comfortable and secure and

then communicate, communicate, communicate.

Identifying Insurance Issues

If you arrange outside financing for your project, the lender requires insur-

ance to cover several issues, including at minimum

 Liability

 Workers’ compensation

 Course of construction

Even if you finance the project 100 percent out of your own pocket, you still

want to protect yourself. This section outlines the different insurance poli-

cies necessary to protect your project and yourself. Don’t wait to discuss

these policies with your insurance agent. Not all carriers have these policies

available, so you may need extra time to find a carrier and shop for the best

price.

Liability policy

Lenders require liability insurance, which protects you against someone get-

ting hurt on the property or by the actions of somebody working on the prop-

erty, to be carried by either you or the contractor. If the contractor carries

the policy, the policy needs to meet the following criteria to satisfy most

lenders:

 It must be in the form of a comprehensive general policy for $1 million

or the loan amount, whichever is greater, or be a policy including broad-

form liability endorsement.

 The contractor must be named as the insured.

 You and the lender must be named as additional insured.

 The property address must be included on the certificate.

You may want to carry this policy yourself because in some states it can be

expensive for a contractor to get a liability policy if he doesn’t already have

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one. If you carry the policy, the cost will be added to your budget and consid-

ered for financing as discussed in Chapter 8. Note that policies vary in cost

by state and the size of your home. If you’re carrying the policy or are an

owner-builder, then you can get the liability policy with a few changes:

 The contractor doesn’t need to be named.

 You’re named as the insured.

 The amounts change to $500,000 for each occurrence, extended to both

property and personal injury or the loan amount, whichever is greater.

Workers’ compensation

Ordinarily, the contractor carries a workers’ compensation policy if she has

employees. You can ask to see the certificate because the lender will as well.

In many cases, however, the contractor doesn’t have her own employees and

hires her labor and subs as independent contractors. If so, then these indepen-

dent contractors fall under your liability policy in case of an accident. Lenders

usually allow for this situation by having you and the contractor sign a waiver

so the lender isn’t held liable for any workers’ compensation violations.

Course of construction policy

This policy protects you in case of theft, fire, weather, or other damage to the

house while it’s being built. So if, for example, your plumber drops his torch

and burns down the framing, this policy pays for the cost of rebuilding the

house to its previous condition before the damage. Lenders absolutely require

this policy to be in place before they fund loans. The cost of this policy varies

depending on your state and the size of your home. The following criteria

needs to be included in a course of construction policy:

 Coverage must be in an amount equal to the estimated replacement

value of the improvements to be built or the loan amount, whichever is

lower. Guaranteed replacement is usually acceptable instead of a spe-

cific dollar amount.

 The borrower is the named insured.

 The lender is named as the “mortgage and certificate holder.”

 There is a 438BFU Lender’s Loss Payable Endorsement naming the

lender as the “Loss Payee.”

 The property address and/or legal description is listed on the insurance

certificate.

 The maturity date on the insurance is at least one day beyond the end of

the construction loan term.

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Managing Your Expectations

One of Kevin’s favorite contractors earned the “favorite” title because he is

the biggest pessimist around. The problem with being optimistic with a con-

struction project is that you’re constantly disappointed. Materials don’t show

up on time or the sub takes longer than you thought to finish; you name it, it

probably will happen. A custom home project is a journey with a life of its

own. You can follow along and guide it, but you can tightly control only a rela-

tively small portion of it. The best approach is to be well prepared, relax, and

enjoy the ride.

Planning a timeline — A custom home

is forever (So what’s the hurry?)

In Chapter 1, we show you a list of all the actions and people involved in the

custom home process. The actual time frames for this process can vary

based upon the size and scope of the project as well as the city or town you

are building in.

In order to make the planning process go as smoothly as possible, talk to a

couple of architects and contractors early to get a sense of how long every-

thing normally takes in your area. Write down each step and the expected

time frame. Now fold up that paper and stick it in your file. This paper is a

guideline for you to refer to now and again only as a reference. You can fully

expect for some tasks to take longer than you estimated.

A house is built to last decades. You don’t want to rush a complex process,

such as design or construction, to the point where corners are being cut.

An extra month or so may cause inconvenience and may even cost a little

money, but in the end you’ll have a better-constructed home and you’ll have

forgotten about that delay after you’ve lived in the house for a year or two.

That being said, you definitely need to monitor the schedule and time frames.

Pay special attention to deadlines associated with the building department

and your lender. But use your best judgment and apply pressure only when

it’s necessary. Your project is a working environment filled with plenty of

stress. Overreaction and constant pressure on the workers can make them

less likely to help your project move along smoothly.

Making hard choices — What you can

(and can’t) afford

Most custom home projects go over their original budget — some more than

others. You really have no way of knowing how much your project will cost

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until it’s actually finished. Until then, you have to constantly make choices to

adjust your budget’s expenses. Take a breather when making these decisions.

Think about whether that gold-plated faucet really makes an important differ-

ence in your lifestyle. Sleep on it for a night or two. Find creative ways to

make the home something you will enjoy while spending less money. We

share some of our favorite ideas for saving dough in Chapter 19.

Give yourself a break. Design a house that doesn’t stretch you to your limits.

That way if you’re coming in on budget, you can choose to upgrade and

splurge here and there without worry. (See Chapter 5 for more tips on saving

money when designing your house.)

Patience — Not everything

must be perfect right away

Many craftsman and artisans participate in the building of your custom

home. If you’ve carefully hired everyone, you need to put your trust in these

skilled workers. Many processes are multistage. Unfortunately, some people

will make mistakes or leave some items partially finished. Don’t panic; this

process is normal. Your contractor and the subs can fix or replace most

everything during the building process, and your contractor and subs do

double-check their work as they go.

We give you spot-checks in the chapters in Part III of this book. Use them as

a guide to check on everything along the way. Write down any concerns and

problems you see. Rather than pointing out everything every time you have

a concern, talk with your contractor and set up a meeting with the appropri-

ate sub to share your findings. Doing so allows the subs to do their job with

a minimum amount of pressure. You may find they had already scheduled

the repair.

Chapter 2: Preparing for the Process

Keeping an eye on everything —

Cameras on the property

If you absolutely need to know what is happen-

ing with the property 24 hours a day, you may

consider putting up cameras and broadcasting

the signal to the Internet. Doing so is perfect for

all you gadget geeks building custom homes.

Internet sites such as

www.x10.com/cameras

sell cameras and software that allow you to

watch the action at your build site from any com-

puter connected to the Internet. You can expect

to pay a couple of hundred dollars for all the

equipment you need to watch your project 24

hours a day. You may find it isn’t much different

than watching paint dry, but what’s a little bore-

dom where peace of mind is concerned?

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Making the process fun

You’re sure to have your share of frustrations and problems before your

custom home is finished. Managing your patience and your temper is difficult

when so many things are beyond your control and so much is at stake. To

help you enjoy the lighter side of the process when everything is looking a

little dim, we give your our top-10 list of ways to make your process extra fun:

 Enjoy a mud football game before the foundation goes in.

 Throw a block party at every completed stage.

 Have an office gambling pool on completion dates.

 Make matching T-shirts for all the workers on the project.

 Create art pieces with scrap lumber and supplies.

 Compile a construction hunk calendar.

 Give out a worker-of-the-month trophy.

 Put your family’s handprints in the cement.

 During framing, fly paper airplanes off the second story.

 Make a photo album/scrapbook documenting the entire process.

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Chapter 3

The Land Grab: Selecting the

Perfect Site

In This Chapter

 Figuring out what a lot is

 Making sure the property will work for you

 Searching for (and finding) a lot

 Estimating what a property is worth

 Understanding tear-down properties

 Purchasing the land

ou can’t have a house unless you have somewhere to put it. Unlike the

pioneers of old, however, individuals today can’t just walk up and squat

on whatever piece of land that catches their eye. If you’re interested in some

land, you have to research, explore, negotiate for, and ultimately purchase a

parcel that you can call home.

In this chapter, we walk you through the entire process of searching for and

finding the perfect site. We provide you with the very best evaluation tips,

and even discuss buying a house in poor condition that you can tear down

and rebuild. Finally, we consider financing options. You have to pay for that

dream property, after all!

Knowing the Difference between

“Land” and a “Lot”

Differentiating between some land and a lot may seem like an easy distinction.

But not so fast. The two are in fact quite different. All lots can be considered

land but not all pieces of land can be called lots. Are you scratching your

head? If so, read on . . .

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 A lot or finished lot is a piece of property that is ready for building a

house. It may or may not have all the utilities (gas, electric, water, sewer,

telephone, and so on) at the site, however, they usually aren’t far away.

 Land is a catchall term that people in the construction industry use for

any piece of property without a finished, habitable structure. Land can

be commercial, residential, or agricultural. Raw land or undeveloped land

is terminology that most people in the construction industry usually use,

referring to land that isn’t ready for building.

If you’re anxious to get your new home built or if your finances are limited,

then plan to buy a finished lot, not raw land. You can find a good loan more

easily with a lot, you’ll likely pay a lower down payment, and you’ll have to

spend less to prepare the property for building — all resulting in major sav-

ings in both time and money.

Raw land can be more difficult or more expensive to finance because it usu-

ally requires additional work (often, significant additional work), such as

putting in roads and utilities, before building can begin. Fewer buyers are

willing to put the time and effort into this type of property, which makes it

less marketable than finished lots. As a result, fewer banks will be willing to

lend you the money you need — you may have to find private financing or

encourage the seller to loan you the money (referred to as having the seller

carry back paper). If you do find a lender, you’ll probably need to make a

larger down payment. In most communities, noninstitutional individuals

invest money in real estate — banks usually know these people. (See “Using

private or hard money” later in this chapter for more information.)

Also, if you buy raw land, plan to allow yourself more time to complete the

entire project because preparing raw land into a finished lot — getting

approvals and permits, building roads, extending utilities to the lot, drilling

wells, if necessary, and more — can take months or even years. Make sure

you consider the extra time when discussing the term of your lot loan with

the seller or private lender.

Location, Location, Location —

Refining Your Lot-Buying Needs

Of course you don’t want to buy just any lot. You want a lot that meets with

your desires and will retain its value, if not appreciate.

Several criteria can affect the sales price of different properties both today and

when your house is finished. Picking the right lot is just like picking a finished

house. Factors such as location and amenities can make a lot undesirable. If a

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lot is undesirable to you, it may be undesirable to others as well, which can

have an effect on the marketability of the property and, ultimately, the resale

value. Consider many factors when deciding on the right location for your lot.

The following sections contain some questions to ask yourself. When answer-

ing them, take into account not only your own lifestyle, but also the factors

that will impact your ability to resell the finished house. Remember, use this

checklist when searching for the right neighborhood as well as when evaluat-

ing a prospective lot for sale.

Lifestyle

You need to decide how you want to live in your home — these elements are

a matter of personal taste. Many of the lifestyle items in the following list may

be important to some of you and unimportant to others:

 Should the lot be in an urban, suburban, or rural area?

 Should the lot be flat or sloped?

 Should the lot have much usable land?

 Will the lot require significant ongoing maintenance?

 Should the lot be in close proximity to the neighbors?

 Should it afford privacy?

 Should it be sunny or shady?

 Should the lot have natural vegetation?

 Should the lot have available on-street parking?

Marketability

The list that follows has a variety of factors that impact value, and you need

to use these factors when evaluating a lot to purchase. Keep in mind that you

may have to sacrifice some of these factors, however, to meet your budget.

Make sure you talk to a real estate professional to understand the market

demand of a particular lot based on these issues.

 Is the lot on a busy street?

 What kind of view does the lot have?

 Does it have waterfront access?

 What is the proximity to power lines?

 Is it next to or near commercial buildings or apartments?

 What’s the noise factor? How close is it to planes, trains, and

automobiles?

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 Is it on or near an earthquake fault or in a flood plain?

 Are there good schools in the area?

 What type of power, water, and sewage is available?

 What does city planning have in mind for this neighborhood?

Finding a Lot

Acquiring the right lot may be the biggest challenge you’ll face in the custom

home–building process. Property values have been steadily increasing in

most places since World War II, and not every piece of land will suit your par-

ticular needs or be cost effective for building. Finding the right lot isn’t easy,

and you need to plan for a long hunt. Some helpful resources are available,

but not as many as you may think. Finding the right lot requires sleuthing and

persistence. Your best resources are using the Internet, utilizing experienced

real estate agents, and taking your own initiative.

Surfing for turf

Using the Internet is a great way to start looking for your lot. The following

Web sites are our three favorite picks for discovering your dream lot:

 www.lotfinders.com: This site provides educational information on

purchasing lots and connections to real estate agents that sell lots.

Financing information is also available.



www.realtor.com: Owned by the National Association of Realtors, this

site can show you every piece of land listed on the real estate bible: the

Multiple Listing Service (MLS).



www.land.net: This site has listings for large parcels of agricultural and

residential land as well as individual lots.

Engaging a real estate agent/lot specialist

Finding a real estate agent that specializes in lots can be difficult and frustrat-

ing. Most agents don’t want to spend the time with a buyer only to sell a piece

of property at a fraction of the price (and a fraction of the commission) of a

completed home; however, a few agents have made dealing with lots their

specialty. Check to see if the real estate agent you’re working with understands

the issues associated with building, planning, and zoning that we reference in

Chapter 5 as well as in this chapter. If your agent doesn’t readily answer your

questions and seems unsure, if you feel like you know more about these

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topics from reading this book than she does, or if she brushes off or blows

over your questions entirely, you may want to look for someone more experi-

enced in lot sales. If your agent seems knowledgeable in lot-only sales, she

can help you assess whether any potential problems associated with building

on a particular lot may surface.

Even if you can’t find an agent who focuses on lot sales, working with an experi-

enced real estate agent at some point still may be in your best interest. Even

though you may have to find the lot yourself, you still need help with the nego-

tiations and transaction management. If the property is listed in the MLS, the

seller is paying a commission of 3 to 5 percent to each agent anyway, so you

may as well have an agent representing your best interest. Otherwise, the list-

ing agent gets the entire commission just for representing the seller. (Check

out Wiley Publishing’s Home Buying For Dummies, 2nd edition, by Eric Tyson

and Ray Brown for more info on real estate agents and their duties and com-

missions structure.)

Doing the legwork on your own

If you want to find your perfect lot, you may have to do some detective work.

Grab your sleuthing equipment and get started.

If you’re looking for large tracts of custom lots, try the outlying areas of your

city. Custom home developments often advertise in the supermarket real

estate magazines, and new golf courses can make for a hotbed of lot subdivi-

sions. Sometimes you can find the right lot simply by spending your Sundays

driving through neighborhoods under development and looking for signs.

Finding a lot when there isn’t one

If you have searched online, worked with an agent, driven the neighborhoods,

and still haven’t found your dream lot for sale, you may need to take a more

aggressive approach. If you find any piece of land you like, then contact the

owner and make an offer! It doesn’t matter that it isn’t listed for sale right

now. Remember, everything is for sale; it’s only a matter of price. Information

on who owns any piece of land is part of the county public record. Through a

real estate agent, mortgage broker, or title company, you can request the

address and phone number of the owner of any piece of land. If your real

estate agent is managing your part of the transaction for a commission, she

should be thrilled to help you with the negotiations and the closing process.

If you’re willing to look at many pieces of land, you can take the shotgun ap-

proach. Have your agent get you a mailing list of all the lot owners in the area

and send them all personal letters explaining your burning desire to own prop-

erty and build in the neighborhood. Perhaps someone will consider selling

his property and, if not, he may know someone in the neighborhood who may.

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Evaluating a Particular Lot —

The True Value of Dirt

Although it may be true that the value of something is based upon what

someone is willing to pay for it, land value has other factors to consider when

determining its ultimate usefulness for building a custom home. You need to

take into consideration the cost of getting the land ready for the build. You

also must factor in limitations on the size of the home.

When determining a particular piece of property’s value, a lender’s appraiser

looks at other comparable land sales in the area to create a number for the

lender’s purposes. Keep in mind, however, that this appraisal doesn’t guaran-

tee your ability to resell the land for the same price. Nor does it mean that

your custom home budget will be able to absorb the price of the land. Consider

all the factors associated with your build — especially financing — before

purchasing a lot. Chapters 8 and 9 can help with understanding how lenders

evaluate your land in relationship to the entire custom home project.

Examining amenities and utilities

The relationship between utilities and your lot can have a significant impact

on the lot’s value. A lot requiring a septic system can add costs (which may

decrease its value). The need to drill a well or to add offsite additions, such

as sidewalks and parkways, can also negatively impact a lot’s value. Be sure

to explore the cost of installing utilities and amenities before you buy any lot.

Part I: Getting Started: The 411 on Custom Home Building

Too bad it’s not 1889!

In 1889, Oklahoma was emerging as a wealth

of opportunity for settlers looking for land.

Oklahoma Station and Guthrie Station were

two promising railroad outposts destined for

urban development. In one of the strangest and

chaotic stories of land acquisition, the govern-

ment created an exciting and unprecedented

process for claiming land — a race! Rules were

posted allowing people to gather at the nearby

Arkansas and Texas borders ready to run, ride,

and walk to their desired parcel of land on

April 22, 1889. Upon arriving at their parcel, they

would claim it by staking a flag and filing a claim

form. People already in the territory (“Legal

Sooners” as they were called) would cheat by

staking their flags early even though prohib-

ited by law. Thousands raced that day and made

Oklahoma land their home. It was exhilarating

and brutal. “It is an astonishing thing,” the New

York Herald observed on the eve of the opening,

“that men will fight harder for $500 worth of land

than they will for $10,000 in money.”

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This section contains some “due diligence” items for you to consider when

figuring the ultimate “cost” of your lot. Ask these questions of the seller and

your agent, or research them with the appropriate county or city agency. Then

create a list of all possible costs to prepare for your budget and estimate how

long it will take to work through the permitting or approval process. Here is

short list of questions to ask:

 Does your lot require gravel, asphalt, or concrete for its driveway?

 Will you need to install sidewalks?

 Will you need to install street lighting?

 Will the lot require extensive earth moving or a special foundation?

 How far is the electricity from the build site, and how much will it cost

to extend it to your property?

 What is the cost of connecting to the sewer or installing a septic system?

 Will the property support a required septic system?

 What is the cost of connecting to water or installing a well?

Many people get so caught up in the dream of building a house that they sell

themselves into impractical situations. Keep your cool and do your homework.

Buying a piece of land without researching all the issues and costs can leave

you with a crushed dream and a useless piece of land.

Zoning in on zoning’s limitations

Nearly every city and county attaches building restrictions to land when the

land is first put into development. This is called zoning. Zoning determines

many factors you must consider, including

 The type of building you can put on the land

 The lot’s minimum size

 The number of dwellings or units you can build on the lot

Finding out and understanding the zoning of a particular lot before you

decide to buy is important. The information is readily available at your

friendly, local city hall or county government building; your local government

also has a guide that can tell you what each zoning designation means.

Most urban and suburban lots for houses are zoned residential R-1. If a zoning

designation has a higher number, you can build more units on it (for example,

a duplex or triplex) based on whatever number is designated (R-2, R-3, and so

on). Some commercial lots can be used for residential, but the rules vary

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among municipalities. Most large, rural properties are designated RA for

Residential Agricultural. When the zoning has a number such as RA-5, the

designation means your lot must be at least 5 acres in size. This information

is important to know in case you want to split the property into more than

one lot. If you have 9 acres with RA-5 zoning, you can’t divide the lot in two.

(Remember, each lot needs to be at least 5 acres.) You could split a 10-acre

parcel in two, providing it meets all other county zoning guidelines.

Don’t take today’s zoning for granted — the local government can zone to meet

with the needs of the community on almost a moment’s notice and without

your agreement or even advance knowledge. Although this change happens

mostly in rural areas, check with the local government to see if any zoning

questions for your area are scheduled. While you’re at it, be sure to ask if any

special tax assessments will affect the property. These assessments can add

to your expenses as well.

Even though you can in theory build a single-family residence on a lot zoned

for commercial or apartment use, you may want to take the zoning into long-

term consideration. Often, a property owner may destroy a small house in a

commercial area and build apartments or office buildings, which could change

the neighborhood’s tone for the worse (think noisy neighbors and cars parked

everywhere), reducing your home’s value.

Zoning only affects the general plans for the property. More detailed restric-

tions for building may also be stated in the covenants, conditions, and

restrictions (CC&Rs) that are recorded on the property as well as design

review guidelines. We talk more about CC&Rs and design review guidelines

in Chapter 5. Ask the homeowners’ association (HOA), your real estate agent,

or title company for a set of CC&Rs and design review guidelines to find out

about other restrictions, such as setback limits, style limitations, and height

limits, before you agree to purchase any lot.

Understanding setbacks and footprints

Setbacks determine how far from the edges of your lot you must build. They’re

generally determined by the property zoning restrictions and the CC&Rs. The

side setbacks are generally closer to the property line than the front and rear

setbacks, but not always. This information is crucial for figuring out where you

can place the house on the lot. Many neighborhoods like to keep the houses

uniform, so look to see how close neighbors’ houses are to the street and

each other to get a feel for the setbacks. In urban areas, the side setbacks

may be as small as only a few feet (Peter’s old house in San Diego had a side

setback of only 3 feet — barely enough room to wheel his trashcan through

to the street every Monday night). Rural areas can require larger setbacks

from the street or other houses, impacting curb appeal.

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Setbacks also apply to outbuildings, not just to the main house. On larger

lots, you may be considering the possibility of guest homes, workshops, and

pool houses within the buildable area. These buildings all have to be within a

certain area defined by the setbacks.

The footprint of the home is the building’s outer perimeter and how it sits

upon the lot, taking into account the setbacks (see Figure 3-1). When looking

at a lot, try to imagine in rough design how positioning the footprint can take

advantage of the following:

 Drainage

 Noise

 Sunlight

 Topography

 Views

 Wind

Courtesy of Tecta Associates Architects, San Francisco

The combination of footprint and setbacks may dictate whether your house

is one story or more. Significant side setbacks can force you to design a smaller

footprint home, which can make a difference in estimating building costs. A

smaller building area may mean building a second floor is essential. Building

Figure 3-1:

Setbacks

determine

the

placement

of your

footprint,

ultimately

restricting

your home’s

size.

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a second story can work to your advantage, however, because a two-story

house can be less expensive to build than a one-story home. (For example,

building a two-story house with 4,000 square feet is cheaper than building a

one-story house with the same square feet. The two-story house requires

less excavation, foundation, and roof work than the one-story house.)

Height restrictions spelled out in the CC&Rs have an impact on your house’s

size. If your setbacks force a smaller footprint, then your height restriction

will limit the size of house you can build. Have your real estate agent obtain

this information for you before you purchase the lot to make sure it meets

your needs. You can also contact the local planning department to access the

information yourself.

Size matters — Assessing the

land’s value with the house

Even though much of the planning for your new home is considered in the

design phase that we discuss in Chapter 5, considering the planned size of

your house when purchasing the lot is important. You can’t build any house

you want on any lot. You’ll probably face restrictions set by the city, county,

and sometimes the market. Doing your homework on the limitations of what

can be built on a lot can keep you from making costly mistakes.

How do you know for sure that the land you want to buy is going to fit within

your budget? You must consider it in the context of the budget for your entire

custom home–building project. (See Chapter 2 for information on budgeting.)

Start by researching the sale prices of houses in the area. If homes in the

neighborhood are selling for $500,000, then buying a comparable lot for

$375,000 isn’t likely to leave you with financial room to build.

Still not sure what to do? Here’s Kevin’s quick-and-dirty four-step process for

getting a rough idea if a lot is too expensive:

1. Contact a real estate agent and get a list of properties that have sold

in the area during the last year.

Make sure the list includes the square footage and room count of each

home.

2. Pick the three sale prices that are most similar to the house in square

footage and room count that you want to build and average the sales

prices.

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Most lenders use at least three comparable sales to establish an

appraised value, so this number helps you evaluate the property from

the lender’s perspective. If no home sales are similar to your desired

home in square footage and room count, then you may need to reassess

your design or your choice of neighborhood.

3. Subtract the land price from the average sales price and divide by the

square footage you want to build.

Doing so gives you a rough number for dollars per square foot. We

explain dollars per square foot in detail in Chapter 2.

4. Call three contractors in the area and ask if they can build for the dol-

lars per square foot number you established in Step 3.

The contractors you call at this point can be referrals or out of the phone

book. Where you locate them doesn’t really matter because you may not

use them for your project anyway, you simply want a rough survey. For

more information on contractor selection, check out Chapter 2.

Taking these steps can give you a rough idea if you’re even close. This

method, of course, does have many variables and unanswered questions,

such as the selection of your fixtures and materials and foundational needs.

However, if all three contractors you contact are rolling on the floor with

laughter, then you’re probably looking at an overpriced lot.

A tale of two lot buyers — How square

footage impacts value

Kevin relates this experience from a custom home project he financed in

northern California.

Ten newly divided lots were being sold for $200,000 in an established neigh-

borhood. Frank Smith looked at one of the lots and was concerned because

he thought the lot was too expensive. He was absolutely right. Mark Jones

came in the same day and looked at the same lot and quickly determined the

lot was a great deal. He was also absolutely right.

How can they both be right if they’re talking about the same lot? The decision

is all about the square footage. Frank wanted to build a 2,500-square-foot

house, which was comparable to other houses in the neighborhood selling

for $400,000. The total cost of the house including the land penciled out to

$450,000, making the project too expensive to build on this lot. Frank wouldn’t

be able to borrow enough money to build his house.

Mark’s house was going to be 4,500 square feet. His cost per square foot was

the same as Frank’s so his total cost for the project including land would be

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$650,000. Houses of this size in the same neighborhood were selling for

$700,000, allowing Mark a $50,000 profit on his house, which allowed Mark

to borrow plenty of money to build his house.

Your real estate agent can show you the sales from the last year to evaluate

the optimal house for your neighborhood, which can help you make sound

choices for maximum value and the best financing.

Dealing with a Tear-Down Property

Buying vacant land isn’t the only option for locating a custom home. Many

people opt to buy a small or dilapidated house and tear it down or add to it

significantly. Doing so can be an excellent way to move into a new home but

still have all the benefits of an established neighborhood.

Accounting for demolition costs

One immediate cost benefit to a tear down is the fact that all the utilities are

already located on the property and connected, which can be a great cost

savings, but you still have an old house connected to them. Contact a demoli-

tion contractor and get an estimate for the demolition and clearing of the

property before you sign on the dotted line.

Demolishing an older home may have additional costs due to the removal of

hazardous waste such as asbestos (often located in roof, ceilings, or siding).

Professionals need to remove asbestos, which can be costly.

Leaving one or two walls of the old home standing may be cost effective and

worthwhile. Why not tear everything down and start fresh? Because many

cities or counties offer a lower property tax rate for a remodel versus new

construction. Depending on your community’s rules and regulations, leaving

one or two existing walls establishes the project as a remodel and can save

you thousands of dollars a year.

Assessing neighborhood tolerance

When you rebuild in an established neighborhood, you want to make sure the

house conforms to the neighborhood. This action is critical to ensure a mar-

ketable property in the future. If you decide to locate your 3,000-square-foot

home in a tract of 1,500-square-foot homes, you’ll never get the value you

want out of your home. The neighborhood needs to support the value.

Underbuilding can also be a problem because people looking to buy in the

neighborhood will expect a comparably sized house.

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Most established neighborhoods require community approval of any major

remodels. The local planning department generally notifies the community,

and residents have the opportunity to voice their opinions — good or bad.

Some areas have a specific design review committee that has a significant say

in what you can and can’t build.

Do your research and build a house that fits within the neighborhood toler-

ance or find another neighborhood that has houses closer to your desires

and needs. You can find more information on the design review process in

Chapter 5.

Financing pros and cons

You may also encounter financing advantages if you buy a house that needs

to be remodeled instead of buying a lot. If the house is still structurally

sound, you may be able to buy the house with little or no down payment,

while a house with structural problems can create financing problems. Most

banks don’t lend money on a house that is in functional disrepair (if you

default on your loan, the last thing the bank wants is to be the proud owner

of a hunk of junk). Buying such houses requires a lot of cash or private money,

which can be expensive. Even then, a large down payment is necessary.

Small houses on large parcels of land can also be a problem in neighborhoods

where bigger houses are now being built. Lenders want to finance houses for

living. House lenders want a property that conforms to the neighborhood,

even if the borrower is well qualified. Many people, when faced with unwilling

house lenders, look to lenders that lend on land only. If the property has any

structure on it at all, most land lenders won’t provide a land loan. Talk to

your real estate agent and loan officer about the ability to lend on a particu-

lar property before you make an offer. Remember, the finished cost estimates

of your project need to account for the purchase cost as well as the demoli-

tion cost in order to be realistic.

If you have found a structurally unsound house and a willing seller, you may

be able to buy the home with a construction loan, which will finance the pur-

chase of the property and the construction together based on the future com-

pleted value of the property. Chapters 8 and 9 explain in detail the

construction loan process and guidelines. You can apply the same construc-

tion loan information in this book as if you were working with a vacant lot.

Simply have your seller agree to a long escrow that allows you the necessary

time to design and permit your new house. Most construction lenders can

fund the purchase as part of the construction loan provided all their other

guidelines are met.

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Buying Your Land

After you find your dream lot, you need to buy it. Whether you pay cash (a big

no-no — Chapter 7 explains why) or finance, you can’t just write the owner a

check and ask for a receipt. Okay, you could, but you need to follow certain

steps and make specific choices if you want to get the most for your money.

Understanding the purchase process

If you have ever purchased a home, then you’re at least somewhat familiar

with the process of buying real estate. Buying a lot is just like buying a house,

but without all the house stuff. You can find a detailed explanation of the pur-

chase process and the players involved in Kevin’s book What the Banks Won’t

Tell You; How to Get the Most Out of Your Mortgage (Grady Parsons Publishing),

available at www.stratfordfinancial.com. For beginners, here is a general

step-by-step look at the process.

Step 1: Determine your offering terms and price

Using the information in this chapter about evaluating a property, you need

to determine a price in your mind of what you’re willing to pay for the prop-

erty. Your real estate agent can give you additional information on the local

market for land and examples of finished houses in the area. If you aren’t

using an agent, you need to access this information through the local title

company. You also must decide on the length of time until closing as well as

any other necessary terms, such as your desire for the owner to loan you the

money in what is called a seller carry back. This term means the seller, after

transferring the property, retains a note or loan that you must pay him at an

agreed time with interest. We talk more about this topic in the “Finding other

land loan alternatives” section later in this chapter.

Step 2: Present the offer and negotiate

You or your real estate agent has to complete an offer form accompanied with

some sort of good faith deposit check from you. The deposit amount can be

anywhere from 1 to 3 percent of the purchase price. The check is deposited

in an escrow account upon acceptance of the offer and held in escrow until

you close the transaction. The offer and copy of the check are then presented

to the seller and negotiations begin.

You and the seller can negotiate the deal through subsequent documents

called counter-offers. The seller’s willingness to negotiate is relative to how

hot the real estate market is at the time. A hot market usually translates to

less willingness to negotiate. The seller isn’t obligated to accept any of your

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terms and can always choose to say no. Of course, you can always choose to

walk away. Ideally, you’ll each give in a little and come up with a workable

compromise. As Kevin’s mom, a 30-year real estate agent veteran, said, “An

offer is an opening of a conversation.” The less emotions in the conversation,

the easier the negotiations proceed.

If the property is listed with a real estate agent, that agent doesn’t represent

your interests. Make sure you bring your own agent to represent you as the

buyer. Doing so doesn’t cost you any more because the seller pays the com-

mission. If no real estate agent is involved, consult one for guidance. She may

help you with the paperwork for a small fee. You can always check with an

attorney as well, but an attorney generally charges more and sometimes

makes the transaction more complicated than it needs to be.

Step 3: Make an application with your lender

We explain various financing options in the next section. After you have

determined which lending approach is right for you, you’ll fill out a loan

application with the lender of your choice. The lender orders an appraisal

from a certified appraiser. You’ll probably have to pay for this appraisal

upfront. The cost can vary depending upon location and the lot’s value, but

usually it will cost between $300 and $600. You’re entitled to a copy of this

appraisal, which will be based upon comparable lots in the area that have

sold in the last six months to a year. The original appraisal goes to the lender

along with the application and any credit documentation you provide, such

as bank statements, W-2s, and tax returns.

At this time, your lender will give you a good faith estimate (GFE) of all the

closing costs associated with your loan and the purchase transaction. The

costs vary based upon the loan amount and type of loan, but you can antici-

pate a range of 3 to 6 percent of the purchase price as an estimate of all the

costs involved.

You can save the upfront cash for closing costs by offering to increase the

price of the lot by 3 percent and then asking the seller to credit you 3 percent

of the purchase price for nonrecurring closing costs. Most lenders accept

this agreement as long as the appraiser mentions that it has no effect on the

value. Financing the closing costs in this way leaves your cash available for

other important costs along the way.

Step 4: Open escrow with an escrow company or attorney

The term escrow means depositing money and property with a neutral third

party to be disbursed upon completion of all terms of a related agreement.

Each state has its own process for escrow procedure. Some states use attor-

neys to act as the escrow agent and others use title insurance companies. If

you’re in a wet funding state, you, the seller, and the escrow agent all pick a

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day to meet and sign the paperwork at one time. In a dry funding state, such

as California, you each execute the paperwork on your own or with a notary

public over several days before the actual closing date.

The escrow period can be anywhere from 30 days to 6 months depending upon

the needs and negotiations of you and your seller. Your real estate agent helps

guide you through the closing process. If you don’t have an agent, then the

escrow agent will be your best guide. You can find good escrow agents through

referrals from real estate agents, loan officers, and friends. Most are well

trained, so unless your transaction is extremely complicated, you should be

able to go with someone you simply find personable.

Step 5: Do your due diligence

While you’re in escrow, you have a chance to complete any research on the

property that couldn’t be done before the offer. In a hot market, you might

not have had much time to research the property before putting in an offer.

As soon as you have a chance, make sure that the property meets your needs

relative to size and value as outlined in this chapter. If you have concerns

about the land, such as building restrictions or guidelines, you may want to

add contingencies to the offer that allow you to pull out of the transaction if

your research results are unfavorable.

Step 6: Execute the paperwork and bring in the money

As soon as your loan is approved, you need to bring your cash to escrow and

sign the loan documents. You can wire money into escrow or bring it in the

form of a cashier’s check. Bring your pen because you’ll have as many as 100

documents to sign for the escrow and the loan.

Step 7: Close escrow and take title

The title insurance company provides you with a deed to the land and a policy

insuring that it is yours. The title company pays the seller the money due and

records any documents and deeds related to the transfer and new loan.

Using the bank

Most people finance their lot purchase through a local bank or nationwide

lender. A good mortgage broker can help you determine who has the best

programs to meet your needs. Local banks generally have more conservative

criteria for loaning on land because they’re heavily regulated. Large, publicly

held lenders have the ability to offer creative and flexible loan programs

because they mix the risk with other loans in their portfolio.

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Not all mortgage brokers have experience with land and construction loans,

so be picky. Don’t trust the phone book on this one; ask around to find the

experts. Try to find a loan officer that has 100 or more loans of these types

under her belt. The best way to test loan officers is to see if they ask you

more questions than you ask them. If they simply try to sell you on one type

of loan without inquiring about your needs, then look for someone else to

help with your loan needs.

Qualifying

The first thing a lender will ask you is whether you intend to buy the land for

your own personal use. The lot-financing rates and terms for owner-occupied

properties are much better than for investment properties. The lender looks

to see if it makes sense for you to move to this property. If you’re claiming it to

be a second home, the lender will expect it to be in a resort type area or a city

other than your primary residence. Buying the lot in a cheaper neighborhood

on the other side of town from where you currently live will raise eyebrows.

The lender next assesses your qualification on the basis of your credit report,

liquid assets (cash, stock, or other easily accessible forms of money), and

your debt-to-income ratio (the amount of debt you carry in the form of loans

and credit card balances versus your income). Your lender’s approach to

these issues is very similar to how it will underwrite your construction loan;

see Chapter 9 for the specifics. To make its decision, the lender wants to see,

at minimum, the following documentation:

 Appraisal

 Credit report

 Three months’ bank statements

 Two years’ W-2s and recent pay stub

 Two years’ tax returns, if self employed

Banks may loan you a higher percentage of the purchase price based upon

the quality of your other qualifications. Being able to show good credit and

sufficient income can get you a loan for 90 percent of the purchase price.

If you have excellent credit, some institutional banks such as Washington

Mutual and IndyMac offer “stated income” programs for purchasing lots.

These loans don’t require you to show any income documents (pay stubs or

tax returns). Some lenders offer these loans up to 85 percent of the purchase

price; however, the income you state must make sense relative to your job. A

fast-food clerk supposedly making $150,000 a year isn’t likely to get approved.

You may need to show other documentation and meet other criteria neces-

sary for these loans, so make sure you get the info from your loan officer before

you apply. We give specific details on these types of loans in Chapter 8.

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Many lot lenders are the same lenders that finance construction. You apply

for a construction loan some months after you get the land. If the lender sees

conflicting information regarding income or assets, the lender could turn you

down. Therefore, understanding the requirements for lot loans and construc-

tion loans is critically important. (We explain construction loan requirements

extensively in Chapter 9.) Lenders look in their files for any other loans they

made to the same borrower. If the information is inconsistent, the lender

simply rejects the loan.

Stated-income loans are notorious for creating consistency problems.

Because a lot loan is usually a lower loan amount than a construction loan,

less income is required to qualify. If you only state enough income to qualify

for the lot loan, and then when you submit the construction loan application

to the same lender you state a higher stated income amount, the lender will

immediately deny the loan. Work with your loan officer to determine the qual-

ifications necessary for the larger construction loan so you can represent the

land loan file in a way that will match the construction loan needs. Chapters 8

and 9 can serve as a guide for that discussion.

One of the advantages of working with a mortgage broker is that she can act

as a filter. By looking at your documentation, a good broker can determine

which lender fits best with your project. Doing so keeps you from stabbing in

the dark and providing too much information to the lender that may result in

denial.

Picking a loan

The most important criteria for your loan is the loan’s length of time. (We talk

more about timing of lot loans in the section “Making sure the loan period is

long enough” later in this chapter). Generally, your lot loan picks you based

upon your qualifications. You may, however, need to choose between a fixed-

rate loan or an adjustable-rate loan. Some lenders offer only fixed-rate loans

where the interest rate stays the same for the loan’s life. These rates are gen-

erally higher than adjustable-rate mortgages, which have interest rates that

move with a particular monetary index such as government treasury bills.

Some people believe a fixed rate can save you money because it protects

you from rising interest rates. But if you plan on building in the next few

years, you’ll be taking a construction loan that pays off the land loan. See

Chapter 8 for details. Because you’ll likely pay off the land loan soon with the

construction loan, using a fixed-rate loan isn’t likely to save you much money.

Ultimately, you need to do the math and compare the various loan payment

options over the length of time you anticipate before you start building.

Kevin’s recommendation is to go with the largest amount of money you can

borrow for the longest period of time with the lowest payment. Doing so

gives you the most flexibility for moving into construction financing by keep-

ing the maximum amount of cash in your pocket where you need it most.

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Getting denied — What the banks won’t finance

We can think of several situations that will eliminate conventional financing

as an option. Some are based upon your own situation and some on the prop-

erty. Here is a quick checklist:

 If your credit score is below 620 (see Chapter 9)

 If you have been late on your mortgage in the last 12 months

 If you’re unemployed

 If you have no down payment

 If the property has existing buildings on it

 If the property is more than 50 acres (some banks allow only 20 acres)

 If the property has no electricity nearby

 If the property has no public access

 If the property has multiple parcels (some banks allow two)

If your property or qualifications fall into one of these categories, don’t panic

just yet. Other lending alternatives are available. Some may cost more money

and be more restrictive than conventional lending, but they may be better

than the thought of abandoning your project.

Finding other land loan alternatives

If you find the perfect lot and the bank thinks the property or your credit and

income are less than perfect, you still may be able to buy it without paying all

cash. Some lending alternatives are available if your property or credit doesn’t

meet the bank’s guidelines.

Letting the owner carry the burden

One alternative way to finance a property is to have the property owner loan

you the money or carry back paper. In this case, the seller acts as the lender

and has you (the buyer) execute a note secured by the property for the

amount he doesn’t receive in cash through escrow. Not every owner will con-

sider this option. If the owner carries back the entire amount of the purchase

price, the seller can’t owe any money on the property. Another way a seller

can help is to carry back a second loan so that you can put down a smaller

down payment. The primary lender must agree to this arrangement. In either

case, the seller has the ability to foreclose if you miss payments. You need

your real estate agent or an attorney to draft the note and security instru-

ment to make sure everyone is properly protected.

When is a seller more willing to carry the financing himself? A seller may agree

to carry paper if the property is hard to finance through banks or if he — for

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whatever reason — is anxious to sell. The seller may also want to defer the

taxes due from the sale of the property; carrying paper allows the seller to

pay taxes only as you pay off the loan. You gain no real advantage when the

seller carries the financing unless the loan’s terms are more favorable than

any other lender offers you. Most construction lenders require the seller to

be paid off when they fund the construction loan. Few institutional construc-

tion lenders allow a subordination of a seller carry.

Some sellers want a premium if they’re going to carry paper. Furthermore,

many sellers still want to check your financial wherewithal, so credit and

income can still factor into their decision. Ultimately, you can negotiate the

best deal with a seller if she is getting all the money expected from the

escrow, so having her carry may not be the best route.

Using private or hard money

Hard money comes from private investors who specialize in making loans on

real estate. Hard-money lenders generally aren’t concerned with credit or

income. They hope to make high-interest yields or make money by taking

back your property through foreclosure and selling it at a profit. Typical

hard-money runs a number of percentage points higher interest than the pre-

vailing market rate, plus 5 percent of the loan amount in upfront fees called

points. This high interest seems expensive, but if banks or owners won’t give

you a loan, then this choice may be better than not buying the lot at all.

Because hard-money lenders like equity, they usually want as much as a 50

percent down payment.

Making sure the loan period

is long enough

Lot loans come in a variety of lengths, but only a couple of banks offer them

for more than five years. Your lot loan needs to be in place until the construc-

tion loan pays it off. Most projects can make it to the construction-loan phase

within two to three years. If you think you’re going to take a long time to

design your home or that you’ll need to save your money for a long time

before beginning construction, then you may want to search for loans that

last more than ten years.

How long it takes to begin the building process can vary wildly. The ultimate

amount of time is based upon your local planning departments, how picky

you are with your plans, how busy the current construction climate is, and

many other factors. Figure out how long you think it will take and double it to

be safe. Most of the delay factors will be beyond your control.

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Stop! Don’t pay off your lot yet!

Contractors, consumers, architects, and many others often tell you that you

must pay off your lot before you get a construction loan. This is the biggest

myth in the custom home–construction world. Actually paying off the lot isn’t

a good idea unless it’s absolutely necessary. The following sections explain

several good reasons to keep a loan on your land until you’re ready to build.

You need cash on hand to fund your project

Buying your land is just the beginning of paying people in a construction pro-

ject. The architect, the engineer, the well and septic people — and many

others — need to be paid along the way. The permitting process can suck

your cash as well. These people and processes can add up to tens of thou-

sands of dollars. If you run out of money because you put all your hard-

earned savings into your land, your new home can become a nightmare.

Having cash in your pocket is your best protection for keeping your project

moving along. Check out Chapter 7 for more on this subject.

Money put in is expensive to get out

Few lenders refinance a land loan; most only let you replace an existing loan.

Rarely does a bank give you a loan where you’re taking cash out of a piece of

land. That means that after you put money into the land, it’s gone forever —

at least until your construction loan has started. Your only choice will proba-

bly be hard or private money, which can cost 5 percent of the loan upfront

and 10 percent annually. This increase compared to institutional lot loan pric-

ing is an expensive price to pay for money you already had in your pocket to

begin with.

Cash reserves are required for construction loans

Banks want you to have cash on hand before they give you a loan. The amount

of required reserves varies from bank to bank (see Chapter 9 for specific

details). If you’re short on the bank’s cash requirements, it won’t give you a

loan — even with a paid-off lot.

Fending off the taxman

Real estate interest is one of the few deductions left for the average taxpayer.

As long as you finish the house as a primary residence or second home, you

should be able to deduct the interest and points paid on the loan. That means

the government will pay a good portion of the payments for you to keep cash

in your pocket. Discuss this option with your CPA or financial planner. You

can ignore the tax benefits if you feel paying more than your share is part of

your civic duty.

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Chapter 4

Defining Your House Style

In This Chapter

 Discovering your style

 Finding out about conventional building materials

 Building with wood

 Contemplating system-built homes

 Exploring alternative building methods

eople tend to judge houses just like books — by their covers. Looks

matter: People either fall in love at first sight or think a house is an eye-

sore. What individuals see is the home’s style. That’s why defining your

home’s look is so important, which is exactly what we help you do in this

chapter.

You may have a truly unique home in mind — like one built of log or post-

and-beam construction. This chapter offers more information on buying and

building these specialized homes.

Getting to Know Your Style Preferences

and Limitations

Close your eyes and picture the outside of your ideal home. Often, a definite

look pops into mind: a yellow farmhouse with white shutters and a front

porch, a boxy glass and concrete contemporary, or maybe a brick colonial

with classic trim and an unadorned face. If an image of the perfect house

doesn’t immediately come to you, get off the sofa, find your camera, and get

ready to go hunting.

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Educating your eye

Get ready and get set to go on a house safari. It requires just a few hours, so

you don’t need to pack water or hire a guide. As you drive through neighbor-

hoods, take pictures of homes that strike you — the good, the bad, and even

the ugly. After you’re back home with photos of a variety of house styles, you

can consider what appeals to you and what doesn’t.

If you can’t find a variety of homes nearby to photograph or aren’t impressed

by the homes you come across, head to your local bookstore to stock up on a

variety of magazines and books for inspiration. Look for

 General home magazines, such as Architectural Digest, Better Homes &

Gardens, House & Garden, Home, Country Home, and Country Living

 Specialty home magazines, such as Natural Home, American Bungalow,

Old House Journal, Dwell, log home magazines, timber frame home maga-

zines, and Victorian-style magazines

 Regional magazines that cover your area, such as Sunset, Southern

Living, Down East, Midwest Living, or Coastal Living

 Books that help you identify architectural styles, such as What Style Is It?

A Guide to American Architecture by John C. Poppeliers (Wiley) or A Field

Guide to American Houses by Virginia McAlester and Lee McAlester

(Knopf)

As you flip through your new library of magazines and books, rip, clip, or pho-

tocopy photos that illustrate exterior details you like. Take note of what speaks

to you: Is it a particular color or material? Window size, shape, or grouping?

Shutters? Dormers or roof shape? Collect your clippings in a three-ring note-

book or expanding file folder. Soon you can define your own personal style.

Discovering your local style

Now breathe deeply and take a reality check. Maybe you’ve fallen for an

Asian-inspired pagoda-style home with a flat roof. It may not be your best

choice, however, if you plan to build in an area with heavy snowfalls (that is,

unless you enjoy the thought of several tons of wet snow crashing through

your roof). This appeal to common sense will lead you to another rich source

of home style ideas: your area’s traditional (or vernacular) architecture. To

discover this style, take a look around and note how older homes were built.

Regional styles typically evolve as a sensible response to a local climate,

making them wonderful guides for what kind of buildings will work and what

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kind won’t. Think about it: If that 200-year-old farmhouse down your street

didn’t know how to stand up to your region’s weather, it wouldn’t still be

around today.

If you’re moving to a new area to build your home, seek out the old-timers. In

New England, for instance, the compact Cape Cod style home with its steep-

pitched roof sheds snow and provides a snug second story under the roofline.

These buildings offered warm shelter for early Americans living through harsh

winters. Down south, in hotter climates, high ceilings in sprawling plantation

homes lured warm air up and out of the way. Their wide porches gave folks a

place to sit, eat, and often, sleep, outside.

Learning from years of building experience can help make your home easier

to maintain and much more pleasant to live in. Employing vernacular archi-

tecture also provides the added advantage of making your home look like it

belongs. Even if you want your custom home to be unique and make a bold-

style statement, you don’t want to own the neighborhood laughingstock

either, and, at some point, you (or your heirs) will want to sell it. Then, your

home’s classic good looks will be a valuable asset.

Still, it’s a free country, and if you live in Pennsylvania and really want a

Southwest pueblo-style home with a flat roof and adobe walls (and you’ve

ruled out a move to Arizona), you just have to be ready to pay more to build

and maintain your home.

Playing by community rules

If aesthetics or the wisdom of your ancestors doesn’t influence you in defin-

ing your home’s style, your neighborhood might — in the form of covenants,

conditions, and restrictions (also known as CC&Rs). These legalities (which

you must agree to as a part of your real estate contract) can significantly

impact your home, so do your homework before buying land. If you really

want a log home, a barn full of llamas out back, or a three-story home over-

looking a lake, you better read the CC&Rs’ fine print before you buy your lot.

Policies set out by homeowners’ associations or local jurisdictions could

restrict many aspects of your home, such as

 The height and size of your building

 Its proximity to a body of water

 The building materials you can use and your home’s exterior colors

 Your ability to raise livestock

 The types of vehicles that can be parked on-site

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Obviously, know upfront what you’re in for. Some associations strictly

enforce their restrictions. Others are more lenient. The upside of these kinds

of restrictions is that they apply both to you and to your neighbors. You can

rest assured your neighborhood will retain its current standards and be free

of worry that some guy across the street will make his front yard a dumping

ground for derelict plumbing fixtures. If you don’t like these kinds of rules

and regulations, you’d better buy your land in a different neighborhood.

If you plan to build in a community with CC&Rs, an architectural review

board may have to approve your home’s design. Because this review process

may take months, add extra time into your construction schedule. (We talk

more about review boards and the plan approval process in Chapter 6.)

Tapping the wisdom of the pros

So, you’ve looked at houses nearby, considered vernacular architecture, and

flipped magazine pages until your fingers were raw, but still can’t decide on a

style. Think back to your house safari and remember the master: Marlin

Perkins from TV’s Wild Kingdom. When things got really dicey, wise old

Marlin sent his sidekick, Jim, out to wrestle the wildebeests, while he stayed

in the safety of the vehicle. Take a lesson from Marlin: Instead of risking a

serious mistake, call for professional help. If you can’t envision a style for

your new home, or you and your spouse can’t agree on a style, ask for input

from an architect or designer. (See Chapter 5 for the specifics of finding and

working with an architect.)

Your design pro will look at the scrapbook you have compiled and ask ques-

tions about your lifestyle. She may suggest a home style that’s common to

your area or make the case for something more unusual. During this design

process, you can help by

 Openly discussing your budget. It wastes your time and the designer’s

if you hedge about how much you want to spend on your home.

 Offering honest feedback. If your designer seems to be veering off

track, say so. The goal for everyone involved should be to create the

best possible home.

 Keeping an open mind. Don’t dismiss an architect’s suggestions without

giving them some consideration.

At some point in the process you’ll wonder if hiring a designer or architect is

necessary or worthwhile. The fees these professionals charge typically fall in

the range of 10 to 15 percent of your project’s total cost. If you can find a plan

in a book that suits your needs as well as your lot and your neighborhood

restrictions perfectly, you don’t need an independent designer.

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But remember those wildebeests: By not using a designer or architect, you’re

facing some wild times all by yourself. An architect or designer often can act

as your advocate in a confrontation with a contractor. Because the designer’s

job is to be knowledgeable about building materials, he can save you from

spending money on a product or material that simply won’t work in your area

or in your home. Furthermore, he can create a home that truly fits on the

land you worked so hard to find.

Good communication and rapport are essential elements in your relationship

with a design professional. If these two elements evaporate over the course

of your project, you may need to cut ties with your building or design profes-

sional and choose someone new. This action is drastic, however, and should

only be taken if you have honestly tried and simply can’t reconcile your dif-

ferences.

Considering Conventional Construction:

Wood versus Steel

By far, the most popular home construction technique is conventional con-

struction, which uses vertical studs to create the home’s skeletal system of

both exterior and interior walls. Choosing conventional construction allows

for a wide range of styles; the studs are simply the basic ingredient. The

studs in your walls will be either dimensional wood lumber (lumber that has

been cut to specific, standard sizes) or steel.

More than likely your house will be stick-built: It will use good old-fashioned

wooden studs — long, thin boards used throughout the framing process.

Wooden studs are popular because

 Most framers have the necessary tools (hammer, nail gun, saw, and so

on) to work with wood.

 Wood is mass-produced and costs up to 30 percent less than steel.

 Most subcontractors and laborers know how to work with wood.

 You can alter wood-framed walls relatively easily in the future.

A second option — steel framing — has been in use for office buildings for

some time now. For a variety of reasons, steel is finding its way into more res-

idential construction projects. Although steel isn’t for everybody, it does

have a few advantages over wood:

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 Steel offers the greatest strength for the lowest price of any building

material.

 Steel is inorganic. Galvanized steel doesn’t burn, warp, rot, split, crack,

creep, or get eaten by termites and other creepy crawlers.

 Steel is dimensionally stable. It doesn’t expand or contract due to

moisture.

 With steel, you have less scrap and waste (2 percent for steel versus 20

percent for lumber).

For every person singing the praises of steel framing, another is swearing

that wood is the only way to go. The benefits and disadvantages seem about

equal for each method, so it comes down to what makes the most sense to

you and your contractor, the price, the climate, and other considerations.

After you find a contractor you like and who you can afford, ask for refer-

ences and check out his work firsthand. Then we advise that you yield to

your builder’s preferences on the wood versus steel issue.

Enjoying the Warmth of a Log Home

Everyone who has ever watched Bonanza or read a Little House on the Prairie

book (come on, admit it!) has harbored a fantasy of living in a log home. For

some, the fantasy is fleeting; for others it becomes a lifelong obsession.

Building a log home does bring a variety of advantages:

 You have a range of log home styles available to you. Logs can do justice

to country, rustic, Victorian, Arts & Crafts, and even contemporary

styles.

 You’ll end up with a custom home that is distinct and filled with character.

 The thickness (also known as thermal mass) of logs offers good insula-

tion and helps the home retain warmth in the winter and remain cool in

the summer.

 Many log home owners say their homes are quieter inside than conven-

tional homes.

 The rugged good looks of a log home make it fit naturally into a variety

of settings, from prairie to woods and from lakeside to mountaintop.

But if you chose to build a log home, understand that you’re asking for some-

thing out of the ordinary, which may cost you more than a conventionally

built home in terms of time and money.

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The following sections briefly outline how the log home–building process

differs from the conventional building process and also provides advice on

selecting a log producer if you decide to make your log home dream a reality.

If you’re interested in a log home, we suggest that you continue your search

for more information in several places:

 Use your friendly, local bookstore or library. Look for books and maga-

zines on the subject. On the newsstand, look for Log Home Living, Log

Homes Illustrated, Country’s Best Log Homes, and Log and Timber Style.

 Stop by log model homes in your area. Talk with the sales representa-

tives and ask questions.

 Knock on the doors of log homes you see. Log home owners are typi-

cally quite happy to discuss their home–building experiences.

 Talk to real estate agents, your lender, insurance agents, and local

builders about your desire for a log home. These building profession-

als may be able to point you in the right direction.

 Finally, keep an eye out for the dozens of log home shows that are

held around the country every year. A show is a good place to see first-

hand what various log home producers have to offer. (You can find infor-

mation at

www.loghomeliving.com or www.loghomeexpo.com.)

Two ways to skin a log

As you research log home options, you’ll find two basic types of log producers.

Most companies are manufacturers that mill their logs using machinery. The

end result is logs that are uniform in shape and dimension. Manufacturers

typically also use machinery to cut the corner notches that connect the logs.

Many manufacturers offer log siding that can be used on a home’s exterior

(and also on interior walls) to give the look of log construction with a slightly

lower price tag. The remaining log companies call themselves handcrafters.

As the name implies, these companies employ crew members who use chain

saws, or sometimes even hand tools, to shape the logs for homes one at a time.

Which should you choose? As with so many decisions involving custom

homes, the answer is, “It depends.” Consider the following:

 Do you need your home fast? Some handcrafters are tiny operations

that produce only a few homes a year. If you want to build quickly,

choose a larger production handcrafter or a manufacturer. Remember,

though, that even these producers need weeks or months of lead time to

cut your logs.

 Do you prefer a certain style of log? For some people, only square logs

accented with wide bands of white chinking (the material used to seal

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the joints between logs) look like a “true” log home. Other people prefer

smaller, rounded logs with no chinking. You can see an example of milled

logs in Figure 4-1. The look you like can help you decide on a producer.

 How much log is enough? Do you want massive, 20-inch diameter logs

for your home and the interior partition walls, too? Most manufacturers’

machinery simply can’t handle oversize logs, so if you think bigger is

better, you’ll most likely choose a handcrafter.

 Will it play in your neighborhood? If you plan to build in an area filled

with log homes, consider following local traditions. Are most of the

homes built with huge, handcrafted logs? Choosing smaller, machined

logs may make your home the odd man out.

 Can you pay for it? Does a handcrafted home cost more than a manufac-

tured home? Again, it depends on whom you ask. Handcrafted homes

are preassembled in the crafters’ log yard, so reerection of the shell on

the construction site may go faster, saving time and money. Still, hand-

crafting a log home is labor intensive; after all, you’re asking someone to

build your home by hand. Manufactured logs may take longer to assem-

ble on-site, but producing them is more mechanized (and less expen-

sive). The only way to find out is to ask plenty of questions and compare

ballpark estimates on your home from both types of producers.

Courtesy of The Original Lincoln Logs LTD.

Figure 4-1:

This log

home is

made from

milled logs

interlocked

together.

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Thinking that logs are a money-saving, do-it-yourself alternative to a conven-

tionally built home? Do your research. Even if you mastered your Lincoln Log

kit at an early age and know which end of a chain saw to point toward a tree,

buying logs from a supplier and planning to cut, notch, and stack them your-

self may provide short-term savings at the cost of long-term headaches.

Unless you have a sound plan (or know a builder who has good experience)

to stack, fasten, and seal the logs into walls that will pass building codes and

stand up to the elements year after year, buy a log package from a reputable

log producer.

Purchasing your log package

Most log manufacturers and some handcrafters sell log packages. A log pack-

age assembled by a log producer will most likely come with fasteners to hold

the logs together, precut notches to interlock the logs at the corners, some

kind of insulating material to place between the logs, sealants for weather-

proofing, and instructions for your contractor (or you) to put it all together.

You can purchase most log packages through a network of dealers or local

sales representatives. Your local representative can help you purchase your

log package and, if she is a general contractor, may also help you build your

home. As your liaison with the log producer, your dealer can help you with

your home’s design, coordinate the logs’ delivery, and walk you through the

purchasing and construction processes.

One major difference in the construction process occurs in the loan process.

Understandably, log producers don’t want to cut and process logs for your

job without knowing that you’re serious about building the home. For that

reason, they ask for a large deposit (typically 50 percent of the package cost)

before they cut the logs. The construction lender you choose must be willing

to advance that sum from your total construction loan early in the process.

(For more information on the construction lending process, see Chapter 10.)

After the log producer delivers the logs to your building site, the producer’s

crew or your general contractor’s crew will stack them into walls. The home

will take shape quickly, because after they’re stacked, the logs create finished

walls, both outside and inside. They don’t need to be insulated, covered with

drywall, or sided on the outside. Log homes do have some unique construc-

tion steps, but generally subcontractors working on a log home will proceed

as they do on a home built with conventional construction.

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Highlighting Wood Inside — Timber

Frame or Post-and-Beam

If you love the look of wood but not necessarily log homes, you may opt for a

post-and-beam or timber frame home. Chances are you’ve seen this kind of

building method used in old barns or churches. A frame of substantial, inter-

locking timbers supports timber homes. The timbers may be held together

with pegged joinery cut out of the timbers themselves or fastened with bolts

or metal plates. Unlike log homes, from the outside, timber frame or post-

and-beam homes can look like any other home. Inside, the frame’s beauty is

revealed, adding character and wood tones to interior spaces. (See Figure 4-2.)

Timber framing is a new take on an old tradition that has several benefits:

 Timber framing creates a home with high energy efficiency. The energy

efficiency comes with the method of enclosing the frame. Many timber

frame companies suggest the use of structural insulated panels (SIPs) to

wrap the frame in a continuous envelope of insulation.

Courtesy of The Original Lincoln Logs LTD.

Figure 4-2:

The beauty

of wood

timbers is

revealed on

the home’s

interior

where posts

and beams

allow for

open,

vaulted

spaces.

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 Timber framing, which has been practiced for centuries, uses large

wood posts and beams that add plenty of character to a home.

 Through the use of trusses, timber framing can create homes with large

open spaces that span great distances and accommodate the open floor

plan that many homeowners desire.

As with log home construction, timber framing may add to a home’s bottom

line. It’s a specialty home, after all. You may be able to recoup the extra money

in energy savings over the life of the home and in a higher price set at resale.

To find out more about timber framing:

 Go to your bookstore or library. Look for books and magazines on the

topic. Look for Timber Homes Illustrated, Timber Frame Homes, and Log

and Timber Style magazines. Tedd Benson’s books, Timberframe: The Art

and Craft of the Post-and-Beam Home and Timber-Frame Home: Design,

Construction, Finishing (both by Taunton Press) are good starting points.

 Search online for timber frame and post-and-beam companies to see

photos and descriptions of their work. Many companies sponsor open

houses, workshops, or frame raisings that are open to the public.

 Visit the companies’ model homes or homes of their previous clients to

see framing in person. Ask the representatives or homeowners questions.

Chapter 4: Defining Your House Style

SIP: Building a better sandwich

Structural insulated panels (SIPs), which range

in size from 4-x-8-foot rectangles to large 8-x-

24-foot sheets, are “sandwiches” of expanded

foam between sheets of plywood, oriented

strand board (OSB), or other solid material such

as drywall. SIP manufacturers bond the layers

together using pressure and industrial adhe-

sives. After they’re precision-formed in a fac-

tory, the panels are ready to be shipped as is, or

the manufacturers’ crew can cut the panels to

accommodate windows and doors. The panels’

plywood or OSB surfaces serve as the base for

drywall or paneling in the home’s interior and

any common type of finish on the exterior, such

as siding, brick, or wood shingles. During con-

struction, electricians can run their wires

through chases drilled in the panels’ foam or

simply install wiring behind wall baseboards. To

connect the SIPs to the frame, the installation

crew spikes or fastens the panels to the timber

frame, and then fastens them to each other.

SIPs can be used for roofs and floors as well.

SIP walls may cost a bit more than convention-

ally framed walls, but their increased energy

efficiency should make up for any additional

upfront cost.

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 Attend one of the dozens of log and timber frame home shows held

each year around the country. You can find information at

www.loghomeliving.com, www.timberframehomes.com,

www.timberhomesillustrated, or www.loghomeexpo.com.

As you research timber framing options, you’ll find that several different

kinds of companies offer timber frames and post-and-beam packages. Most

packages contain the timbers for the frame, and oftentimes, the system to

enclose the frame.

The style of the timbers can create or enhance a number of different styles,

from Shaker style to Old World lodge to Arts & Crafts style to something more

rustic. If you’re an antiques lover, you might search out a timber producer

that can supply timbers salvaged from old buildings or a complete frame from

a former barn to give your new home a vintage feel.

If you’re concerned that timber framing will bust your budget, opt for a hybrid

home. In a hybrid, timber framing is used selectively, typically in large public

areas, like great rooms, entryways, or dining rooms. Smaller rooms, utility

spaces, and bedrooms can be built without timber framing to save money.

Along with cutting the timbers, and often raising them on-site, companies may

offer additional services. Make sure you understand if your timber producer

provides these kinds of services, or if you need to hire additional, local help

to work on your project. The companies may

 Enclose the frame with SIPs, conventionally framed walls, or some other

enclosure system

 Have a staff member who can design the frame or the entire home

 Serve as the general contractor for your home’s construction from start

to finish

In your research, you’ll find that timber frame operations range in size. Some

small companies concentrate on handcrafting just one or two frames a year.

Other timber frame and post-and-beam companies produce many more homes

annually and sell packages through sales representatives or dealers. Some of

these representatives live or work in a model home. Your representative can

help you purchase your timber frame or post-and-beam package, and, if he or

she is a general contractor, may build your home. As your liaison with the

company, your dealer can help you with your home’s design, coordinate the

frame’s delivery, and explain the purchasing and construction processes.

One major difference in the timber home construction process occurs in the

lending process. As with producers of log homes, a timber producer doesn’t

cut a frame without knowing you’re serious about paying for it. For that

reason, the producer will ask for a large deposit (typically 50 percent of the

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package cost) before the timbers are cut. The construction lender you choose

must advance that sum from your total construction loan early in the process.

(For more information on construction lending, see Chapter 10.)

After delivering your timbers to your site, your timber producer’s crew will

assemble and raise the frame. The framer’s crew, or your general contractor’s

crew, will then enclose the home and it will be considered “under roof” or

“dried in.” Although timber frame and post-and-beam houses have some

unique construction steps, subcontractors working on these homes generally

proceed as they do on a home built with conventional construction. As with

other types of custom home construction, the general contractor typically

supervises the entire timber home project from start to finish.

Considering a System Approach

When you need new kitchen cabinetry, you usually don’t ask a cabinetmaker

to haul his tools, crew, and raw materials to your home to build cabinets for

you on-site. You pick a style at a cabinet supplier’s showroom and order the

number and size you need. The supplier sends your order to the manufac-

turer, who goes about building your cabinets in a factory. You can apply

these very same methods of production and delivery to building a home.

Homes produced in a factory are called system-built homes.

Before visions of double-wides rusting in trailer parks come dancing into your

head, you need to know that “trailer homes” are now labeled as “manufactured

homes” and are built to a different code (known as “HUD code” for the Housing

and Urban Development agency that writes it) than system-built homes

(which are built to the same codes as site-built homes). System-built homes

include both modular and panelized homes.

Weighing your options

Today’s factory-built or system-built homes come in many forms, but fall into

two broad categories:

 Modular home: Built using preconstructed sections of the house, called

modules

 Panelized home: Built using preconstructed wall, floor, or roofing units,

as well as all other components of the house

Each form uses components that a supplier cuts to fit — and sometimes even

assembles — and then delivers to the building site for completion.

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Some companies specialize in creating large “chunks” of homes in their fac-

tories. These companies build panels or wall sections using conventional

construction or SIPs that are made of layers of plywood or oriented strand

board and foam. The panels may contain prehung doors or fully installed win-

dows, and they’re shipped to the construction site to be joined together to

create walls on the foundation.

Why would you choose to have your home prebuilt instead of built on your

property? The question for many is, “Why wouldn’t you?” Some of the bene-

fits include the following:

 System-built home plans are as flexible as conventional construction

homes in that they can have one, two, three, or more levels, gourmet

kitchens, finished basements, brick walls, and fireplaces. And, no, they

don’t have wheels.

 Prebuilding in a factory saves time because workers aren’t delayed by

weather or lack of available materials.

 The volume of building at the factory means workers can be concen-

trated in one place — painters can stay busy in a modular home factory

shift after shift. They don’t have to travel from job site to job site or wait

between jobs.

 Inspectors in the factory ensure that work is done precisely to plan and

with closer tolerances than on a job site.

 Best of all, you’ll likely save money by choosing a modular or panelized

home. Here’s where the savings come in:

• There is less risk that valuable building materials will be stolen or

damaged on the construction site.

• A shorter construction time means fewer interest payments on

your construction loan.

• Design work or drawings may be included in the price of the home

package so you can avoid paying an independent designer or

architect.

• Because you can’t make changes to the structure after it reaches

your site, you don’t rack up expensive change-order fees.

Still, a modular or panelized home may not work for you for various reasons.

Access to your site might be impossible for large delivery trucks. Your home’s

designer, architect, or contractor may prefer to work with conventional site-

built methods. The level of amenity you want for your home may just be too

high to be efficiently fulfilled by a system manufacturer.

If you’re considering a modular or panelized home:

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 Start with the companies’ floor plans. Review them and their list of con-

struction specifications.

 Make sure your site is accessible to the trucks that will deliver your

home’s components. Speak with your representative to make sure your

site is appropriate.

 Begin looking for a general contractor to oversee the building of your

home’s foundation, the installation of the prefabricated components,

and the final finish work. If you want to serve as your own general con-

tractor, ask the manufacturers you’re considering if they have worked

successfully with owner-builders in the past.

 Tour as many system-built homes as possible. You can see firsthand

how the finished structures look and feel.

 Inspect each company’s finished product closely. Ask questions of

people who have lived in the houses for a few years or longer. Have the

homes stood the test of time? Are the homeowners experiencing any

problems with their homes?

 Check out appropriate Web sites. For fast facts about system-built

homes, compiled by the Building Systems Council of the National

Association of Homebuilders, go to

www.nahb.org/generic.aspx?

sectionID=455&genericContentID=10216.

Making a purchase

If you have your home system-built, you’ll first contact either a local builder

who has experience putting the houses together or a local system-built home

manufacturer representative. The representative or dealer you purchase your

package from will have specific assembly and construction instructions for

your contractor. Many manufacturers provide training courses for complex

systems, and in some cases, the representative also serves as a contractor.

You need to find a company that can provide you with two things: A home

design that fits your needs, or that can be altered to fit your needs, and a

home built to the level of amenities that you desire.

Not sure what design works best for you? Our advice is to study each manu-

facturer’s stock designs and then ask if the manufacturer has the ability to

customize the plans. To determine the quality of a manufacturer’s homes, ask

to see the company’s specifications. Some areas to take note of include

 Insulation: The manufacturer builds your home to meet the insulation

level required by your local building codes. If you want greater insula-

tion, talk to your manufacturer, and expect to pay more.

 Pitch of the roof: A flat pitch makes the home look more like a trailer-

park model and less like a custom home. Steeper pitches look richer.

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 Roofing and siding materials: If a manufacturer can’t provide a certain

type of shingle or exterior finish for your walls, you can have your builder

apply the shingles after the home is on-site.

 Stairs: The standard stairs may be carpet-grade. In other words, you

need to cover the stairs with carpet. If you want exposed wood on your

stairs, ask what options are available. Again, be prepared to pay for an

upgrade.

 Types of appliances: Can the manufacturer accommodate your lifelong

desire for a commercial-size range in the kitchen and a high-end, built-in

refrigerator? Some can, but be prepared to pay extra.

 Windows: Ask about your options for windows, and be sure to see the

window units firsthand. Be sure the windows are easy to open, close,

lock, and tilt for cleaning (if that’s a feature you prefer). For more in-

depth information on comparing window quality and energy-efficiency,

visit the EnergyStar program’s Web site at www.energystar.gov/

index.cfm?c=windows_doors.pr_windows.

If you have firm ideas for your new home, make sure the manufacturer you

choose can supply what you need. For example, do you have your heart set

on a vaulted master bedroom? Because they are limited by what size compo-

nents can be delivered by truck, not every modular manufacturer can build

a home with ceilings above 8 or 10 feet. Ask questions and be sure to look at

homes the company has previously built.

Perhaps you want to bring your own drawings to the table. Some modular

manufacturers can accommodate custom-drawn plans, but you may find that

panelized manufacturers will more readily accept plans from an architect or

independent designer.

On the line

With modular homes, workers install wiring, plumbing, ductwork, cabinetry,

and some plumbing fixtures in the factory, and also apply certain finishes,

such as paint, flooring, and countertops. After the workers finish, they shrink-

wrap the modules like giant pork-chop packages and load them onto flatbed

trucks for delivery.

Before you hit the road, Jack, be sure you know the rules. Some states limit

the weight of items that can be shipped by truck at certain times of the year.

Imagine that a truck carrying your kitchen jackknifed on an overpass in a bliz-

zard, or worse, overturned. Discuss your construction schedule and any pos-

sible restrictions with your contractor or sales representative well in advance

of your purchase.

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After the house arrives at your lot, workers cut away the heavy-duty wrap-

ping from the modules, and a crane lifts the modules off the trucks and on to

the home’s foundation. Depending on its size, the home may comprise two,

three, or more modules. Under the supervision of your builder or manufac-

turer’s representative, the crew completes the steps necessary to make the

home ready for occupancy.

A modular home leaves the factory pretty close to complete. After the pieces

arrive on the construction site, the homeowners can usually move in within

just a few weeks. Make sure you’re packed and ready to move in.

Panelized homes go up in much the same way, except that the parts that are

delivered to the site are smaller and require more assembly on-site. A crane

may still be needed for lifting large wall or roof sections. After the pieces are

in place, the home is ready for interior finish work. The construction time

may vary from one system to another. Obviously, those systems that leave

the factory in more-finished states require less time and labor on-site.

Unearthing Alternative

Construction Methods

Does a system-built home sound too buttoned-up for you? If so, then get

earthy with alternative building methods. Some of these methods are ages

old and recently rediscovered; others have become viable and more widely

available by recent technological improvements. Two different options

include

 Straw bale homes: Today, people are rediscovering the ability of straw

bale construction to create highly energy-efficient homes. After the bales

are stacked into walls, they are coated outside with an earth-based

material and inside with plaster, and then finished as any other home.

Straw bale homes usually resemble adobe homes with thick walls and

gently rounded arches. They offer their owners great efficiency and a

quiet interior. An added bonus is knowing that you created something

lasting out of a material that would normally be burned or sent to the

landfill.

In laboratory tests, the bales have resisted damage from fire, mainly

because of their density. Insects don’t seem to be a problem and mois-

ture issues aren’t of great concern as long as the bales are well dried

before construction and kept dry until they are finished on the exterior.

Check with your local municipality and lenders if a straw bale home

sounds like your cup of tea.

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 Rammed earth homes: Like straw bale homes, rammed (or stabilized)

earth homes use a natural material to create a cozy home with thick

walls. In this type of construction, your wall contractor mixes screened

(sifted) soil with cement and water, and then pours it into wall forms

built on your site. The crew then uses pneumatic tampers to compress

the earth mixture in the form. After the mixture sets, the forms are

removed and the 18- to 24-inch walls are complete. The walls can be left

as is, colored with pigments, or sealed with stucco.

As with other building forms that create thick, solid walls, rammed earth

homes enjoy increased energy efficiency and quiet interiors. Solid, natural

material walls paired with a heating system that doesn’t require blowing

air provides an ideal home for those with heightened sensitivity to

chemicals or synthetics.

Keep in mind that although the raw materials for a rammed earth

home — notably dirt — are widely available and, well, dirt cheap, the

labor involved adds to the home’s cost. Knowledge is the best weapon

when encountering setbacks, so visit rammed earth suppliers online or

in person and talk about your plans with homeowners and builders who

have relevant experience.

If you’re interested in an alternative building method or material for your

custom home

 Do as much research as possible. Look for magazines like Natural Home

and books such as The Art of Natural Building by Joseph F. Kennedy,

Michael Smith, and Catherine Wanek (New Society), and Alternative

Construction: Contemporary Natural Building Methods by Lynne Elizabeth

and Cassandra Adams (Wiley).

 Get help. Enlist the aid of experienced builders or suppliers.

 Attend workshops and seminars. Many producers or building schools

offer workshops and seminars, which are particularly valuable if your

home will be a do-it-yourself project. Knowing in advance if you have the

skills and persistence to tackle the job is better than finding out too late.

 Look online. Check out www.greenbuilder.com, www.thelaststraw.

org, or http://oikos.com/index.lasso for further information on an

array of alternative building methods.

Believe it or not, you can find financing for a home built with alternative

building materials. It may, however, take more legwork than finding a lender

to finance your purchase of a regular suburban tract home. Start by talking

with the company that’s helping you build the home. Most likely, the com-

pany’s previous clients have faced the same situation, and they may be able

to offer sound advice. You can also search online for lenders who frequently

make construction loans. Having complete plans for your home, information

on the building system from an experienced builder or home producer, and a

clear idea of the costs of your project can help ease a lender’s mind and make

your project that much more appealing to a loan underwriter.

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Chapter 4: Defining Your House Style

Living off the grid

For some, the idea of living without public utili-

ties or supplementing those utilities with wind,

water, or solar power sounds like roughing it.

But technological advances in these alternative

power systems make it easier for people who

wouldn’t consider themselves pioneers to make

their own energy.

The use of alternative energy sources proba-

bly won’t affect your home’s style except in

the instance of passive solar heating. Homes

designed to benefit from solar energy in this

way are carefully sited on their lots. Banks

of windows bring sunlight into the home and

focus the warmth into the home’s heat sink —

typically a masonry wall or floor that collects

the warmth, and then slowly radiates that

warmth back into the home. Of course, if you

use active solar systems, such as panels of

solar cells for generating electricity or large

solar collectors for heating water, you’ll need to

either hide them or integrate the look into your

home design.

If you’re interested in using alternative energy

to power your home, research your choices

thoroughly. Start with books and magazines,

and then supplement your reading with visits to

the Web sites of suppliers of solar, wind, and

water energy equipment.

Although building a home powered solely by

alternative energy (called off-grid) is good for

the planet, it may cripple your checkbook:

Homes that are built off-grid aren’t eligible for

bank financing. If you need a loan, connect your

home to the grid, and then simply use your alter-

native energy system. Many people who make

their own power, but who are still connected to

the public utility grid, are actually able to “sell”

their excess power back to the utility company.

Rules and regulations on this buy-back of power

vary from region to region. For more information,

visit

www.oikos.com.

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Chapter 5

Architects and Design: Time

Spent Is Money Saved

In This Chapter

 Using an architect

 Relying on other design resources

 Placing the house

 Making aesthetic choices

 Defining the details

esigning your own home is probably the reason you started on this

custom home journey in the first place. But, guess what? Designing your

own home also is the most complicated and challenging part of the process

(although at the same time it can be the most rewarding). Wondering what

the biggest mistake made in the design process is? Underestimating the time

you need and the sheer amount of decisions you need to make.

In this chapter, we assist you with the multitude of decisions and choices

that you’ll face by giving our insights from our own years of experience. We

start with the discussion of using an architect, relying on a stock plan, or

designing your new home yourself. We give you an introduction to choosing

styles and determining functionality. Finally, this chapter has lists of features

and choices to use when making the necessary decisions for your custom

home. The result is a script for you to follow in conversations with your

architect and contractor.

You’re designing your custom home project. There is no right or wrong way.

But some ways may be easier or less costly than others. Entering into the

design process with open ears and an open mind is better than resisting new

ideas. Be prepared to take extensive notes during the process because it

occurs over an extended period of time, and you may need to refer back to

what you were talking about six months ago.

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Arming Yourself with an Architect

Like any other professional consultant, because you’re paying the money,

you have the right to determine how much your architect will be involved in

your home-building project. Architects can serve you in several ways. They

can take a stock plan you have seen in a magazine or on the Internet and

simply modify it to fit your needs, or they can help extract ideas from your

mind and create a whole new home to meet your dreams. Some people

simply want an architect to design a home based upon their thoughts and

needs. Others want to be fully engaged in the entire experience and use the

architect as an interpretive tool, expressing what they see completed in their

own mind.

Deciding whether you even

need an architect

The question of whether or not you need an architect for your project boils

down to two elements: time and experience. If you’re in no hurry to move

your project forward and are willing to invest the time to figure out all the ins

and outs of the process and make the right choices, then an architect may be

unnecessary. But if you work for a living, are raising a family, or don’t have the

slightest inclination to take the time to figure out design, construction, and

building codes, then an architect will be a welcome addition to your custom

home team of professionals. Here is a list of questions you need to ask your-

self to determine if you’re up to the task of designing your own home:

 Does your state require an architect for submitted plans?

 Will your project require extensive structural engineering?

 Are you extremely picky and difficult when making decisions?

 Are you lacking in aesthetic vision?

 Do you have difficulty understanding home functionality?

If you answer yes to any of these questions, then you’ll probably gain value

from an architect. Despite their seemingly high cost, architects can save you

time and money by bringing their experience to the table. Their insights on

functionality and government bureaucracy can save you months of time and

thousands of dollars.

The biggest question to ask yourself is whether you have the confidence to

take this project to its completion. You may prefer to dabble or play with

the design aspects, but an architect is a true professional who has spent

years becoming an expert at home design. If you were to go alone without

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an architect, you might spend a great deal of time and energy gathering the

information that already sits at the architect’s fingertips.

Finding the right architect

Locating an architect is as easy as picking up the phone book or searching on

the Internet. The hard part is figuring out which architect is right for you. You

have several approaches you can take to find the right architect:

 You can drive through neighborhoods of custom homes looking for

houses that strike your fancy. Don’t be afraid to knock on the door and

ask for the architect’s phone number. Most people are happy to share

the information while you’re flattering their home.

 If you’re lucky enough to have many friends with custom homes, you

can ask for referrals from them. What are friends for?

 You can hit the Web. The American Institute of Architects (AIA) has a

list of its members by location at

www.aia.org. Click on the “Architect

Finder” option, enter your zip code, and select the “A Home for Yourself”

building type to find architects in your area.

Now that you have a list of prospects, you need to compare them. Cost is

usually the first comparison but by no means the most important. When

choosing the right architect, look for someone that fits the needs of your par-

ticular project and working style. You may want someone who manages the

whole process or perhaps will work with you in a teamlike manner. Plan to

have several discussions with two or three different architects so you can

choose the right one for you. Here are the important issues to address in

those discussions:

 Aesthetics: You need to see if the architect can create something that

suits your taste. Ask to see many of her prior designs. Ask for introduc-

tions to the owners. Go to the completed houses and see if the floor plans

make sense and are comfortable for you. If you don’t like the homes she

previously designed, chances are you won’t like a new one either. A good

architect is also a good listener. Look for someone whose taste is similar

to yours and who will design what you’re looking for. You want your new

home to be a reflection of you — not a monument to the architect.

 Experience: What’s the point in hiring an expert who knows less than

you do? You want an architect that has designed many custom homes

and is familiar with the process. A commercial architect who specializes

in office buildings may be looking for the next new challenge, but his

lack of residential experience could create problems for you down the

line with builders and planning departments. An architect needs to have

a minimum of 15 custom homes under her belt to be considered for your

project.

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 Local knowledge: Every municipality and planning department is differ-

ent in the way they process custom home plans. Some are more bureau-

cratic than others. Much of the architect’s time may be spent working

your plans through the system. If you’re looking for exceptions (vari-

ances) from the established local guidelines, you could have a fight on

your hands. This fight could cost you time and money. An architect with

local knowledge and experience can save you from costly battles and

exercises in futility. (Check out Chapter 6 for more information on local

design guidelines.)

Managing the architecture process

If you’re lucky, you may find the perfect architect — someone who is atten-

tive to your needs and makes the process easy. In a perfect world, the archi-

tect would come up with the perfect design first time out with a minimum of

communication. Sadly, wake up and smell the coffee: You don’t live in a per-

fect world. Most custom home architects are small businesses; they’re shoe-

string operations without huge profit margins. They tend to be overloaded

with work and less concerned for your time frames than you may be. The

more successful the architectural firm, the busier it will be. You need to

manage your expectations and the process.

Set your initial meeting as a getting-to-know-you session to get a feeling for

how you’ll work together and to see if you have a common vision for the pro-

ject. After everything gets going, stay proactive in driving the process. (To

stay on top of everything, you need to call the architect regularly to check

progress and set the next appointment.) After all, it is your house and your

time frame. The architect’s job is to present you with information and deci-

sions to be made. All the decisions relate to four basic elements:

 Aesthetics

 Cost

 Quality

 Time

Get the facts from the architect and conduct your own research. The more

you take responsibility for educating yourself and making some decisions

upfront, the greater chance you have of eliminating problems, saving some

money, and getting the home you’re looking for. Use your architect as the

high-paid consultant that he is and make sure to set a regular meeting sched-

ule with him. Doing so helps you get a better handle on the time and dollars

involved to design the project. Setting a regular schedule also reduces the

panic or inquiry calls that can cost you more money and frustrate you during

the process.

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What does all this cost?

The architect has the worst position of all the partners you have in the

custom home process — the first position. Most people expect to put out a

substantial chunk of money for the building lot, but the five-figure check

you’ll write to the architect is probably the first one you signed that didn’t

get you a big hunk of steel with tires and headlights. Don’t let the price tag

scare you; during this stage isn’t the time to skimp. If you’ve done a good job

of budgeting (see Chapter 2), you’ll easily make up the initial costs later in

the build.

Architects generally charge in one of three ways (or a combination of all

three for various stages of the project):

 On an overall percentage of the build

 On an hourly basis

 On a fixed-price basis

The following sections provide some vital information you need to know

about each billing program and which one is better for you.

Percentage of the build

The first way of billing is on an overall percentage of the build. This method

can range anywhere from 3 to 10 percent of the total project costs, not

including land. So a typical $500,000 custom project may cost you $15,000 to

$50,000 in architect fees for the plans and the architect’s time in getting the

plans approved. In some high-end projects, architects may charge as much as

20 percent, equaling hundreds of thousands of dollars. This method doesn’t

have a set percentage, so you need to evaluate the value of the architect’s

services that you receive in exchange for your hard-earned money.

Hourly basis

The second way of billing is on an hourly basis. Hourly rates vary widely

depending on the firm you engage, its experience and reputation, and its

location. (A firm in Los Angeles is probably going to cost significantly more

than one in Des Moines.) Expect to pay anywhere from $50 to $350 per hour,

depending on these factors. You’ll pay the architect for the following list of

items to get you to the permitting stage:

 Construction documents

 Landscape plan

 Mechanical and electrical drawings (see Chapter 6)

 Plan copies ($4 per page)

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 Soils report

 Structural engineering (see Chapter 6)

 Surveyor

 Time for the architect and associates

You can pay all these items directly through the architect, or you can pay for

them separately on your own. Project costs can be more clearly broken down

into time and materials (expenses), and they’ll vary depending on where you

live and on your project’s scope. The consultants and types of reports they

can generate vary due to the scope of work and the requirements of govern-

ing bodies, such as planning and building departments.

When paying by the hour, time is money. Use the architect’s time for providing

information and education. Keep all discussions or disagreements between

spouses or partners at home, not in the architect’s office while the clock is

ticking. Absorb as much information as possible and take detailed notes to

review on your own time. The more you prepare for the meetings with the

architect, the more efficient those meetings will be. Shorter meetings mean

less billable hours and less money out of your pocket.

Part I: Getting Started: The 411 on Custom Home Building

Considering the design-build combo

A number of companies today design the homes

and build them for you. Such companies are

called design-build firms in the industry. Many

custom home companies have added architects

to their staffs so they can provide you with a

seamless process from start to finish. The main

advantage of this approach is consistent com-

munication throughout the process. The builder

has experience building what the architect

designs and the architect designs a home

based on the builder’s expertise. You can take

advantage of the cost savings attached to using

one firm for both the design and the build, but

you need to compare the price and work with

that of independent architects and contractors

before making a decision. You can find an

annual list of leading design-build firms online

www.designbuildbusiness.com.

Just because they handle both design and build

aspects through one firm doesn’t mean you can

reduce your investigation for finding the right

partners for your project. Design-build can be

something of a conflict of interest because it

doesn’t involve any competitive bidding in the

process. Not only that, but the project’s ultimate

quality is tied up in the firm’s ability to both

design and build in a cost-effective standard.

Pick a design-build firm using the same criteria

we suggest for picking an architect in “Finding

the right architect” section earlier in this chap-

ter, and investigate the builder portion of the

firm using our suggestions in Chapter 2.

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Fixed-price basis

The third way of billing is on a fixed-price basis, where your architect quotes

you a firm, all-inclusive price for the entire job. On one hand, this option can

be beneficial to you because you know exactly what your architect will cost,

but an architect may underestimate and you may suffer when he feels he has

already put in too much time.

Always discuss the price with the architect before you sign a contract. Get a

complete estimate upfront with a detailed breakdown of expenses. Set a maxi-

mum price with progress payments based upon certain milestones such as the

preliminary design and design review approval (discussed in Chapter 6). Keep

the communication open along the way so you don’t encounter any surprises.

Looking at Architect Alternatives

Not everyone uses an architect when building a custom home for several

reasons. For example, aside from money being a factor, you may have

design skills yourself that you wish to exercise. No problem! Technology has

improved the choices for designing a custom home. You can also utilize alter-

native consultants if you want to save on architecture fees. These resources

require additional responsibility on your part and may still have additional

costs depending upon the design requirements of your local government.

The following sections explore architect alternatives.

Published floor plans — Picking

a home from books or online

You can purchase thousands of plans from magazines and online resources —

many of them quite good. The choice is endless. The magazine shelves at book-

stores are stocked with more than ten new magazines every month; these plan

books have houses to fit every size and budget. You can buy the preliminary

floor plan and elevations for a few hundred dollars. You can also purchase

complete building plans including the structural drawings from these sources

for a few hundred to a few thousand dollars. (Check out Chapter 6 for a com-

plete explanation of the differences in types of plans.) Even if you don’t buy the

full set of plans, the magazines and online sites make for good conversation

starters with your family and architect. Here are a few of our favorite Internet

resources for plans:



www.familyhomeplans.com

 www.eplans.com

 www.dreamhomesource.com

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Although buying plans may seem like a less expensive approach than using

an architect, it depends heavily on your situation. Many of these plans don’t

include the foundation or full structural drawings required for permitting.

The plans need to meet all the design and code regulations for your area, and

if they don’t, you’ll have to hire an architect or engineer to make any changes

necessary for permitting. Depending on those costs, you may or may not

save money by using the stock set of plans compared to hiring an architect to

design your home. Buying plans from a book can, however, be a great option

if you’re building on a flat lot with liberal design guidelines. Otherwise you

may be wasting your money.

Software programs — Designing

your own plans

A number of software programs exist for individuals wishing to design their

own home on a computer. Many of these software tools make it easy with

templates for rooms and architecture choices. For less than a few hundred

dollars, these programs can be excellent tools for discovering the basics of

home design — saving you time and money with your architect even if you

don’t design the entire home. If you find yourself with the time and skill to

design the whole project, you can save significant money. Here are our

favorite software choices available online or at any computer store:

 www.smartdraw.com

 Better Homes and Gardens Designer Suite

 3D Home Architect

The same issues apply when designing your home using software as with

store-bought plans — the need for foundational engineering and structural

drawings. However, in this case you’re now responsible for all the structural

elements of the house construction. Make sure to find a structural engineer

you can work with before heading down this path. You’ll need to search the

phone book or ask architects or local building departments for referrals to

find a good structural engineer. Otherwise your new home may become your

design nightmare.

Hiring a home designer

You can also choose from a growing number of talented home designers who

aren’t licensed architects. They offer you the possibility of significant cost

savings in the design phase of building your new home. They don’t have the

architectural training or certification, so they bill at a lower rate than archi-

tects. These designers may draft the house design for you from scratch or

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help you determine materials. No standard for the services they provide

exists, so you need to ask them what part of the process they will provide.

Treat them as you would any architect. Investigate their credentials and experi-

ence. Discuss with them the differences in the services they will provide from

architects and other designers and find out where the gaps exist. The best way

to find these designers is in local newspapers and design magazines.

Many states limit designers from designing anything more than a bathroom,

kitchen, or single-story remodel without the plans being approved by an

engineer with an engineer’s stamp before obtaining permits. In addition, a

designer may not be aware of code complications in a more extensive pro-

ject, creating more cost to fix the plans even with the engineer’s assistance.

Placing the House on the Lot

Before you start designing your new home, you need to figure out how it will

sit on the lot. Lot placement is important because it allows you to take advan-

tage of views, topography, and amenities. Some lots may have special features

or limitations that make this decision a simple one. Others that are large and

flat may have limitless possibilities. We lay out some of the biggest considera-

tions in this section.

Foundation issues

If your house is on a slope, then the engineers are going to give you limited

choices in how to place the house on the lot. You’ll have to follow very spe-

cific requirements for grading, piers, or other specialized foundations. If your

topography is far from flat, you may want to consult an engineer early in the

design process. You can do this through an architect or consult the phone

book.

Constructing a foundation can be complex, and you need to discuss it with

the architect or engineer during the house design process. To understand the

specific process for hillside foundations, look in Chapter 12.

Which orientation is best?

North, south, east, or west

There are no right or wrong answers for picking direction placement for your

home — it’s a matter of preference. Some people like the sun in the morning

and some in the afternoon. If you’re building in Seattle or Vancouver, the sun

may not be a factor at all.

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In North America, the sun shines from the south so a southern exposure

means that the sun will shine on the front of your home for most of the day. A

south-facing house also means your backyard may get little sun until midday,

when the sun is high enough in the sky to shine over your house. Figure 5-1

shows the relative angles for exposure and house placement.

Too little sun can make the house seem dark and dank. Too much sun can be

energy inefficient and weather the house prematurely. You need to consider

other directional factors, such as wind, noise, and city lights, that can nega-

tively impact your home. To decide on the right direction, ask yourself the

following questions:

 What are sun patterns where I live?

 What is my preferred daily temperature?

 How bright do I want my home?

 How much sun do I need in each yard?

Courtesy of Tecta Associates Architects, San Francisco

Figure 5-1:

Exposure

impacts

placement.

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 Where does the wind normally come from?

 Where is the closest major city?

 Are there any noise issues in any of the directions?

After you have considered these questions, determining which direction will

benefit your lifestyle and then designing doors, windows, and decks to face

that optimum direction should be easier.

Taking advantage of natural elements

In some suburban neighborhoods, the most natural thing about your lot

may be the hippie couple living next door. However many people building

custom homes have some natural features that can add to their home’s

beauty. Following are some natural elements to consider in the design and

placement of the home:

 Foliage: If your lot is in a rural area with plenty of natural landscaping,

consider natural growth patterns for beauty and easy maintenance. High

trees and bushes can afford you privacy; however, clearing tall brush

and cutting back trees may give you unexpected views.

 Mountains: If you have a larger lot in a mountainous area, decide to be

on top of the peak or shaded at the foothill. Or you may simply prefer to

stare at the neighboring giant.

 Rocks: Small groups of stones or even large boulders can make for a dra-

matic effect depending on where you place your house. In some rural

and mountainous areas, designers have built spectacular homes with

boulders in the house making the home unique and saving the cost of

demolition.

 Trees: Trees provide shade and beauty. They can also be a nuisance

with dropping leaves and fruit. Like boulders, some old magnificent

trees can be incorporated into the home’s design.

 View: The right view can significantly increase your home’s value and

beauty. Try to optimize views for rooms where romance, relaxation, and

entertainment occur.

 Water: People pay premiums to live by the ocean or near lakes and

rivers. Take advantage of these aquascapes, but be wary of flooding

issues by checking flood maps with your engineer.

Custom home projects tend to run smoother and cheaper when they’re

designed to take advantage of natural elements. Reconstructing landscape

and waterways or removing huge trees and boulders can be costly and in

some cases environmentally damaging. Look for ways to take advantage of

what was naturally provided.

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When making significant changes to the elements, work with your engineer to

create proper site drainage and insure the soil will remain stable with few

erosion problems. Otherwise your house could slide down the hill or be

buried by mudslides.

Planning the Size and

Shape of Your Home

Even though building a custom home implies you do it your way, few people

actually have enough money to put everything they want into their first pro-

ject. Unless you recently won the lottery or invented the cure for the common

cold (congratulations if you fall within either of those two categories!), you’ll

probably have some limitations on what you can build. Also, unless you’re in a

position where money has no bearing, you’ll want the house to maintain its

value and potentially appreciate.

So you now have three gods to appease:

 Desire: You want to build a house you want for your needs.

 Taste: You want the house to have aesthetic appeal, particularly to you.

 Value: You want to make sure the house is built in such a way to main-

tain its investment potential.

You must carefully consider all three of them in the design process.

Part I: Getting Started: The 411 on Custom Home Building

Nothing is as lovely as a tree

One very expensive cost for a new home can be

trees. In new developments, the land is bare

and the cost of transplanting a mature tree can

be as much as $20,000. The expense of mature

trees is the reason why it takes decades for

neighborhoods to have tall trees. If you’re lucky

enough to have mature trees on your property,

take advantage of them in your house place-

ment. In some locations certain trees may be

protected, such as live oaks in California (the

state tree). You can get plenty of information

about types of trees and how to protect them

from the National Arbor Day Foundation (www.

arborday.org).

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Size matters — Figuring

the right square footage

For reference, you’ll often see square feet represented by a number with a

symbol so that it looks like this: 2,000®

. Three major factors dictate the

appropriate square footage for your home:

 You need to establish your family’s needs. For example, do you have

elderly parents living with you who need a downstairs bedroom or does

your wife want her own separate walk-in closet in the master bedroom?

We address this topic more in-depth later in this chapter in “Ten general

floor-plan considerations.”

 You need to adhere to zoning limitations or covenants (neighborhood

guidelines). Many design rules set limits on how big and how small of a

house can be built on a particular lot. You may also encounter limits on

the house’s ground floor. These guidelines may impact other decisions

such as the need for more than one story to meet your square footage

needs. (See Chapter 3 for more on zoning regulations and covenants.)

 Your need to keep in line with your budget. In Chapter 2, we give you

a method for determining a budget as well as a way to define dollars per

square foot. You’ll need to design a house that not only fits your family

and the lot but also fits your budget as well. Many of these calculations

go in circles, so start with the house you want and see if it fits based

upon local estimates for building costs, which you can get by talking to

a few contractors. If the going rate seems to be $100 per foot and your

budget allows for $300,000, then a 3,500 square foot house won’t work

and you need to adjust your design.

The more square footage you build, the more the house will cost, so effi-

ciency is important. At the same time, skimping on rooms can reduce utility

and make for unpleasant living. Here are some minimum recommendations

for typical room sizes to give you a general idea of what you need:

 Bedroom: 100 to 200 square feet

 Dining room: 100 to 300 square feet

 Family room: 300 to 800 square feet

 Full bathroom: 60 to 150 square feet

 Great room: 400 to 1,000 square feet

 Kitchen: 150 to 350 square feet

 Living room: 300 to 800 square feet

 Master bedroom: 200 to 600 square feet

 Staircases: 100 square feet per story

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Calculate the total square feet of the rooms you have picked. You can figure

on adding another 10 percent to account for hallways, cabinets, and closets.

This total can give you a basis from which to start your estimate. Other fac-

tors to consider may include unfinished space like basements and garages.

Garages can vary based upon size, but each car needs roughly 200 square

feet. Generally, a basement matches the square footage of the first floor. If

you’re not going to finish the walls and flooring in your basement or garage,

then you don’t count it in your livable square footage, but you’ll need to rec-

oncile the cost when you get your estimates from contractors. You can esti-

mate its cost now by multiplying the square footage by the dollars per square

foot and dividing by 2.

Designing for resale — Create a

house everyone wants to buy

When designing your home, you want to remember that a unique house can

create difficulty even in a custom home — particularly thinking ahead to the

future and your new home’s resale value. For whatever reason, most people

prefer houses that are familiar, functional, and comfortable, which means

many people may find your home to be a nice place to visit but they wouldn’t

want to live there. If buyers aren’t interested in your house, lenders will shy

away as well making financing difficult. (We discuss the issues of marketabil-

ity in greater detail in Chapter 7 and the lender’s perspective in Chapter 9.)

Just because you want to design your house with resale in mind doesn’t

mean the house has to be generic. A number of proven theories in home

design create functionality and appeal yet allow for uniqueness. Talk to local

real estate agents and your architect about the expectations of most buyers

in your neighborhood. You don’t have to build your new home exactly for

them, but at least you can consider them in your design decisions as you

move through the process.

Exterior styles — Considering

architecture examples

Some local guidelines require specific architecture styles for the neighbor-

hood. Some design review committees may actually dictate the type of siding

to be used and colors to be painted. We discuss these committees at length

in Chapter 6. The key is to pick something that suits the neighborhood and

your taste. You can choose from many examples of exteriors in plan books

and on the Internet.

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Knowing the size of the home isn’t enough to get a handle on costs. Not all

exterior designs cost the same. The more complex your exterior is, the more

it will cost in framing (see Chapter 13). Architectural extras such as peaked

roofs, dormers, and balconies can increase costs. Exterior materials have an

impact on cost as well. If the neighborhood guidelines allow it, you’ll have to

choose between siding, stone, or stucco as well as roof material choices like

slate, tile, or metal. We discuss these material choices extensively in Chapter

14. Do your research on these materials now by checking prices and dis-

cussing options with your architect.

Designing Your Home’s Interior

Although design review committees may have a lot to say regarding your

home’s exterior, the interior choices totally belong to you. The floor plan

determines where everything is located in your house. A well thought-out

floor plan can make for a comfortable house whereas a bad floor plan can

create problems and inconvenience.

Several components, such as doorframes and hallway passages, require you

to make decisions about style, size, and location. For example, choosing an

open feel in a house requires open passages and larger hallways whereas pri-

vacy needs may push you to opt for smaller cozier options. These decisions

impact the feel of the house and, ultimately, your enjoyment of it.

Other interior choices on details such as corners and finish trim can add sig-

nificant themes to the look and feel of your home’s interior. You can find hun-

dreds of interior ideas in the multitude of home magazines on the rack at the

bookstore. Interior Design magazine is excellent for ideas and, of course, you

can always find plenty of pictures in the classic Architectural Digest and on

the Internet.

The best way we have found to search for ideas on the Web is to go to

www.

google.com, click on the “Images” button, and search terms such as interior

architecture and interior design. You’ll get hundreds of pictures to look at for

ideas.

Ten general floor-plan considerations

Whether you’re designing the house or using an architect, you need to be

aware of elements of good home design. We lay out these elements in this

section so you can incorporate them into your thought process while design-

ing your home. Our experience shows that most design problems in the flow

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and functionality of the house result from not addressing one of the following

areas:

 Lifestyle: To be comfortable and relaxed, your home has to fit your

lifestyle. Not every home works for every family. Are you a family living

in a formal style? If so, then maybe you need a formal living room and

dining room. Do you gather around the kitchen? Do you entertain a lot?

Then a home with a big family room open to the kitchen may work for

you. Determine how you want to live and design a plan that fits the

lifestyle you enjoy.

 Foot traffic: Try to project how people move through the house on a

daily basis. Look for problems in the traffic patterns. Some problems

may include issues like tight hallways and people crossing through work

areas of the kitchen, formal areas, or TV-viewing areas. (You don’t really

want Little Johnny racing through your dinner party in his Spiderman

tighty-whities to get to the bathroom.)

 Noise: This factor can be huge in multilevel houses. Remember that bed-

rooms are for sleeping, so any noise above, below, or next to a bedroom

can make for a restless night. Consider carefully the placement of noise-

generating rooms like the garage, home office, laundry room, and bath-

rooms. (For example, if you have a large family, you don’t want to put

the main bathroom by your bedroom. The last thing you want to hear is

a flushing toilet all night.)

 Storage: You can never have enough storage space in any house.

The longer you live somewhere, the more stuff you acquire. What you

really need is plenty of useful places to put it. Create ample-size closets,

pantries, and cabinet areas. And make sure your storage areas are con-

venient without being obtrusive.

 Door placement: Every room needs a door, but it needs to open in such

a way that it doesn’t bang against walls, obstruct other doorways, or

block closets or windows. Consider the placement and opening space

necessary for each door in the house.

 Window placement: What’s the point of having a view if your windows

don’t take advantage of it? Other window considerations include pri-

vacy, not being blocked by doors, or looking out on the garbage area.

Put plenty of thought into the size and placement of your windows to

the world.

 Accessibility: Can you get to the outside from everywhere that makes

sense? Are bedrooms and bathrooms easy to access from common

areas? Make sure you can easily access important rooms without creat-

ing unnecessary obstacles.

 Convenience: We can think of nothing worse than having to traipse

halfway across the house with food from the kitchen to serve in the

formal dining room. Think about where you may be unloading your gro-

ceries or how to get the food from your barbecue. Bathroom placement

is another major convenience consideration.

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 Utility: Many homes have nooks and cubbies that serve no useful pur-

pose. You’ll pay to build any square footage whether or not it’s useable

space. Make sure all areas serve a purpose.

 Future expansion: Perhaps your new house is perfect for all your needs

at this time, but someday your needs may change. Think about how you

might expand the house should that occur.

Special considerations room by room

We realize many of you are hoping in this section for a detailed list of deci-

sions on design in the various rooms of the house. But if we made all the

design choices for you, then your new home wouldn’t be custom.

In this process of custom building your home, all the decisions are yours –

you’re in charge. Our job is to share our insights on the questions. In this sec-

tion we give you questions and suggestions to analyze when designing the

rooms. You can use it like a checklist. Then you’ll have a good basis for con-

versation with your architect or designer. For those of you designing your

own house, use this section as a template for decision making.

A cook’s tour — Kitchen elements

Isn’t it funny how every party eventually ends up in the kitchen — often one of

the smallest rooms in the house? Think about how much time you spend in the

kitchen. Food is a critical part of family culture, and you want your kitchen to

reflect it. Think about placement for breakfast eating areas. Where are people

going to collect and connect? Although the kitchen is usually the most expen-

sive room in the house, the kitchen also brings the best return on money spent

in any home. For greater detail on kitchens, you can read Kitchen Remodeling

For Dummies by Donald R. Prestly (Wiley). Here are our tips for assessing your

basic kitchen needs.

Cabinets and counters

Your cabinetry sets your kitchen’s tone as well as establishes its conve-

nience. You have three major issues to consider with cabinetry and counters:

 Layout: You need to make kitchen layout choices in the floor plan

including the specific layout of the counters and island. Put your time

into the kitchen design early because making cabinetry and counter

changes can be costly after materials have been ordered. Walk through

as many kitchens as you can at open houses to see what works well for

your lifestyle. The general rule is that you don’t want to have to walk

food over great distances during preparation. You also want to make

sure you have adequate room for those appliances you’ve been lusting

after as well as ventilation for your cooking needs.

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 Cosmetics: The kitchen design is likely to stay the same for a long time.

You can always change the look of other rooms by painting the walls,

but you’re less likely to change the kitchen cabinets in the near future

for simple aesthetics. Cabinetry is expensive. Make sure you have

chosen a style and color that will suit the house’s style for decades to

come. If you get bored easily, consider paint-grade cabinets so you can

change the look just like walls.

When making a decision about countertops, you have many choices to

consider, but it often comes down to a choice of beauty versus practical-

ity. Tile can be cost effective and attractive, but grout can be difficult to

clean. Granite or marble is gorgeous, but expensive and harder to main-

tain. You can choose from many suitable manmade alternatives such as

Corian that will last almost as long as tile or stone. You can even choose

from other surfaces, such as laminate, wood, zinc, copper, stainless

steel, and even concrete, that have been used for utility and a unique

look. Do your homework to determine which surface is best for you and

your cooking style.

 Size: The size of your counters and cabinetry and how much storage

space you’ll need depends upon your cooking style and equipment.

Many people like to display their pots in pot racks and others prefer a

kitchen that hides everything cuisine related.

The choice of shelving and inserts requires much thought about your

lifestyle and needs in the kitchen. Think about the way you like to cook in the

kitchen. Make an inventory of all your cooking tools and machines. Then plan

in advance and make a map of where they might live. If you’re a kitchen

gadget-hound that needs everything at your fingertips, then you’ll want

plenty of counter space and electrical sockets for your juicer, meat slicer, and

George Foreman grill.

100

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Feng shui — The art of balance

Feng shui has had a huge impact on design,

especially when it comes to housing. Feng shui

is an ancient Chinese system of philosophy, sci-

ence, and art. Its purpose is to connect people

with heaven and earth. It’s based upon the inter-

action of the environment with energy and

intention. The feng shui philosophy seeks to

obtain a balance between opposites in the envi-

ronment. So, for example, feng shui philoso-

phies can determine room placement, window

and door location, and so on. If you make a feng

shui mistake, to maintain good feng shui, you

may need to create fixes such as hanging coins

or mirrors to remove imbalance.

Many people find feng shui suitable for creating

their own interior design guidelines and even

necessary for resale if building in a city with a

large Asian American population. You can find

out more about feng shui in Feng Shui For

Dummies written by David Daniel Kennedy

(Wiley).

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Appliances

You can probably expect your oven, stove, refrigerator, and dishwasher to

last a minimum of ten years. More and more people are choosing cosmeti-

cally matching suites of appliances that are matched and installed. Home

shows are the best place to find the appliances that will suit your budget and

your cooking needs. Pick the largest and best you can afford. You can get

great information and compare appliances at www.consumerreports.org.

Beware of deciding on industrial equipment. Some stoves designed for

restaurant use have different power requirements and safety standards than

consumer-designed equipment. Many companies, such as Viking, Wolf, and

GE, make commercial-grade equipment designed for consumers.

Flooring

Aside from its appearance, the main consideration when selecting kitchen

flooring is to remember that it gets the most traffic and requires the most

cleaning. Carpet collects dirt and crumbs and so does tile grout. Smooth tile

can be pretty, but every dish you ever drop will smash to smithereens. Gaining

popularity are waterproof-composite floors such as Pergo or WilsonArt. These

floors come in a variety of textures and styles impressively looking like slate or

wood, making for a well-designed alternative to linoleum or vinyl. Many archi-

tects believe that the best surfaces for kitchens are wood or stone.

Bathroom considerations

After the kitchen, bathrooms are the next most expensive rooms in the house.

The labor necessary for all that electrical, plumbing, and tile work adds up

quickly. Plus you only have to create one kitchen, whereas you may have mul-

tiple bathrooms. Each one can rival the Taj Mahal if you want. You can find

specific details on designing good bathrooms in Bathroom Remodeling For

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Custom or prefab?

A big debate rages on about custom cabinetry

versus units that are made in factories. The pre-

fabricated companies claim quality control is far

better and you can’t beat the price. Today’s

technology allows for tremendous customiza-

tion of prefab components suiting most situa-

tions adequately. However if you’re looking to

create something worthy of the museum of

modern art, then you need a custom cabinet

maker. Custom cabinetry can cost more than

three times the amount of prefab, but they make

better use of your kitchen space because

they’re designed to fit exactly. The good news?

These artisans can create incredible pieces of

curvy-grainy-spectacular-laminated art that will

be the envy of kitchen guests for decades.

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Dummies by Gene Hamilton and Katie Hamilton (Wiley). Here are the major

considerations for the bathroom:

 Size: A full bath has a sink, a toilet, and a bathtub/shower. For a three-

quarters bath, take out the tub; a room with only a sink and toilet is a

half bath or powder room. Decide what is necessary for each designated

area. Master suites and guest live-in areas generally require more space

with full amenities.

 Surface: Tile has the cost attractiveness as well as decorative versatility,

but grout can be difficult to keep clean. If using pedestal sinks, you can

save on counter work. Complete prefabricated cabinet and counter units

are also available for less formal cost-effective bathrooms.

 Ventilation: Most exhaust fans are installed for code but serve little pur-

pose. Decide on your most desired form of ventilation. An open window

still serves as the most popular and efficient. Be alert to sightlines for

privacy from neighbors.

 Luxury: Big sweeping claw-foot tubs, Jacuzzi tubs, built-in saunas, steam

showers, and the like are available to make your master bathroom your

slice of heaven. Many of these amenities need to be installed early in the

process and require high maintenance, which can be annoying and

costly. Make these choices early and research to see which pieces

appear relaxing but are really more trouble than they’re worth.

Bedrooms and home offices

Most people don’t designate between guestrooms, den, office, or workout

rooms because these rooms change based upon the usage of the family living

there. The most versatile designs give these rooms easy access to bathrooms

and equal appeal as the design allows.

The master bedroom is your reward for paying for this project. You want it

to have plenty of room for relaxation with a great view for those romantic

moments. A touch of privacy is desirable, so placement of the master bedroom

away from other bedrooms and heavy traffic areas helps provide seclusion.

Also, plenty of room for closet space is a required necessity for shopaholics.

Aside from the master bedroom, the other bedrooms need to be designed for

optimum utility. Take advantage of light and views where you can and make

sure each room has adequate storage space. Each wall needs to have at least

two electrical sockets to accommodate technology.

Closets can gain greater clothes capacity through closet organizers. A wide

variety of companies today manufacture design systems and materials for

creating efficient closets that hold significant amounts of clothes, shoes,

and stuff. To get an idea of available options, check out

www.california

closets.com

or for you do-it-yourselfers, try www.closetmaid.com.

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Dining and entertaining

Dining rooms and family rooms often center around food and need to have

reasonable access to the kitchen. Decide whether a television is a critical

part of your food time; otherwise you may find yourself eating on TV trays in

your family room. If you want a home theater, understand that it’ll have its

own special needs in terms of acoustics and technology. You can start that

research with Home Theater For Dummies by Danny Briere and Pat Hurley

(Wiley).

The biggest mistake we have seen in entertaining rooms is people wasting

money on built-in furniture. For storage, your needs will change — and so will

the furniture. Built-in cabinets in dining rooms can go out of style or create

furniture placement problems. Building furniture around TVs and stereos has

proven to be a bigger waste of money as the technology changes make TV

styles obsolete every seven to ten years. For example, yesterday’s bulky pro-

jection TV has given way to the compact, wall-mounted flat screen, making

large cabinets useless and cumbersome.

Running water will be an important consideration for entertaining. Any rooms

with a wet bar need running water, drainage, and power for a dishwasher and

the all-important blender for daiquiris and margaritas. Additional cabinetry

may be necessary as well.

What’s in a garage

Some people may consider the garage as only a home for their vehicles.

However, other people view their garage as a workshop and storage unit.

Your garage can serve all these purposes with a little planning.

When designing your garage, think about storage access as well as the space.

You want to get to everything while avoiding obstacle courses or throwing out

your back. Consider dumbwaiters for storage above. If your space includes a

workshop, take into account ventilation and noise. You may add extra fans and

insulate with soundproofing, which adds to your comfort in extreme weather.

Make these choices early on so you can plan for power and water needs

accordingly.

The Devil Is in the Details

Earlier in this chapter we discuss basics for the house, but really the little

details will make this house something to cherish. For those of you who love

detail work, these projects are just what you’re looking for to personalize

your new home. If you don’t love detail work, take some time to get organized

because you can’t leave out anything. If you’re completely detail-challenged,

you can pay an architect or a designer to help you through this process.

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Many people choose to leave the details to the contractor, but doing so often

leads to misunderstandings on types of materials and costs late in the

process. Avoid the headache. Make the decisions in advance and communi-

cate with your contractor what you want.

Materials, hardware, fixtures, and finishes

Check out Table 5-1, which contains a comprehensive list of items that you

need to consider for your new home and different questions to ask yourself.

Chapters 12 and 13 outline the installation for most of these materials as well

as certain advantages and disadvantages. Use this table as a shopping list for

when you’re estimating your costs.

Table 5-1 Important Details to Consider

Specific Items Questions to Answer

Appliances What brands? Do you want free-standing or built-in?

Baseboard What type of wood? What kind of finish?

Carpet What type do you want? Wool or synthetic? What color? What

kind of pad? How thick do you want the pad?

Crown molding Do you want it? What type? What kind of finish?

Doors What style do you want? What type? What finish? How many?

Door handles What style and color do you want? How many?

Door hinges What type and style do you like? What color? How many do you

need?

Eaves What type and finish do you want?

Exterior facade What color and style do you want? What type of material do

you like?

Exterior trims What type and finish do you want to match your exterior

facade?

Faucets How many do you want? What styles? Do you want any outdoors?

Fireplace What type of face and mantel do you want? Do you want a

hearth? If so, what type? Will it be gas, electric, or wood burning?

Floor tile What style and color do you prefer? What color do you want

for the grout?

Front door Do you want glass or solid? What type of material, fiberglass,

or wood? What color? Do you want a screen door?

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Specific Items Questions to Answer

Handrails What type of wood do you want? What type of finish?

Hardwood floors What style do you like? What kind of thickness and width?

What color stain do you prefer?

Heating and Will it be a forced air system? How many pump units? How

air conditioning many tons of cooling? Will you have any radiant floor heating?

Will you use Zone heating and cooling for efficiency?

Insulation Will it be rolled insulation or blown? What rating will it be?

Interior walls What type of materials? What kind of finish?

Lighting fixtures How many do you want? What types?

Roof What type of shingles do you want? Do you want a flat or

pitched roof?

Wainscot Do you want it? What types of finish and wood do you prefer?

Wall tiles Do you want them? What type (decorative, monochromatic,

accents)?

Windows What thickness do you want? What type (metal, wood, or

vinyl)?

Make all your decisions now —

Allowance is a dirty word

Be prepared to put a lot of time into the material selection process. You’ll

have to make all those decisions at some point. It’s never a question of how

much time you’ll have to spend on this shopping process; it’s merely a matter

of when you’ll do it. Our recommendation is to select materials as early in the

process as possible.

Many people spend less time on the small details during the design process

and defer them until their home’s basics are erected. They take their plans to

the contractors who bid based upon estimates for the finish materials they

call allowances. Doing so is a recipe for disaster. Contractors make their own

decisions about the quality of materials you want and their assumptions may

not be accurate. Also, you may not like what they have chosen and it may be

too late to get what you really want.

In our experience, putting off the shopping for materials until the end of the

project is the No. 1 reason for projects going over budget! Spend time at the

beginning to make the decisions or pay your architect extra money if you’re

using one. You need to pick out every hinge, fixture, and appliance before you

get price estimates for your project. This way you insure that all bids from

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subcontractors are equal, and you can be sure of the availability of materials.

Doing so also removes surprises and gives you the most accurate financial

picture.

The Internet is an awesome place to find materials prices and even unique

hardware. Just go to www.google.com and type in “hinges” or “doorknobs”

(or whatever you’re looking for), and you’ll be delighted with the many

choices available. You can even buy antique lamps and hardware in a cost-

effective manner at auction sites such as www.ebay.com! For a more hands-

on experience, you can go to showrooms, such as Ikea (www.ikea.com) or

Home Depot Expo (www.expo.com), to see kitchens and bathrooms and get

a feel for functionality.

Energy efficiency — Saving the

earth (and your money!)

We can think of several areas in your home that you can enhance to conserve

energy and be more environmentally friendly. We list a few here and provide

additional resources in Chapter 22.

 Doors and windows: Today, advancements with double-pane windows

and gas-filled panels reduce the ability of glass to transfer energy. Check

out companies like Marvin Windows at www.marvin.com, Pella at www.

pella.com

, and Anderson at www.andersonwindows.com for the latest

achievements.

 Insulation: A tight house is an efficient house (but keep in mind that

a house that is too airtight can be an unhealthy house). Houses need

proper ventilation so the air stays fresh and you don’t breathe your own

carbon dioxide. You can research or discuss with your architect meth-

ods and materials that provide maximum insulation at a reasonable cost.

In extreme environments, insulation will be the No. 1 factor for energy

savings.

 Energy-efficient appliances: Many manufacturers make lines that focus

specifically on energy savings. Many local utility companies offer

rebates for choosing appliances with lower energy ratings.

 Solar power: Many people have saved money by supplementing their

energy with solar panels. The technology has improved since people

started using solar power in the 1970s. Panels have become smaller

and lower profile. Many options are available through sources on the

Internet.

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 Heating, ventilating, and air-conditioning (HVAC) system: Over-

estimating the cost of HVAC happens often because everyone wants a

more efficient air system, a reduction in noise, and comfort, especially

when the weather is extreme. Larger systems may cost more, but you

typically can make up the extra cost in savings when the energy bill

comes around.

Considering technology options

Technology has never been as much a part of individuals’ every day lives

as it is today. The Internet is a regular part of home life, and more and more

people can work at home because of it. Custom homebuilders often tend to

want to add every new piece of technology offered. Check out Smart Homes

For Dummies by Danny Briere and Pat Hurley (Wiley) for more details about

all the different choices.

Kevin has seen the pros and cons of working with house technology over the

last several years, and he has a few pointers.

The less technology-specific the home the better

Technology changes faster and faster today. Kevin has clients who only five

years ago spent a fortune to run state-of-the-art Cat-5 computer wire through-

out their homes. Today, wireless routers render the wire obsolete.

Design your house to accommodate any new technology by providing tubing

(conduit) and cubbies that give you general access points to rooms in the

house. Mark the access points clearly so you can always add things where

you want them.

Make sure you have ongoing support

Technology companies come and go. Sometimes the most innovative go up in

a ball of fire the fastest. Whatever technology you install in the house needs

to be maintained and serviced. If the manufacturer goes out of business, your

technology may be as useful as that 8-track tape player in your attic.

Watch the budget

Your house project may take years, and new features that are better than

what you install will be available. Buy only what you’re truly likely to use.

Kevin has one client that spent more than $350,000 making his house a smart

house. By the time the three-year project was finished, most of the technol-

ogy could have been installed for a mere $35,000. Talk about one unhappy

client!

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Chapter 6

Engineering and Plan Approval:

Bureaucracy Made Somewhat

Easy

In This Chapter

 Reading your plans

 Getting approvals

 Obtaining permits

ouldn’t life be great if you could simply sketch your house on the back

of a napkin and the contractor would magically build exactly what you

had in mind? Whether designing a log, stick built, or timber frame home, sadly

the process is a bit more complicated; your project requires outside expertise

and approvals. In this chapter we take the mystery out of looking at blueprints

and plans. We talk about engineering the working drawings. We also explain

the design review process and discuss acquiring and paying for permits.

Understanding Plans and Blueprints

If you have ever built model cars or airplanes, you know how important the

instructions are. Nothing gets you into trouble faster than trying to assemble

that model by looking only at the picture on the box.

Obviously, having instructions when building a new home is essential.

However, because a house is a complex structure made of many different sys-

tems, your instructions (or plans) need to include many different drawings.

A typical set of plans will include 30 to 50 pages of specific instructions on

how to build your house. The plans first include a set of preliminary designs

or prelims. After these prelims are approved, the engineer prepares the work-

ing drawings for constructing the house. (See “Working drawings: The how-

to-build-it papers” later in this chapter for more on working drawings.)

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Architects and engineers often draw plans in quarter-inch scale, meaning that

each

⁄4 inch on paper represents 1 foot in real life. You can read the drawing

measurements easily with a ruler by measuring any line and dividing the

number of inches by 4 to understand how many feet long any straight line

will be in real life.

Prelims — Floor plans, site

plans, and elevations

The first designs will be rough sketches and drafts drawn by an architect or

designer. They may include scratch drawings and renderings, which are an

artist’s version of what the house may look like. If you buy plans from a book

or online as discussed in Chapter 5, you can skip the rough sketch phase of

the process. Plan software also discussed in Chapter 5 provides a neat way to

try different floor plans with ease.

As soon as you and your architect, if you’re using one, have made some basic

decisions on style and size, the architect will draft preliminary drawings. These

drawings are necessary to show the house in three dimensions. The prelims

will be used primarily for making initial decisions, such as room placement and

size, with your architect, as well as preparing for the initial design approval

process. (For the nuts and bolts on the design approval process, check out

“Submitting Your Prelims for Approval” later in this chapter.) Creating these

prelims is an ongoing process of reviewing drawings and making changes. If

you’re buying plans, the plan company provides you with the prelims. If you’re

using a software program, the prelim creation is your responsibility.

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Why are blueprints blue?

Blueprint is a long-surviving term, more than 150

years old, that comes from the fact that repro-

ductions of plans for construction were always

blue with white lines representing the drawings

and words on the page. The construction indus-

try needed a way to make exact replicas of

large drawings with exact measurements

because the corner Kinko’s was unavailable.

Architects and draftsmen first drew their plans

on tracing paper. The translucent paper was

placed on light-sensitive chemically reactive

paper and soaked in chemicals that turned all

the light exposed areas blue and left the lines

white. This system was a cost-effective method

for creating multiple sets of perfect duplicates

suitable for construction. Later, the process was

reversed to create blue-line prints where the

lines are blue and the paper is white. Although

blueprints and blue-line prints are still used

today, most architects now use Computer Aided

Design (CAD) systems and simply print plans on

large printers. The term blueprint has stuck and

now means any sort of master plan.

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These prelims consist primarily of three basic elements:

 Floor plans (see Figure 6-1): Each floor of the house has a layout that

shows the following:

• The location of each room

• The placement of each door and window

• The location of other amenities, such as stairs, fireplaces, closets,

and major fixtures such as kitchen cabinets and showers

 Site plan: The site plan shows how the house and other buildings such

as the garage will sit on your lot (see Figure 6-2). The site plan explains

the position of the house and the direction it faces. It also specifies how

far it sits from the street and neighbors’ houses based upon the required

setbacks discussed in Chapter 3.

 Elevations: The elevation drawings illustrate what your house’s exterior

will look like from the ground up on each side (see Figure 6-3). Most ele-

vation sets show the house from all four directions. The plans illustrate

exterior windows and doors as well as any ornamentation in the design.

From these plans, you can measure the height of the structure and its

elements.

Courtesy of Tecta Associates Architects, San Francisco

Working drawings: The

how-to-build-it papers

After the prelims have been finalized and approved, the architect and engi-

neer create working drawings. Working drawings are a series of individual

papers giving explicit instructions on how to build the house. They give you

A1.2

FIRST FLOOR

PLAN

SHEET TITLE

SHEET NUMBER

ASSOCIATES

03/03/00

APPROVALS

REVISIONS

PROJECT

BACON STREET

NEW RESIDENCE

OAKLAND, CALIFORNIA

CONSULTANTS

140 GEARY STREET SUITE 1004

SAN FRANCISCO, CA 94108

415-362-5857

415-362-5044 FAX

213-469-2609

planning

TECTA

architecture

interiors

LOWER FLOOR PLAN

AREA=1805 S.F.

DATE

06/19/00

Figure 6-1:

Example of

a floor plan.

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every detail for construction including where to put the plugs and switches

as well as the number of rafters in your roof. Furthermore, the working draw-

ings include all the technical specifications and requirements for engineering

and compliance with building codes. Each of the systems in the house is

specified in the working drawings.

Courtesy of Tecta Associates Architects, San Francisco

In addition to the floor plans, site plan, and elevations, a typical set of work-

ing drawings has individual drawings for each structural system of the house.

These individual working drawings

 Provide all the technical specifications necessary for contractors and

subs to bid on your project. Each different section goes out to a different

craftsman so they can determine the time and materials necessary to

complete the project.

 May include some variations if you’re working with a design-build firm

like we discuss in Chapter 5. Because the same firm will be handling

both the design and building process, it may combine or reorder some

of the technical pages to fit its process.

ENTRY ELEVATION/ EAST

Figure 6-3:

Example of

an elevation

drawing.

SITE PLAN

Figure 6-2:

Example of

a site plan.

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 May contain other pages that detail specific construction of parts that

require extra detail such as unique staircases or particular architectural

elements.

 May also include pages specifying energy calculations where required by

the building department.

Working drawings generally include the following documents drawn in equal

scale:

 Architectural plans: Site plan, floor plan, elevations, cross sections, wall

sections, schedules of materials, and details

 Civil plans: Site plan, grading plan, and details

 Electrical plan: Outlets, switches, and lighting plans (see an example in

Figure 6-4)

 Landscape plan: Landscaping layout, irrigation plans, schedules, and

details

 Mechanical plans: Furnace and ducting plans and details

 Plumbing plan: Plumbing riser plans and isometrics, and details

 Structural plans: Foundation plan, framing plan, cross sections, and

details

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Building codes and ABCs

Building codes are rules and guidelines that

specify how construction should be completed

so that buildings will be safe. They address

issues such as the requirements for electrical

wiring, the size of pipes, how far to place fram-

ing posts, and so on. Unfortunately, no one stan-

dard building code exists for the entire country

(or for the entire world), although it would cer-

tainly be easier if there were. Most municipali-

ties have adopted a regional code and then

created variations as required for their area.

In the United States, the basic codes come from

the following published codes:

 The Uniform Building Code (UBC): Widely

used in the West.

 The Standard Building Code (SBC): Widely

used in the South.

 The National Building Code (NBC): Until

recently, widely used by everyone not using

the UBC or SBC.

 The International Building Code (IBC): The

latest code, being adopted by everyone in

all regions.

Your contractor, subs, architect, and engineer

need to be knowledgeable with the codes for

your area. Some regions, such as California,

have more stringent code requirements than

others due to seismic or other environmental

issues. If you want to find out more about build-

ing codes or check a specific code, try

www.

codecheck.com.

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You can see an example of how these system drawings are isolated in Figure

6-5 so each sub can focus on his or her work.

Courtesy of Tecta Associates Architects, San Francisco

Working with the Building and

Planning Departments

Many of the nightmare stories you may hear about custom homes stem from

dealing with local government during the plan approval process. The local

county or city has to approve your designs and make sure the plans fit with

their rules and regulations in a process called plan check. You have to pro-

vide to the local government offices all your plans and anything else they

may ask for, which varies with every department in every municipality.

Figure 6-5:

Each box

explains to

the sub

specifically

how to

construct an

individual

section of

the house.

LOWER FLOOR REFLECTED CEILING PLAN

ELEC./MECH.LEGEND

Figure 6-4:

This

electrical

plan shows

the

electrician

where to

wire the

house for

sockets,

switches,

and junction

boxes.

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If everything goes smoothly, then you can be ready to break ground in three

to six months from the time you first call your local planning office. (Of

course, this time frame varies widely depending upon where you live.) If you

hit a snag, then all bets are off. Kevin has clients who have battled building

and planning departments for more than a year. The best way to prevent

problems is to work with experienced architects, engineers, and contractors

(if involved at this time) that know the department you’re submitting to.

These professionals can use their relationships and knowledge of the local

government inner workings to chart the fastest, smoothest course for

approvals and save you from making costly mistakes.

Here are additional pointers to remember to make the process of working

with the building department go smoothly, especially if you have a problem:

 Keep communicating. First and foremost, keep the lines of communica-

tion open. The permitting process is all about passing information back

and forth. Ask a lot of questions so you’re sure you understand how

everything works.

 Be complete. Most building departments hand out or post online the

information required to apply for a permit. Have all your information

together in a nice neat package. Make sure it’s complete when you turn

it in. If you piecemeal the process, you’ll frustrate the clerks, inspectors,

or plan checkers and they won’t be able to make informed decisions —

possibly leading to costly delays.

 Deal with one person. One helpful person can make all the difference in

a building or planning department. Dealing with the same person can

keep you from having to explain your situation again and again. Find a

person that you can work with. If you respect this person and give him

or her a pleasant experience, then he or she is more likely to give you

one.

 Have a single point of contact on your end. Plan-checkers, clerks, and

inspectors get frustrated and confused by getting what can be conflict-

ing information from the architect, the contractor, and the client. Pick a

contact on your side, keep in touch, and trust in your contact. Most

people choose to make the architect or contractor the contact because

they usually have longstanding relationships with the local employees.

 Be persistent. Most building and planning departments are underfunded

and understaffed. They’re busy, and there is always a bigger problem to

take your place. Don’t be afraid to call regularly to get the response you

want. Be careful not to pester needlessly however. Pick your battles, but

when there is something you really need, press the issue. Letting them

know the realistic timelines at stake helps so they can set priorities in

their workload.

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 Don’t be intimidated or intimidating. These people are civil servants;

they’re there to help you and want to do so. Don’t be afraid to be igno-

rant of the building process, and don’t be afraid to ask questions. At the

same time, treat everyone in your building department with courtesy.

Even if you hit a roadblock, you’ll get further in the process with calm

discussion than with angry theatrics. Smiling and saying thank you goes

a long way in reminding people that you’re human. A friendly tasteful

joke once in a while may make that civil servant the inside friend you

need.

Submitting Your Prelims for Approval

Before you spend thousands of dollars engineering plans and creating work-

ing drawings, you’ll want to get approvals for the preliminary design of your

house.

Generally, in rural areas, the design approval process is simple and has mini-

mal limitations. In rural areas, houses are typically separated by vast acreage

and the county is seldom concerned about what your house looks like as

long as it meets the safety and building code requirements.

But if you plan to build in a higher density neighborhood or planned commu-

nity, the guidelines can be strict and the design-approval process exhausting,

especially if you’re looking to bend the rules. Keep reading for info about the

design review process.

Addressing grading, septic,

and well issues

Before you submit your prelims for approval, the county may require special

separate permits for specific items such as grading, well, and septic systems.

These approvals and permits may need to be handled by you, your architect,

or your contractor before the house plans are completed based upon the

needs of the lot. You may encounter some restrictions with grading, well, and

septic systems. For example, the building department may only issue grading

permits at certain times of the year to prevent erosion when grading a hill-

side prone to geological issues.

Find out about any grading restrictions in your area before starting the per-

mitting process. By taking time-sensitive issues into account in the beginning,

you can avoid stopping and starting your project, which can create financing

and labor problems down the line.

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Wells and septic systems need to meet county standards for habitability as

well as environmental concerns. The county may have minimums for water

pressure allowable for the size of the house. A similar issue can exist for

septic systems. If the soil doesn’t support a standard system, the county may

require a more expensive engineered system or restrict the size of the house.

Exploring these issues first with your architect and other professionals who

can certify wells and septic tanks can save you time and money. Otherwise

you may run into a brick wall on your approval and have to redesign the

house from scratch or — worse — find out you can’t build at all.

Understanding design guidelines

Have you ever wondered why all the houses in a neighborhood seem to have a

similar look and feel? The similar look and feel isn’t by chance. Neighborhoods,

cities, and counties often develop specific guidelines that govern what you

can build and how you can build it. Furthermore, other agencies such as the

Coastal Commission may also have to approve your design if you’re building

near the coast. You can obtain these published planning and building depart-

ment regulations from your local planning and building departments.

You also need to be aware of other guidelines that were put in place when

your lot or neighborhood was created. You can find some of these rules in the

covenants, conditions, and restrictions (CC&Rs). You should have received a

set of the CC&Rs when you bought the lot. If you didn’t, you can ask the title

company from your purchase to get you a copy for free. Subdivisions older

than 50 years likely have a minimal set of rules. They may not have CC&Rs

that are pertinent.

Newer subdivisions are usually developed with specific themes. Seaside

areas or golf course developments may have very restrictive guidelines to

make sure you’re staying within the theme of the development. No one in a

planned Spanish-style development wants to drive by a giant Cape Cod house

everyday. You can obtain these rules from the homeowner’s association

(HOA). Depending upon your neighborhood, the guidelines may include the

following:

 Architecture style

 Drainage

 Environmental issues

 Exterior finish materials

 Height of the house

 Landscaping restrictions

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 Minimum and maximum size of the house

 Paint color

 Types of the following building materials:

• Doors

• Roof

• Windows

Developers and HOAs establish guidelines to ensure that no one house is

imposing upon the pleasure of any other homeowner in the neighborhood.

Most likely, after you have successfully built your house, you too will adopt

a NIMBY attitude (which stands for Not In My Back Yard) and will become

a vigorous defender of your neighborhood’s guidelines.

Requesting variances and exceptions —

Don’t be Don Quixote

Some smaller cities and neighborhoods have volunteer design review com-

mittees, whose members may be appointed or elected by the community.

Although such committees may have a government employee involved or in

attendance, most are dominated by residents concerned with the preserva-

tion of their neighborhood’s particular aesthetic feel. Design review commit-

tee members are passionate about determining what other people’s houses

must look like, so you’ll need approval from this committee to build your

new home. If you’re lucky and careful, the process can be short and sweet; if

you’re not lucky — or worse, careless — the process can take far longer and

be more harrowing than the building of the entire home itself.

Because you’re building a custom home, you have already made a statement

that you’re dissatisfied with the homes already available in your neighbor-

hood or community and want something more unique to suit your taste. As

a result, design review isn’t likely to be a picnic. For design review, you’ll

submit your preliminary plans to the design review board, neighborhood

association, and/or planning department to get approval for the basic design

of the house. They will review the plans and return them to you with a list of

everything they don’t like. Subjective guidelines such as style and colors may

provide for negotiation for an exception. Objective rules such as exceeding

height limits likely require a variance to the guidelines.

The best way to deal with variances is to design a house that doesn’t require

them. Working with an architect familiar with the community’s regulations

may help. If you’re looking at too many restrictions for what you want to

build, you may want to consider a different piece of land entirely.

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No one has the right to a variance or exception. You can request it but it may

be turned down. Some people choose to fight restrictions legally by showing

evidence that similar variances have been granted in the past. If you under-

take such a battle, you may win but at a great expense of time and money.

Remember, even if you take your case to court, there’s no guarantee you’ll

win. Furthermore, you may ultimately win a long drawn-out design review

battle and end up losing the war. Don’t forget that the design review board is

comprised of your neighbors. A protracted battle filled with hate and law-

suits can make for a rather hostile housewarming when it’s time to move in.

Not so fast — Acquiring

neighbor approval

Just because the local design review association or planning department says

they like the house doesn’t necessarily mean you’re home free. In many cities

you still have to get neighbor approval before presenting your project to the

design review board or planning department. Getting neighbor approval most

often occurs when you’re building in a long-established neighborhood, but

not necessarily. This neighbor approval process gives you the opportunity to

inform your neighbors and prepare them for the new addition to the neigh-

borhood before you submit your plans. (The city will tell you if you need

neighborhood approval.)

As a part of seeking this approval, you may be required to erect story poles.

Story poles are wooden boards that outline the perimeter and height of the

house as shown in Figure 6-6. These poles are required to stay in place for

a designated period of time while your soon-to-be neighbors assess if your

house will block their sun exposure, lake views, and so forth. Your neighbors

will then be given the opportunity to challenge the approval of your building

plans, which can turn into an unpleasant experience.

The earlier you establish a friendly, working relationship with your neigh-

bors, the better your overall custom home experience will be. Just by plan-

ning ahead, you can reduce the stress level when submitting your plans and

possibly start to develop good relationships with your new neighbors.

Consider the following:

 Take into account your neighbors’ sight lines and exposure before

you commit to the design. Ask if you can look through their windows to

see the impact on their property.

 Put yourself in their position. What would you think of living next door

to your planned home?

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 Get their feedback and support for your project. Kevin has one client

who threw a wine and cheese party for the neighbors so they could

come and see the plans before submitting. He had rousing support at

design review. This process has been a favorite of architects he has

worked with as well.

Courtesy of John Stetson

Gathering the Permits You Need

After the prelims have been approved, you can start moving down the per-

mitting path. Don’t worry; this process is a lot more cut-and-dry than the

design review. The building permits are there to make sure that your final

plan meets with the minimum standards required by your local city or

county. The rules may be set for reasons of safety, logistics, or for environ-

mental or other reasons. (No one has come up with a code to restrict

teenagers to their rooms yet, but who knows, maybe soon.)

You or your architect will hire engineers to make sure you’re meeting the

needs of your local government and help create the working drawings. The

permitting process isn’t always a short one. If everything goes smoothly, you

may get through it in a few months. Some processes can take more than a

year with complications or bureaucratic difficulties.

Many building departments have a preliminary review process. For a fee,

they look at all your working drawings after design review or before you for-

mally submit the information to the planning department. They’ll let you

know if they notice anything questionable or potentially against code so you

can fix it first. Utilizing the preliminary review process can get you through

the formal process fast and easy.

Figure 6-6:

Story poles

are required

in some

cases to let

neighbors

know how

your house

will affect

sight lines

and

aesthetics.

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Submitting and revising

the working drawings

After the designs are approved and the working drawings finished, you, your

architect, or your contractor (if involved at this point) submit the working

drawings to the building department with appropriate fees required for appli-

cation. These fees get the ball rolling.

The plan checkers scrutinize the working drawings to make sure they meet

all the local codes and requirements. The plan checker marks the working

drawings with red pencil for correction or in rare cases turns the plans down

for permit. (If turned down flat, you’ll need to have the plans re-engineered.)

You, your architect, or your contractor, if you’ve hired one yet, can pick up

the marked plans at the building department. The architect and engineer

make the requested changes to the working drawings and resubmit the plans

to the building department.

If the plan checker still isn’t satisfied, he’ll red pencil the plans again and

request they be fixed again. This process continues until the plan checker is

fully satisfied, at which point the plans are officially approved.

In some areas, you may need to go through this process more than once. The

plans may require review by a local city department and a county depart-

ment. Different local governments have different jurisdictions for code, so

they’ll dictate their own approval process. Discuss the plan check process

with your architect and engineer so you’re clear on the steps and timing.

Picking up permits and paying the fees

After the building department has fully approved your plans, you or your

contractor, if he’s involved at this point, can pick up the permits.

You’ll write a large check for all your permits and the remaining fees and pick

up the permits so you can break ground. The costs vary widely from area to

area, as do the names for the fees, but you can expect your permits and fees

to cost between $3 and $10 per square foot of building area. You’ll have to

pay these fees in full before you’re allowed to begin building on the property.

Often these fees cover general expenses for the neighborhood’s local infra-

structure as well as overhead for the local government. (Remember, the city

or county has to cover every cost and support the numerous staff members

necessary to run their departments.)

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The following list contains many of the fees you can expect to pay:

 Appeal fee

 Building permit

 Design review fee

 Drainage study fee

 Grading permit

 Land use permit

 Parks and recreation fee

 School fee

 Tree permit

 Variance fee

 Walkway fee

Although the cost of these various fees shouldn’t be deal breakers for you, be

sure you have sufficient funds budgeted for them and that you’re prepared to

pay when the time comes. Even though you may have to pay these fees out

of pocket, you may be able to reimburse yourself through your construction

loan if you included them in your budget. See Chapter 9 for more details on

how these fees fit into the construction loan budget. These fees can often be

reimbursed immediately by showing the bank the receipts. We talk about

reimbursing these fees in Chapter 10.

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Part II

All You Need Is

Dough: Financing

Your Custom Home

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In this part . . .

our custom home project needs plenty of money.

Either you have the cash or you don’t! In this part,

we explain the need for cash and how to determine if a

lender is necessary. We walk you through the entire con-

struction lending process including getting approved and

picking the right loan. We also show how you get your

money from the lender during the building process.

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Chapter 7

Cash Is King: Using Debt

to Your Advantage

In This Chapter

 Figuring out your cash needs

 Analyzing how your new home and finances fit together

 Managing the cash

 Protecting your home as an investment

 Postponing some financial decisions until the house is complete

his chapter may be one of the most challenging to accept, but within its

pages, you can find some of the most important concepts in this book. A

construction project lives and dies on the availability of funds. Without access

to cash when it’s needed, a construction project will quickly come to a grinding

halt. Most people want to be fiscally conservative when dealing with a large

financial project like building a home. The challenge, however, is in under-

standing exactly what fiscal conservatism is really all about.

To make good decisions with your finances, spend some serious time educat-

ing yourself. No need to bury your head in the sand from the fear of numbers;

you can access all kinds of information on the Internet and through the help

of financial professionals. The more you find out about financial management,

the better equipped you’ll be to make the right decision for your situation.

In this chapter, we explain why having adequate cash on hand is so impor-

tant. We also help you put borrowing in the proper perspective, and explain

concepts that can help you protect your investment and manage your cash.

Finally, we give some tips for deferring major financial decisions until the end

of the project, when you have the information you’ll need to make a good

decision.

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Accepting the Need for Cash,

Cash, and More Cash

You may be wondering why cash is so important if you’re already planning to

get a construction loan and not relying on savings to fund building your new

home. The answer is simple: Whether or not you borrow money, your custom

home project will suck up cash like a vacuum cleaner. If you have enough

money, you’ll be fine, but run out of cash and you’ll be in a big time world of

hurt.

A construction loan does cover a significant portion of the funds to build your

home, but you’ll also face some significant restrictions and procedures for get-

ting that money, so having extra cash on hand will keep the project moving.

Not only that, but you need some cash before your loan is in place to cover

expenses like permits, and after it’s complete in order to pay for moving in

and landscaping. In addition to your construction loan, you may end up need-

ing as much as 40 percent of your total budget in cash to make the project

work. We explain how construction loans work in Chapter 8 and discuss how

you get your money from construction loans in detail in Chapter 10.

If you’re still not convinced, consider the following reasons why extra cash is

necessary even if you’re financing your project through a bank:

 You need a down payment for your land. Chances are, when you pur-

chase your land, you’ll need to make a down payment and pay for clos-

ing costs. See Chapter 3 for details.

 You need to make the loan payments and pay taxes on your land until

the construction loan is in place. It may take several months from the

time you buy your land before you’re ready to build and get a construc-

tion loan. You’ll have to make payments on your land loan and pay prop-

erty taxes while carrying the payment on your current home.

 You need to pay the soft costs. You have to pay for soft costs, such as

the plans, engineering, and many fees for permits before you can fund

your construction loan. See Chapter 6 for details about soft costs.

 You need cash to close the construction loan. Your construction loan

may not be big enough to cover all your costs for the project. Also, the

bank will want to see money in the bank beyond what is necessary for

the project for qualifying. See Chapters 8 and 9 for details.

 You have to pay the monthly costs during construction. Your loan may

have an interest reserve (or a pool of money set aside) to cover the con-

struction loan payments as described in Chapter 8, but you still have to

pay for property taxes and homeowners’ fees as well as the house pay-

ments where you’re currently living.

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 You need to fund the work between the construction draws (fundings

from the bank). The construction lender won’t give you loan proceeds

for a particular part of your project until the work is done. You’ll have to

put the money upfront, and be reimbursed by your construction lender

with the loan proceeds later. See Chapter 10 for details.

 You want to upgrade as you go. You may want to improve certain items

as you see the house come together, for example, substituting granite

kitchen countertops in place of the Formica ones you originally speci-

fied. Because you can’t increase the construction loan after you fund it,

you have to pay for the upgrades out of pocket.

 The project costs more than you budgeted. Do you want some sobering

news? Approximately 95 percent of custom home projects go over budget.

(Can you say ouch?) And when a custom home project goes over budget,

guess who pays? You. Although you may be the lucky 1 in 20 who doesn’t

go over budget, do you really want to take the chance with the largest

investment you’ll probably ever make in your entire life? We didn’t

think so!

 Landscaping, decorating, furnishing, and moving expenses. These items

probably aren’t included in your construction loan budget. Even if land-

scaping and hardscaping are included, the decorating of a new home can

cost a pretty penny.

 Something goes wrong. Always remember Murphy’s Law: If something

can go wrong, it will go wrong. Anything from your contractor winning

the lottery and abandoning your project to August snowstorms in

Arizona can unexpectedly create the need for more extra cash. Just

remember, as Yogi Berra said, “It ain’t over til it’s over!”

Breaking the Emotional Barriers —

This Is Not Your Father’s Depression

Many people approach their finances today using philosophies that have

been passed down through many generations. For example, the concept of

using extra cash to pay off your mortgage early was based on Depression-era

economics of the 1930s. In those days, banks were unsafe, Social Security was

merely a twinkle in the eye of President Franklin D. Roosevelt, and owning

one’s home free and clear was the only financial hedge most people could

rely on.

Of course, times change. Banks are safe, most people have retirement income

and/or Social Security to help out as they grow older and leave the work-

force, and a home is merely one of several assets that most people keep in

their financial portfolios. Are you living your financial life based upon the

philosophies of the 1930s?

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Although your elders may have handed down lessons to you, you also need

to realize that today’s economics are somewhat unique to the last 30 years.

Financial structures today are vastly different than they were — even a

couple of decades ago — and all different kinds of new tax laws and invest-

ment strategies didn’t even exist in Grandpa’s time.

Evaluating real estate

within your net worth

Calculating your net worth can give you a good perspective on your finances.

Many people make the mistake of separating their real estate — particularly

their homes — from the rest of their assets. If you’re like most people, your

house is probably your single largest financial asset. For that reason alone,

don’t ignore it. Chances are, of course, your mortgage is also your single

biggest financial liability. Understanding your asset and liability picture is

important to gaining the proper perspective for making major financial deci-

sions such as the structure of financing a custom home. Use the following

simple method for calculating your net worth:

1. List all your assets with their values.

Make sure you include the current sale value of your existing house, the

resale value of your cars, cash on hand, and any stocks, bonds, cash-

value insurance policies, or retirement money you may have squirreled

away.

2. Add up the total dollars of all your assets.

3. List all your liabilities (money you owe).

Don’t worry about the monthly payment amounts, instead, write down

the outstanding balances of your mortgage, car loans, student loans,

credit cards, and other debts.

4. Add up the total dollars of all your liabilities.

5. Subtract the liability total from your asset total.

This amount is your net worth.

Now that you know your net worth, you can assess how your real estate fits

in the picture:

1. Estimate today’s value of all your real estate.

2. Add up the amounts of all your mortgages.

3. Subtract the mortgage total from the value and this amount is your

net equity.

4. Take your net equity and divide it by your net worth.

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If the number is greater than .45, then you have too much of your net worth

tied up in equity. Even the most conservative investors don’t like to keep all

their eggs in one basket. Talk with your financial advisor, accountant, and

loan officer about the methods for increasing your liquidity or available cash

and the benefits of doing so.

Acquiring secured debt can be good

Everyone agrees that too much debt can be terrible, but we can think of sev-

eral good reasons to borrow money if you know you have the ability to pay it

back. Unfortunately, debt can easily get out of hand for some people. All debt,

however, isn’t treated the same.

 Unsecured debt is cash loaned to you strictly on your promise to pay it

back with interest (and any other fees that you and the lender mutually

agree to). Repayment of the loan isn’t guaranteed by any of your prop-

erty (home, automobiles, boats, and so on). Unsecured loans generally

have interest rates significantly higher (the words loan shark may come

to mind in some cases) than the prevailing prime rates that banks

charge their best customers.

 Secured debt is a different animal altogether. Repayment of the cash

loaned to you is guaranteed by some item of your property like a car

or your home. When debt is secured against an asset, it simply means

you’re making the asset more liquid. The asset still exists to pay back

the debt, and very few banks will allow you to borrow more money than

exists in the asset. In other words, you’re really borrowing your own

money out of the asset.

Because the loan is secured, the lender has less risk and will generally loan

you the money at lower interest rates. You can also receive government sub-

sidies for borrowing against assets such as real estate.

Getting on the same page —

How banks evaluate risk

Lenders don’t think secured debt is bad. In fact, they’d rather bank on some-

one with secured debt and liquidity (cash in the bank) than someone who

has no secured debt at all. Consider this example:

Two neighbors walk into the local bank. Bill Smith has a home worth $400,000.

He has paid off his home and has $20,000 in the bank. His net worth is $420,000.

Jane Clark, Bill’s neighbor, also has a net worth of $420,000, but Jane’s net worth

is structured differently. Her house is also worth $400,000. But Jane has a mortgage

for $300,000, and she has $320,000 in certificates of deposit and mutual funds.

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Who gets the bank’s attention?

The bank offers Jane its best signature loan for $200,000. She can have the

money today with five minutes of paperwork and no costs. Why does Jane

get this special treatment? Jane is no risk to the bank; she has ready cash

available to pay back her loan if necessary.

Bill, however, is sent down the hall to the mortgage department. He doesn’t

get a quick loan. Instead he has to apply for a secured mortgage, and then

wait for his money while the bank verifies all his information and performs an

appraisal on the house. Bill has no means to pay back the loan unless he sells

his house, so the bank wants to secure the loan to his house to protect its

investment.

So, even though on the surface Bill seems to be the most prudent investor,

he’s actually a walking, talking risk in the eyes of the bank.

How would you look to your lender? Consider changing your financial profile

to look more like Jane’s.

Changing perspective — Home

equity isn’t a savings account

Many people have the erroneous belief that paying off their home is just like

putting money in a savings account. Nothing could be farther from the truth.

Understanding this concept is important so you can make the right long-term

decisions regarding your custom home financing. Your home is not a bank!

Why not? Because

 When you put money into a savings account, you can withdraw the

money whenever you want. The only way to draw money out of your

house is through some sort of mortgage or credit line, which requires

time and often some costs.

 You can quickly move money in a savings account to better investments

as markets change. Equity is stuck in the house and can only be

acquired at prevailing rates.

 You can take out money in savings in any amount — no matter how

small — and at your discretion. You can only remove equity in large

amounts and at the discretion of the bank willing to loan money to you

based upon whether or not you qualify.

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Understanding the benefits of liquidity

When it comes right down to it, good old-fashioned fear is the biggest motiva-

tor for tying up cash in the home. Some people are afraid they might squan-

der their money, so they increase their payments. Others are afraid of losing

their job, so they increase their payments. Many are afraid of the economy

changing, so they increase their payments. To counter those fears, consider

some basic benefits of keeping your cash liquid instead of burying it into

your house:

 If you lose your job: If you lose your job, you’ll need to worry about a

lot more than just making your house payment. Borrowing extra money

on your mortgage for the sake of having cash in the bank can be an

excellent form of security. Even though having a house payment that is

$500 cheaper may make a financially difficult situation a little easier for

you, having a higher monthly payment with $100,000 in the bank will

make life a lot easier while you work on finding a new job. You can take

your time to assess the situation, and you can afford to take an extra few

months to find the right job — instead of feeling like you have to take

the first offer to come along.

 The economy: If the economy goes south, then you have cash on hand

to bail you out of any situation. If your house decreases in value, so

what? You already have the money to use as you see fit. If the interest

rates are on the rise, all the better for you because now you can get a

higher return on your cash.

 Cash squandering: Getting a professional to help manage small portfo-

lios of money isn’t easy. The more money you have to invest, the better

caliber professionals will be available to you. They earn a percentage of

your portfolio’s growth, so they’ll work hard to help you save and invest

in ways that will benefit you both in the long run.

All this advice assumes that, instead of spending every extra bit of cash like a

drunken sailor, you put it aside into a savings account, stocks, a money

market fund, certificates of deposit, or other liquid assets. So, instead of run-

ning out to buy an expensive new sports car, taking an around-the-world

ocean cruise, or gold-plating your plumbing faucets and fixtures, invest your

money wisely!

Okay, So You Have All This

Cash — Now Manage It

So now you have the cash, and with it comes the added responsibility of

managing it. Having wealth can be a pain initially, but have no fear; excellent

resources are available. Start with the terrific book, Investing For Dummies by

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Eric Tyson (Wiley). Then check out some of the many excellent online

resources to help you discover how to manage your money. Our favorite is

www.motleyfool.com.

Finding and working with

a financial advisor

If doing your homework is too time consuming or mind boggling, then don’t

hesitate to work with a professional financial planner. After you have a decent

size portfolio, getting the attention of an experienced professional to help

you manage your dough should be fairly easy.

Ask friends and family that are financially secure whom they use for financial

planning. Many qualified, experienced professional money managers are out

there, but many of them aren’t up to the task or don’t have your best inter-

ests in mind. Do your homework. Ask for referrals and references and check

them out. You want someone who will ask you a lot of questions to prescribe

the best options. Three basic types of financial advisors are available to you:

 Fee planners: These planners work on flat fees rather than commission-

like insurance-based advisors and stockbrokers, and therefore they

aren’t necessarily tied to selling you any particular kind of investment.

Many people believe the lack of commission makes them more objec-

tive. Others argue they aren’t motivated to earn you the best yields. For

more information on fee planners, check out the National Association of

Personal Financial Advisors Web site at

www.napfa.org.

 Insurance-based advisors: These advisors work for insurance compa-

nies or independent insurance brokers, and their primary focus is using

insurance policies as investment vehicles. They’re often experts in

estate planning.

 Stockbrokers: These advisors deal primarily in stocks, bonds, and

mutual funds (and they’re in business primarily to sell stocks, bonds,

and mutual funds). Many larger brokerages have expanded their ser-

vices to provide other banking and insurance services.

After you find a few financial planner candidates, investigate their credentials

and approach. You want to work with someone that takes everything in your

financials into account and who is knowledgeable in all kinds of different

investments. For example, you’d be surprised how many advisors have little

knowledge in real estate.

Stay away from brokers just trying to sell you the hot stock du jour. And be

aware that there is no way to magically make money. The best advisors

advise. Find someone that can spend his or her time educating you so you

can make the decisions.

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If you can’t find one person you trust and you have more than $100,000,

spread it around. Try splitting your portfolio among a couple of advisors and

see which one performs the best over time. As soon as the trend becomes

clear, then shift your assets to the financial planner who does the best.

Diversifying your portfolio

A good financial planner may suggest several strategies, but the primary

focus needs to always be diversification — splitting your money over many

different types of investments. Why? Because no high-performing investment

stays that way forever. Diversifying your assets can protect you when a

market goes through changes.

Some markets work in the opposite direction. For example, when interest

rates rise, the stock market may fall, and vice versa. By investing in a number

of different kinds of assets, you can protect yourself from volatility in a partic-

ular market and gain a steady return. Studies have shown that well-diversified

portfolios have consistently earned 8 to 10 percent during any ten-year period

of time in history — from the time of the Great Depression through today,

even accounting for the bursting of the stock market Internet bubble. Work

with your advisor and discuss the best way to divide your assets, keeping tax

ramifications in mind. Different options include

 Commodities (such as oil, orange juice futures, and pork bellies)

 Corporate bonds

 Government/municipal tax-free bonds

 Large-company stocks

 Precious metals (gold, silver, titanium)

 Real Estate Investment Trusts (REITs)

 Small-company stocks

Many advisors recommend investing in mutual funds and annuities because

they’re a single fund that mixes many categories for you. You can focus these

funds toward income or growth. You can also look at an established fund’s

prospectus, a pamphlet explaining all the management details and risks asso-

ciated with a fund, to see how the fund has performed over time and who is

managing the fund.

Exploring alternative investments

Other types of investments can provide good returns outside the standard

investment markets. Ask your financial advisor about the risks and benefits

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of investing in some alternative investments. Check out the following invest-

ments that are worth exploring:

 Equipment-leasing funds: Usually available only through a financial

advisor, you loan money secured against business equipment, such as

computers, furniture, tools, and other assets.

 Federal tax credits: Believe it or not, you can buy someone else’s tax

benefits and the government guarantees them.

 Notes: Just like a bank or savings and loan, you can loan money to

people and get paid interest in return for the risk you take. A note is the

written promise by a borrower to pay you back with interest. To protect

your investment, you can secure notes against real estate holdings.

 Limited partnerships: A limited partnership is a group of two or more

people who work in partnership to invest in assets such as large com-

mercial buildings, apartments, and shopping malls. Limited partners, by

definition, have only limited say in the operations of the partnership.

 Other real estate: Many people opt to take their money and buy rental

properties. See

www.stratfordfinancial.com for more information on

this topic.

You won’t find a shortage of investment choices. Not all are financially sound

or make sense to every investor. Investigate each one thoroughly and leave

yourself with options. Protect yourself by only investing in something you

can effectively explain to someone else.

Turning Your House Into a

Money-Making Machine

For most people, their house is more than just their home. It represents their

single largest investment, as well as their largest source of long-term income.

When building a custom home, consider your home an investment. With any

investment, you need to make decisions aside from whether or not to invest,

such as how to leverage using financing and how to take actions to maximize

the return. Many of the questions require research and conversations with

professionals like certified public accountants (CPAs), real estate agents, and

loan officers. Understanding how a home works as an investment will better

prepare you to make the right financial decisions on your custom home to

help you maximize your investment return.

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More house for less cash — Benefiting

from leverage and appreciation

The way people make money on their home is through appreciation, which is

a return on your investment — the reward for taking a risk with your money.

With very few exceptions, you can count on real estate to go up in value over

long periods of time. Although appreciation isn’t always consistent from year

to year, short of some local economic catastrophe, you can typically expect

to see the value of your home rise at least 3 to 5 percent per year. Some parts

of California and New York have risen more than 20 percent annually in

recent years.

You can increase the return on your investment with something called lever-

age. Leverage means using less of your money to make the same profit. You

have a choice about how much of your cash is tied up in your house. The

dollar amount of the appreciation will be the same regardless of the amount

you have invested, but your return can increase substantially using the prin-

ciple of leverage to your benefit.

For example, consider Jim and Mary, who own a house worth $400,000 free

and clear of any mortgages or other encumbrances. Their house appreciates

by 5 percent in a year, so they have earned $20,000 or a 5 percent return on

their $400,000 investment.

Their neighbors, Tom and Sue, have a house also worth $400,000, but they

only have $100,000 equity with a $300,000 loan. They’ve invested the $300,000

cash that they could have used to pay off their loan elsewhere, such as a

diversified stock portfolio. Their house also appreciates the same 5 percent

or $20,000 in a year. But instead of the same 5 percent on their investment

that Jim and Mary earned, the $20,000 in appreciation represents a 20 per-

cent return on Tom and Sue’s $100,000 home equity. Not only is their return

better than Jim and Mary’s, but also Tom and Sue are free to make other

diversified investments with their large chunk of cash.

Protecting your investment

by making it marketable

Much of the fun of building a custom home is in creating something that

is exactly what you want — it’s your dream, after all! If your dream is too

unique, it can pose a problem, however, if what you want is unappealing to

the rest of the world. A property’s value is based upon supply and demand.

If many people like your home and want to buy it, then they’ll bid against

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each other and the price will increase. By contrast, if no one wants to own

your house besides you, you may not be able to give it away. Keep these

major considerations that can impact value and marketability in mind:

 Conformity: If the house is much smaller than the rest of the neighbor-

hood homes, it will be less desirable. At the same time, a home that is

bigger than the other homes in the same neighborhood won’t attract

proportionately more money.

 Design: People want homes that are functional and easy to maintain.

A castle with a moat may be great in the French countryside, but will

sit on the market forever in suburban Cincinnati.

 Location: Remember the real estate agent’s favorite mantra: Location,

location, location! Elements such as busy streets or being close to com-

mercial buildings can deter buyers.

Your best financial security is knowing you can sell the house quickly in any

market, good or bad. The more the house appeals to a large cross section of

people, the more likely you can sell it at a good price in any market. Nearly

any house can sell when real estate is in a boom. Ultimately, you want to be

able to sell for the highest price possible when the market and the economy

are at their worst because that is when you need the money the most.

Understanding taxes — Many parts

of a home project are deductible

One of the greatest benefits of home ownership in the United States is the

benefit of tax deduction. As long as you intend to move into your custom

home when it’s finished — using it as your primary residence — you have

a number of different items that are tax deductible:

 Points (loan origination fees) on the land and construction loans

 Interest on the land and construction loan

 Interest on your permanent loan

 Property taxes

The Internal Revenue Service (IRS) does limit how much money you can

borrow and still deduct in interest and points. The IRS only allows deduc-

tions on a loan amount of $1 million or less, but it does allow you to deduct

the interest and points on an additional credit line of $100,000 beyond the

$1 million.

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These deductions translate into real dollar savings for you. Effectively, the

government is subsidizing you to borrow money on your house, putting more

money in your pocket every month. In states like California, people with sub-

stantial income can have tax savings of as much as 40 percent of their

monthly payment. Here’s a quick formula to calculate your tax savings:

1. Multiply your loan amount times your interest rate to get your annual

interest.

2. Multiply your estimated value times your local property tax rate.

This amount is 1.25 percent in most states, but can be much more in

states like Texas and New Jersey. You can get the information by calling

your friendly, local county tax office.

3. Add the interest and the taxes, and then multiply the total times your

combined state and federal tax bracket.

You can get this number from your accountant or tax preparer.

4. Take the amount and divide by 12 to get your monthly tax savings.

This tax savings represents real dollars you can use toward your

monthly payment.

Sometimes, your deduction can be big enough to reduce your income signifi-

cantly, moving you into a lower tax bracket and saving you even more money.

Ask your CPA or tax preparer to check how close you are to the income

thresholds.

If you claim these items as deductions during the build and then sell the

home as an investment, you may have to amend your returns and pay back

the savings. Check with your CPA or tax preparer about the implications and

be sure of your intentions.

You don’t have to wait until the end of the year to get the cash from your tax

savings. You can increase the deductions on your W-9 so that you’re taking

home more of your paycheck on a monthly basis. Check with your CPA or tax

preparer to figure out your proper withholdings and stop letting the govern-

ment hold your money for free.

Safely Deferring Financial Decisions

Until the End of the Construction Project

Even though planning ahead is crucial to a successful custom home project,

you can and need to wait until the project is finished before making certain

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financial decisions. By deferring some of these choices, you can save yourself

from making commitments that may strap you for cash too soon, such as

applying a large down payment to your land (see Chapter 3). When you

have better information at your fingertips, you can make decisions, such

as locking in the rate on the permanent loan or deciding on your permanent

loan amount or program. We discuss some of these choices in Chapters 15

and 16.

You have no way of knowing how much your project will actually cost or how

long it will take until it’s complete. Any estimate before then is strictly an

educated guess. The same is true for economic conditions. You can spend

a lot of time worrying about where the interest rates are or if your house

is holding its value, but you can’t do anything to change the situation or

predict more accurately. Risk occurs either way, so you have to analyze

the situations carefully.

The best approach to dealing with uncertainty is education and careful deci-

sion making. Keep emotion out of the decision process. Consult experts and

educate yourself about the risks and benefits of each decision. Analyze the

repercussions of delaying the decision. Ask these questions when making

financial decisions:

 What is the total amount of dollars at risk on this decision?

 When will I have all the facts for sure?

 What is the worst case if I guess wrong today?

 Is there a way to protect myself against the worst case?

 What is the cost of that protection?

 Is it worth it?

 What course of action will make me sleep best at night?

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Chapter 8

Knowledge Is Power: What You

Don’t Know About Construction

Loans Can Hurt You

In This Chapter

 Understanding loan types

 Finding a lender

 Moving through the loan process

 Figuring out fees and costs

 Giving some burden back to the lender

he nation’s big lenders have done a good job of teaching you to shop for

a mortgage as if it were a TV dinner that you can pull from your grocery

store freezer, only comparing price and forgetting taste. Getting a construction

loan, however, isn’t quite so simple. In fact, obtaining a construction loan is

more like cooking a gourmet meal from scratch for a 20-person dinner party.

Although important, the loan’s total cost will end up being less important than

its functionality. If you ignore details, it could be a disaster.

As you read this chapter, put aside any knowledge you may have of regular

home purchase mortgages. Construction loans are different; they have differ-

ent pricing and structure than loans to purchase existing homes. When you’re

shopping for a construction loan, relatively few loan officers have extensive

experience putting one together, and even fewer firms specialize in these types

of loans. Therefore, make sure you’re as knowledgeable about the process as

you can be before you meet with your loan officer.

Write down every detail (from program information to approval guidelines)

and don’t be afraid to ask questions several times until you understand

everything completely. Your loan officer will probably have to research your

answers and get back to you later. Never assume he understands what he is

talking about unless he has personally funded at least 50 construction loans

over the course of his career.

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In this chapter in addition to putting construction loans in the proper per-

spective, we spell out the differences between construction loan types and

take you through all the details. This tour includes picking a lender and

understanding the different costs for construction lending.

Exploring Your Construction Loan Options

If you’re going to borrow money to build the house from any kind of institu-

tion, the money most likely will be in the form of a construction loan. This

loan replaces your existing land loan. A construction loan differs from a con-

ventional mortgage or the land loans discussed in Chapter 3 in the sense that

the bank doesn’t give you the money all at once. Instead the bank meters out

the money based on the progress of construction. The banks have more risk

because taking back a house and selling it if you stop paying them is much

more difficult when the home is incomplete.

When dealing with construction lending, don’t expect to find much standard-

ization with different lenders’ loan programs. Banks pretty much design their

own products to fit with their own short-term cash needs. Most banks — small

and large — borrow money on giant credit lines and use that money to fund

construction loans. Local banks and savings and loans may use portions of

their depositor base to fund loans. Because construction loans are by nature

short term, banks don’t need to sell the loans to third parties (a common

practice for long-term mortgage loans). This short-term approach makes stan-

dard programs unnecessary in the bank’s view.

That said, some similarities do exist among different lenders. All construction

loans can fit in the following categories.

Getting it done all in one — Benefiting

from a single-close

Large institutional mortgage banks, including IndyMac Bank and Countrywide

Financing, created these single-close loans during the last ten years. They fig-

ured out that people who build their own custom homes live there longer and

default less often than other people. They figured (correctly) that, by offering

a great construction loan upfront, they could automatically roll these cus-

tomers into profitable long-term mortgages. See Chapter 15 for more info on

rolling into permanent mortgages.

All-in-One, Construction/Permanent (CP), One-Time-Close (OTC), and

Construction-To-Permanent (CTP) — no matter what you call it, the

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single-close loan has the same features. Some features of the single-close

construction loan include

 Generally, no re-qualification or re-appraisal is required for these loans.

Simply finish the construction, and you get a free permanent loan with

no questions asked.

 The borrower usually has a variety of popular permanent loan programs

from which to choose.

 Some lenders offer options for locking interest rates before the house is

finished.

 The lender may allow the borrower to buy land as part of the process

provided she has all the necessary construction documentation ready

before funding the loan.

As a result of the ease of the overall process, single-close loans are extremely

popular and easy to find in the marketplace. These loans are excellent pro-

grams for first-time custom home consumers.

Construction-only loans —

The double-close process

In this process — used by most local banks, and the only way to get a con-

struction loan before the single-close program came along — the lending

bank provides a short-term loan only for the construction time period. After

construction is complete, arranging for another loan for your permanent

financing is your job. Unfortunately, having to take this step means going

through the process of applying and qualifying for another loan, although

your bank may have you prequalify for a permanent loan before it commits

to the construction loan.

We strongly recommend against this type of loan if you find a single-close

option that works for you. Why? Because

 This process is potentially more expensive because you have to pay for

two loans and all the fees and costs that go with them.

 This loan is like a short fuse on a long stick of dynamite. Many things

can change in the course of 6 to 18 months while you’re building your

house. You have no way of knowing whether or not you or the house will

still qualify for a permanent loan when the house is finished. A change in

the market or interest rates could force you into foreclosure or, at best,

payments you can’t afford.

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 The banks that sell this product work on a “buyer beware” ethic and

consider permanent loan qualification or getting an unaffordable loan to

be your problem at the end.

Our advice? Shop around for an all-in-one deal!

Full documentation versus no-income-

qualifier programs

Oddly enough, the best loan programs are available to people who can fully

document sufficient income for qualification with tax returns and pay stubs.

Documenting your income is always to your advantage, because you can

borrow more money at cheaper rates and fees. The key? Be sure you qualify

before you apply. (We go into more detail about the qualifying process in

Chapter 9.) If you don’t pass with flying colors, then a no-income-qualifier

program is your next best option.

You may have heard the terms EZ Qualifier, Quick Qual, No Qual, No Income

Qualifier, Reduced Doc, No Doc, and the like thrown about. These terms

by themselves don’t designate actual types of loans. They are merely the

lenders’ marketing terms to distinguish their own no-income-qualifier pro-

grams. And, by the way, these loans aren’t necessarily easier or quicker than

full-documentation loans. They usually require better credit and take just

as long to approve. Here is a breakdown of the specific types of no-income-

qualifier loans currently available in the marketplace:

 Stated income, verified asset: You must state your income and verify

liquid assets that meet the lender’s requirements. See Chapter 9 for

more details on this particular flavor of no-income-qualifier loan.

 Stated income, stated asset: You can state your income and assets with

no further documentation required. Stated loans are usually for people

with variable income or who are self-employed.

 No-stated income, verified asset: You put no income on the application;

however, you do provide documentation of your assets.

 No-stated income, no-stated asset: This loan requires great credit and

costs more. You simply state your name and Social Security number.

Poor credit and odd-property options

Consumers with bad credit or properties that fail to meet bank guidelines

don’t have many options for construction loans, much like the land loans

that we discuss in Chapter 3. If your credit is below a credit score of 620 (see

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Chapter 9) or if you have recent problems, such as bankruptcy, judgments, or

tax liens, you don’t have many options in the institutional lending world.

Additionally, any property that doesn’t meet with lending guidelines as we

outline in Chapters 3 and 9 (for example, property without public electricity)

requires a nontraditional lending source. The best option aside from robbing

a bank (no, we’re not suggesting that as an option!) is private or hard money.

(See “Private money — The last resort,” later in this chapter.)

Finding a Good Construction Lender

Picking a loan and finding the right lender can be a bit of a chicken-and-egg

process. Do you find the lender and then choose the program, or do you

search for the lender that has the program you’re looking for? Kevin advises

you to explore both directions. If you come across a great loan program,

explore it further. On the other hand, if you can find an experienced loan offi-

cer with good programs, he may be worth a little more money for the service

and education he provides.

Many people make the mistake of looking for someone close by and applying

with the first person that makes them feel comfortable. The Internet has also

become a new resource for construction financing, but most advertisers

don’t specialize in construction loans. They’re just casting their nets wide

for business. In fact, most of the links that come up on Yahoo! or Google are

clearinghouses generating leads to be sold to mortgage companies. Read the

ads carefully; relatively few companies actually do specialize in construction

loans, and you definitely want to find an expert if you can.

Sadly, most of today’s lenders are more interested in selling you their loans

than helping you make the right decisions. Most loan officers are fast-talking

sales guys and gals subscribing to the philosophy that the customer is

always right. They’ll spend most of their time telling you what you want to

hear just to lock you up as a customer.

A loan officer shouldn’t be a used-car salesman. He needs to be a professional

expert advisor using his knowledge to advocate for your best interest. You

wouldn’t want your doctor or lawyer lying to you just to make you feel good,

would you? Expect the same from your loan officer. Find a loan officer willing

to risk your business by telling you hard unpleasant truths that will keep

nasty surprises from occurring later in the process. Remember that you have

lots of time and money at stake, and you don’t want to lose either of those

because someone was afraid to tell you the truth or acted upon ignorance.

Start with a loan officer that listens to what you’re saying. If he is talking

about programs before asking you about your situation, then steer clear fast.

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Choosing a broker or a bank

A mortgage broker is an independent loan originator that helps you, the con-

sumer, and can submit loans to many different lenders. Mortgage brokers act

as middlemen and are paid primarily by the lender via wholesale pricing on

loan programs, which brings up the age-old question: Do I need to eliminate

the middleman? Drum roll please. And the age-old answer: It depends! You

may get lucky and qualify with the right bank that has the perfect loan for

you in your circumstances. It’s not likely, but it could happen. The question

is, if you didn’t ask around and investigate, how would you know if it was the

best program for you? Consider the following reasons why bypassing a mort-

gage broker and going directly to a bank can be limiting:

 Bank loan officers are salaried (not commissioned) and tend to be the

least experienced loan officers in the business.

 Banks are product oriented. They have only their programs and, if you

don’t fit or don’t like them, they’ll send you away having wasted your

valuable time.

 Banks tend to focus only on the construction loan, ignoring other ways

of helping your finances.

 Any documentation you give directly to the bank must be used by the

bank — even if your situation changes or can be represented more

favorably.

 The bank considers depositors to be their customers. To the bank,

you’re just another liability. (See Chapter 16.)

Mortgage brokers today fund 65 percent of U.S. mortgages because they pro-

vide great benefits to consumers, including the following examples:

 Mortgage brokers have access to almost every loan program in the mar-

ketplace, providing a one-stop shop.

 Mortgage brokers only get paid if your loan closes, giving them incentive

to get the job done.

 Mortgage brokers are required by law to disclose the fees they make, so

you know exactly what they’re getting paid.

 Good mortgage brokers are accustomed to comparing and contrasting

many different loan programs — finding the best one for your situation,

regardless of the lender.

 Mortgage brokers can act as a filter, helping to determine how to present

your package in the most favorable way to the bank.

 Mortgage brokers work with you months in advance to help prepare

your package.

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 Good mortgage brokers may identify other loan programs for your situa-

tion, such as a refinance to help your cash position.

 Many mortgage brokers are dependent upon referral business, making

them more concerned with your happiness.

Although mortgage brokers aren’t necessarily less expensive than going

directly to a bank, banks do offer discounts to brokers in the form of whole-

sale pricing, so the terms can be close. In construction lending, a broker who

knows his way through the process and can get you qualified with a good

program is worth far more than a bank that offers a discounted program for

which you don’t qualify.

Not every mortgage broker is worth your respect. Like any high-commission

business, there are plenty of slimeballs. Only a seasoned professional with

experience and knowledge in construction financing is going to be an asset in

helping you get a good loan for your situation. (More about this topic in the

next section, “Testing a loan officer’s knowledge.”) However, if you can’t find

anyone who meets these qualifications, first educate yourself, using this book

as a guide. Then, armed with this information, pick an honest, willing mort-

gage broker with access to many lenders. Kevin’s book What the Banks

Won’t Tell You (Grady Parsons Publishing) — available at

www.stratford

financial.com — has a great test for nonconstruction loan officers.

Testing a loan officer’s knowledge

Regardless of whether you work with a bank or a mortgage broker, you need

to be assured that the loan officer is giving you accurate information and she

knows what she’s talking about. Use this book as your guide for testing your

loan officer’s construction loan competency. Use these five test questions for

doing just that, along with references to the chapters for the answers:

 What is the difference between LTV and LTC, and how does it relate to

your best programs? (See Chapter 9.)

 Why is title insurance more expensive on a construction loan? (See the

section “Understanding All the Fees” in this chapter.)

 What is the difference between a voucher system and a draw reimburse-

ment system? (See Chapter 10.)

 Calculate a nine-month interest reserve. (See Chapter 9.)

 Why is an indemnification agreement necessary? (See the section

“Getting the loan after construction starts” in this chapter.)

If you’re fortunate enough to be dealing with someone who understands and

can articulate these issues, then you’re already ahead of the game. If after

you pose these problems, your loan officer is standing there with a glazed

look in his eyes, run — don’t walk — to a different company immediately.

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Most loan officers haven’t been extensively involved with construction loans.

Regardless, you may find someone that has had some experience. Whether or

not this person can answer all these questions exactly isn’t so important.

What is important is that he doesn’t try and slide lies by you in hopes you

don’t know what he’s talking about.

Find someone who tells you she doesn’t know all the answers, but she can

happily research the issues and get back to you. Honesty and patience are

the signs of a trustworthy professional. Make sure she also asks you as many

questions as possible. You can best judge your loan officer by the questions

she asks rather than by the answers she gives.

Getting value added — Education and

experience are worth the money

A small number of mortgage brokers in the country act as construction loan

consultants. Kevin’s company, Stratford Financial, is one of these companies.

Consulting mortgage brokers such as Stratford expertly guide you through

the entire process. Their knowledge comes from seeing hundreds of scenar-

ios in construction lending. By understanding patterns, they can almost see

the future because they have seen something similar before.

They sit down with you at the very beginning of the process when you’re

just thinking about a custom home. They can analyze your situation as it sits

today and design a program that takes into account every variable and road

bump you may encounter along the path until move-in day. They then take

this data — combined with your personal financials — and develop a specific

plan that assures you the most cost-effective method of succeeding with all

the financial steps of your project including risk management, cash flow, and

lender approvals.

Sometimes the loan fees with these mortgage brokers can be a little more

expensive than going directly to the lender; however, often they can find

better programs and structure your project in ways that can save you signifi-

cant amounts of time and money. Furthermore, you’ll have peace of mind

knowing you have an expert advocate on your side when embarking into

uncharted waters.

If you have already made major mistakes and failed with a lender or two, find

one of these consulting mortgage brokerages — construction loan consul-

tants are accustomed to fixing these problems. After a loan runs into prob-

lems with a lender, it becomes difficult to determine where the problems are

and how to fix them. If you find yourself in this position, contact the lender’s

wholesale office that turned you down and ask for the most knowledgeable

mortgage broker in your region. You can also contact

www.customhome

experts.com

or the National Association of Residential Construction

Lenders at

www.narcl.org.

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Private money — The last resort

If you have realized that private or hard money is the only way to get the loan

funded, then you still need to find the right private lender for your needs.

The good news: These lenders are relatively easy to find, and they usually

don’t offer a lot of different options. Most local mortgage brokers or bankers

can give you a referral to private money lenders. These private lenders are

simply investors that like to make moderate risk interest income by making

real estate loans that banks won’t touch. The lender drives the process and it

can be relatively easy. Your main concerns in this kind of loan are price and

terms.

Hard money usually costs around 10 percent, plus 5 to 6 percentage points

in fees, which is roughly twice the cost of conventional financing. The rest

of the fees run the same as any other construction loan as we outline in the

section, “Understanding All the Fees,” later in this chapter. The terms that

differ are

 The loan’s time length

 How much the private lender will loan

 How the private lender gives you the money during construction

Some private money lenders are also more conservative about values with

appraisals than others. Ask the referring party about its prior experience

with the lender. Try to talk to two or three private or hard money lenders

before you fill out an application and move forward.

The Loan Process from Start to

Finish — When to Do What

Because a construction process involves many people over a long period of

time, you need to be as efficient as possible. Starting too early with banks can

cost you money and waste your time. Waiting too long can hold up the start

of your build. Remember that the actual process is all about proper timing.

Use this step-by-step guide to managing the loan process.

Although exploring the construction loan process early is important in order to

be prepared, you need to complete several steps before applying to a bank. By

this time you should have your lot (see Chapter 3), have your finances in order

(see Chapter 7), and have your plans finished and submitted to the building

department.

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Deciding when to sell your existing house

For everyone who thought you’d have to sell the house you’re living in before

you can afford to build, we have good news. Most lenders don’t calculate the

cost of your current residence when evaluating your construction loan quali-

fications. You will, however, need to provide a letter that you intend to sell

when the new house is finished. Some lenders also accept a letter of intent to

rent the house. Either way, qualification won’t be an issue forcing you to sell

the house early. You can wait until the new house is finished, and you don’t

have to incur the expense of moving twice.

Because banks don’t count your existing house payment during the loan appli-

cation process, you can access any necessary cash you may need for your

build (see Chapter 7) without affecting your qualifications. Simply refinance

your existing house to the highest loan possible and take a low payment,

adjustable-rate mortgage similar to the ones we explain in Chapter 16. Doing

so gives you extra money for the build as well as low monthly expenses during

the build. You don’t need to stay on a long-term fixed payment when you’re

going to sell the house soon anyway.

In order to access necessary cash from their existing home, some people

choose to take out a Home Equity Line Of Credit (HELOC) to get the extra cash

out of the house. (We discuss HELOCs in Chapter 16.) A HELOC gives you

access to the cash in your home; however, a HELOC does increase your cur-

rent payment to cover the cash you take, whereas a complete refinance can

give you the cash and actually lower your monthly payment.

If you’re worried about making payments on both your house and your con-

struction loan at the same time, don’t fret. Many banks offer or require you to

hold an amount of money in the construction loan called an interest reserve

for covering the construction loan payments. If you have an interest reserve,

you won’t have to make payments on two houses at the same time. You can

read more about interest reserves later in this chapter in the section “No pay-

ments — Taking an interest reserve.”

Some construction lenders offer bridge loans to cover cash needed from your

existing residence for construction. We advise you to stay away from these

loans if you can. Bridge loans are more expensive than the refinance or HELOC

options, and the bank secures the bridge loan with both properties instead of

one. With a bridge loan in place, you have greater difficulty restructuring your

financing situation if you underestimate your project and run out of money.

You don’t need this type of loan because the refinance and HELOC options can

provide you more cash at a lesser cost.

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Applying on time

Loan documentation is only valid for 90 days from the time it is signed or initi-

ated. This expiration applies specifically to your credit report and the prop-

erty appraisal. If you apply with a bank and don’t fund the loan before these

documents expire, you’ll be forced to pay for a new credit report as well as an

appraisal extension or recertification of value, which is only good for another

90 days. Most lenders won’t fund the loan until the permits are in place. And,

because getting permits is often one of the most challenging tasks as you pre-

pare to build your new home, applying for the permits is the best benchmark

to use for your loan application. We discuss the permitting process at great

length in Chapter 6.

Kevin’s company, Stratford Financial, uses the permitting process to deter-

mine the correct timing for the loan application. Kevin’s goal is to avoid

double work, so he starts the application roughly 60 days before the bor-

rower is ready to break ground. Because most building departments take 30

to 45 days to review working drawings, Stratford instructs clients to start

loan paperwork when they turn the working drawings in for final approval.

If your permits are done and you’re ready to break ground, you can apply

pretty much anytime. The faster you turn in all your paperwork, and the

more complete it is, the sooner you’ll get funded. The loan process generally

takes roughly 40 to 60 days. The slowest parts are the appraisal and under-

writing processes that we describe in Chapter 9.

Getting the loan after construction starts

Most lenders fund a loan when you’re in mid-build with no problem. The only

issues they may have to resolve are with the title insurance companies. Title

insurance is necessary for the lender to insure that its loan is clearly secured

against the property in case you default on the loan. The lender likes to be the

first one to get paid back if it has to take the property back and sell it. The title

insurance starts officially the day you and the bank close escrow (finish execut-

ing all the paperwork and transferring of money on a prescribed date) the loan

and the trust deed (a legal paper that protects the lender’s interests) securing

the property is recorded with the county.

When you break ground or do any work on the property, you create what the

title companies call broken priority. This term means that any contractor or

sub who hasn’t been paid as agreed can at any time file a mechanic’s lien

securing their debt against the property. (We talk more about mechanic’s liens

in Chapter 11.) The problem is that these contractors and subs can file these

liens months after the loan is in place, but, because the work in question took

place before the loan, the mechanic’s lien takes priority and the contractor

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has rights to the property before the lender. Understandably, a mechanic’s

lien makes the lender very unhappy and nearly impossible for the title com-

pany to insure the lender.

Most states have a remedy for mechanic’s liens with something called an

indemnification agreement. Most title companies allow you to sign an agree-

ment assuring them that you’ll pay any and all claims by contractors and subs

for work completed prior to the date of recording the loan documents. The

title company will want to examine your financials to make sure you can afford

to take this step, but it’s relatively simple and, more important, it’s free!

Most loan officers don’t know about indemnification agreements, so you need

to educate them and check directly with the title company. Check on this

issue with your loan officer and title company before anyone starts work on

your property.

Preparing the paperwork

Keeping all your paperwork handy and organized can save you time and

hassle when applying for your loan. (Check out the organization tips in

Chapter 2.) You need to gather personal and construction-related documents

that tell the lender about you, your contractor, and your project. The follow-

ing checklist describes the personal documents most lenders require before

they’ll review your loan package. The items are listed in the order that most

lenders stack their loan documentation:

❑ Application (supplied by lender; lists all your personal and financial

information)

❑ Consent form (supplied by lender; allows the lender to verify your

information)

❑ Signed disclosures (supplied by lender; keeps the lender in compliance

with the law)

❑ Most recent year-to-date pay stub

❑ Two years’ W-2s

❑ Two years’ personal tax returns

❑ Two years’ business tax returns (if self-employed)

❑ Year-to-date profit and loss statement (if self-employed)

❑ Rental agreements (if you own rental properties)

❑ Three months’ bank statements on all accounts, both business and

personal

❑ Most recent statements for retirement accounts

❑ Closing statement (HUD-1) for land purchase

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The following checklist includes the construction-related documents most

lenders require before they’ll review your loan package:

❑ Three sets of plans, including working drawings

❑ Completed cost breakdown (supplied by contractor)

❑ Completed description of materials form (supplied by contractor)

❑ Completed builder statement (supplied by lender)

❑ Construction contract (signed by contractor)

❑ Architect information

❑ Insurance agent information

❑ Contractor’s liability policy (see Chapter 2)

❑ Workers’ compensation policy or waiver (see Chapter 2)

❑ Course of construction policy (see Chapter 2)

❑ Copies of permits or permit applications

❑ Copies of paid receipts/canceled checks for items paid and work

completed

Even if the lender doesn’t require all these items from you upfront, prepare

these items in case the lender asks for them at the last minute.

Locking in an interest rate

When to lock into an interest rate is usually the No. 1 question on most home-

builders’ lips, but you usually have the least amount of control with it. First

of all, not all construction loans have programs allowing you to lock the rate

(fixing the rate at a certain percentage while you pursue the loan application

process). The programs that do allow you to lock the rate generally lock at

higher than the market rate you would get on a refinance loan on the same

day. Why? Because banks can’t predict what the interest rates are going to be

6 to 18 months down the road when you finish the house, anymore than you

can. And being banks, they’re certainly not going to accept additional risks

that they can successfully pass on to you. Some banks offer lock options if you

pay more in the interest rate or pay upfront fees. Much of the decision whether

or not you can lock the rate depends upon on your qualifying program.

When you lock, you’re betting that the market will get worse during your build

time. But how can you decide whether or not that will be the case? First, ana-

lyze the economy by reading all the financial reports on www.yahoo.com and

in the Wall Street Journal. If you’re still sane, have your loan officer lay out the

lock options on the programs for which you qualify. Figure out the dollars side

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by side and make your best guesstimate. Understand taking any lock before

you’re approved may be a total waste of time if the bank turns you down or

you pick the wrong program.

Determining the length of

your construction loan

Most construction loans are offered for a period of 12 months. Some lenders

offer shorter periods or longer, but rarely are they offered for less than 6

months or more than 18 months. But if you want something different than

the standard 12-month loan term, you’re going to pay a different rate. The

6-month rate is usually lower than the 9-month rate, which is lower than the

12-month rate, and so forth.

Be conservative rather than optimistic in estimating your timing. Despite

your carefully constructed building plans, you really don’t know exactly how

long it’s going to take to finish building your custom home. You may save a

little money upfront with a shorter loan — thinking your house will be done

sooner rather than later — but you could have to pay expensive penalties for

going over your time limit when schedule delays interfere with your best-laid

plans. Choosing a 9-month period over a 12-month period may save you only

.125 percent or $625 on a $500,000 loan amount, but the penalties on this

same loan for going past the 9-month term could be as much as .5 percent of

the loan amount, or $2,500 each month until you finish. Ouch! Not only that,

but you also have to pay the penalties in addition to the interest you’re

already paying, which can get very expensive indeed.

Understanding All the Fees

So you’ve probably been wondering what all this financing is going to cost.

There is nothing like the irony of the loan officer handing you that piece of

paper with the big number that makes you feel there should be a brand-new

car in your driveway. Who are all these people and why do they need to be

paid so much money? In this section we break your loan down, fee by fee, so

you can justify where your money is going. Be aware that construction loans

have their own, unique quirks.

Your best guide to your fees will be the original Good Faith Estimate (GFE)

completed by your loan officer at the time of the original application. If

you’re lucky, your loan officer will fill it out by hand right there on the spot

so you have it in her handwriting with a copy you can go back to later. See

Figure 8-1 for a sample GFE. If the government form the lender uses isn’t

clear to you, ask your loan officer to write the fees on a simple piece of paper.

Make sure your loan officer explains every fee clearly and consistently.

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Courtesy of Stratford Financial Services

This list gives you an estimate of most of the charges due at the settlement of your loan. The figures are subject

to change. They are based on a value or sales price or total build of $ and the proposed mortgage

amount of $ . For an explanation of these costs, please refer to the "Settlement Costs and You"

booklet.

LOAN TERMS

Borrower:

The following items are not fees, but may either be collected or retained at the close of escrow.

Date

Borrower Co-Borrower

901. Prepaid interest $ per day @ % (30 days)

1303. Interest

903./1001. Insurance

107./1004. Property Taxes

1002. Mortgage Insurance Premium (2 months)

905. Misc.

TOTAL EST. RECURRING CHARGES AND/OR RETENTIONS

TOTAL ESTIMATED CHARGES

ESTIMATED CASH REQUIRED TO CLOSE

Starting Payment $ est.

801. Loan Origination Fee pts. + $ =

1303. Funding Fee

1306. Loan Document Fee

813. Tax Service Contract

812. Life-of Loan Flood Contract

815. Courier Fees

803. Appraisal Fee

804. Credit Report Fee (personal)

804. Credit Report Fee (business-for self-employed)

814. Processing Fee

902. Mortgage Insurance Premium (1st year)

1101. Settlement Fee (escrow or attroney fee)

1108. Title Insurance Premium

1201. Recording Fees

815. Misc.

TOTAL ESTIMATED NON-RECURRING CHARGES

P.I.T.I. $ Interest rate % est.

GOOD FAITH ESTIMATE

STRATFORD FINANCIAL SERVICES

www.constructionloanexpert.com

Figure 8-1:

Good Faith

Estimate.

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Paying points

There is no shortage of loan people trying to make their point. (It’s okay to

groan on that one.) Points are upfront fees (one point is equal to 1 percent of

the loan amount) charged for one of two reasons:

 To generate cash at the closing to pay loan officers and origination

departments

 To reduce the interest rate by compensating upfront for the interest the

banks pay to their investors

Despite what the TV loan hucksters say, points aren’t inherently evil or good,

they just simply are. Paying more points can be advantageous if the points

create a comparable savings. You and your loan officer need to figure out

what is the best deal for your situation. Points are usually broken up into

eighth fractions. Check out the following list to see how they’re represented.

This list can help you with discussions with loan officers on points and rates:



⁄8 = .125



⁄4 = .250



⁄8 = .375



⁄2 = .500



⁄8 = .625



⁄4 = .750



⁄8 = .875

 1 = 1.000

Even though points have some flexibility, you won’t find many construction

loans out there at zero points. Depending upon the terms of the program and

how much risk the bank takes, your points should range between 0 and 3 for

a conventional lender. Hard money is more expensive. For zero points to

happen, the lender has to increase the interest rates in order to pay a rebate

to the originating broker or loan officer. This scenario may or may not work

to your advantage.

To figure out whether you’re getting a better deal on points versus rate when

comparing two loans, follow these steps:

1. Calculate the loan amount times the points on each loan.

2. Multiply the loan amounts by .6 to represent the amount of loan you’ll

use during construction.

3. Multiply this amount by the offered interest rate.

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4. Add the points and the interest together.

5. The loan with the lower total is the better deal.

Most knowledgeable mortgage brokers want to make at least 1.5 to 2 points

on a construction loan because it’s much more work than a purchase or refi-

nance. Loan officers split the fees with their company so they don’t always

get the lion’s share of the points being charged. Some mortgage brokers who

provide consulting services or solve difficult problems may charge more.

You can negotiate points, especially with mortgage brokers, but make sure

you negotiate upfront. Waiting until the mortgage broker has done all his

work and then beating him up on fees at the last minute is unethical, particu-

larly if he is charging what he disclosed to you at the beginning. If he didn’t

deliver what he promised, then negotiating may be okay. Also, by negotiating

in a hardball fashion at the end of the process, the broker may simply decide

to not fund your loan, leaving you suddenly high and dry. Remember that a

good loan officer is worth his weight in gold throughout the entire project to

help work with the lender.

If you’re concerned about being overcharged, negotiate upfront the amount

of points the mortgage broker will charge, allowing for extra work such as

problem solving and exceptions. Most mortgage brokers appreciate this

upfront approach and accommodate you. And because mortgage brokers

must disclose their fees by law, you can insure they’re making good on their

part of the deal. Imagine how great it would be if other professionals like

attorneys and mechanics were willing to agree on costs upfront. Yes, we

know that’s not going to happen, but we can dream, can’t we?

Points are generally tax deductible on your primary and secondary residence.

As long as the loan amount is less than $1 million, you may be in for some

extra savings. Check with your accountant or tax preparer to make sure you’re

taking advantage of all the tax benefits available with this project. Don’t you

think it’s about time the government started paying you instead of the other

way around?

Escrow and title are more than other loans

Clients who look at the GFE often notice significant differences between the

rates charged for escrow and title by various lenders. Being able to identify

this difference is actually a great tool for weeding out loan officers who

aren’t really that informed about construction loans. The Real Estate and

Settlement Procedures Act (RESPA) heavily regulates title fees, so they’re

pretty much the same no matter which company you use. The title fees are

more expensive, however, than the same fees for a purchase or refinance

loan. Escrow companies and escrow attorneys often charge more for con-

struction loans because of the additional risk they assume for construction

loans and the added work that is involved.

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The reason for the added expense in the title insurance has to do with

mechanic’s liens (see Chapter 11). These liens are remedies for contractors

and subcontractors to recoup money if you don’t pay them, and they can

attach (file a legal claim against) the property. The title company’s job is to

protect the lender from this happening, otherwise, the lender won’t loan

you money. The title company accomplishes this by way of an endorsement.

Various endorsements are required throughout the project every time you

take money from the bank. The price of these endorsements can range from

one hundred to several hundred dollars. So, although title insurance (includ-

ing endorsements) for a $500,000 refinance may cost only $1,200, title insur-

ance for a construction loan (including endorsements) may cost as much as

$3,000.

If you’re working with a loan officer who is well versed in construction loans

(exactly the kind of person we advise you seek out), accept the title and

escrow company she recommends. You may already work with your own

attorney or escrow officer, but chances are that he isn’t familiar with the con-

struction lending process. If he stumbles or makes a mistake, you will suffer.

Using someone else’s title company on a construction loan can end up adding

two weeks to the process.

My goodness . . . so many appraisal fees

Construction loan appraisals are different than appraisals obtained for a pur-

chase loan or a refinance. For construction loan appraisals, the appraiser has

to work from the plans and specifications to assess what the house will be

worth when it’s finished — a feat much more difficult than assessing a house

that is already built. And because custom homes often congregate in neigh-

borhoods of other custom homes, comparable properties against which to

compare home values are hard to find. Needless to say, these appraisals take

more time and cost roughly 25 percent more than conventional appraisals.

The price of an appraisal can range from $350 for small houses in a modest

price range, to $2,000 for mansions in multimillion-dollar neighborhoods. If

you have a large loan amount — say, more than $650,000 — you can double

the cost of the appraisal fees because the lender will probably require two

appraisals.

In addition, many lenders review the appraisal because it’s their most critical

piece of information as we describe in Chapter 9. They may just have it desk-

reviewed, meaning a reviewer checks all the information stated by the

appraiser with his or her own research online. This desk-review generally

doesn’t cost you any money. The lender may, however, request a field review

where the lender has another appraiser go out to the property and state an

opinion. This extra appraisal may cost you an additional $150.

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Don’t order your appraisal too early in the process; your appraisal is only

good for 90 days. Although an appraisal can be extended with a recertifica-

tion of value for an additional 90 days, depending upon the lender’s guide-

lines, this extension can cost you another $150 to $250 depending on whether

the appraiser needs to add recent comparable properties to bring it up-to-

date. And don’t order the appraisal yourself. After you select a lender or

broker, have him do it. The appraisal has to be in your lender’s name anyway,

so if you change lenders, you’ll need a retype at a cost of $150 — assuming

that the appraiser gives you the retype at all. Appraisers tend to be loyal to

their lenders, so they make up all sorts of excuses as to why they can’t

release the appraisal to you even though you paid for it. A threat of legal

action usually solves this problem, but paying for a new appraisal is much

cheaper than litigation.

Insurance costs

Don’t forget to consider the cost of insurance in your construction loan; we

cover the various kinds of insurance necessary in Chapter 2. Assuming you

aren’t acting as your own contractor, you’ll have one insurance policy to pay

for at the close of escrow — the course of construction policy. This insurance

policy pays for any damage that occurs to your property during the course

of the build, and it must be in place before the lender will fund the loan (the

lender protects its investment in the property, as well as your own!). Your

insurance agent needs to start shopping for the best policy for your situation

early in the process. The price of the policy is based upon the loan amount,

and roughly runs $1,500 to $3,500.

Figuring all the little stuff

Various parties charge their small fees in the construction loan. These fees

are often referred to as garbage or junk fees. But, junk or not, they can add

up, and they deserve your attention. Some of these fees may be negotiable,

but most aren’t. Don’t let that stop you from asking.

So, what do these fees pay for? Most are for items necessary to cover real

costs that occur on the loan. Because consumers have become so points- and

fee-sensitive, lenders have felt hard pressed to break the loan fees out into

every service they have to pay. The following list details most of the small

fees that routinely occur in a construction loan:

 Administration and inspection fee: We extensively discuss the purpose

of this fee in Chapter 10. This fee covers the costs of inspections and

wire transfers every time you take money during the construction loan.

It may be collected along the way rather than upfront, but if taken at the

beginning, the fee is usually $700 to $1,000.

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 Credit report: Each lender that is considering loaning you money has to

order your credit report from a credit reporting agency such as Experian.

These fees have decreased recently, and are usually less than $50 for all

three bureau reports.

 Documents: The lenders subscribe to document software services that

prepare the loan documents for signing. Often they pass on the $175

cost to you.

 Flood certification: The lender needs to know if your property is in a

flood zone to make sure it doesn’t require special flood insurance. This

fee is a cheap one at $15.

 Funding and underwriting: Lenders actually give these terms a variety

of different names; they charge $400 to $750 in junk fees because they

can (and they do). The fees generally represent administrative fees

within the lender’s particular branch. In his 21+ years in the business,

Kevin has never successfully argued them away, so don’t feel bad if you

can’t either.

 Messenger fees: A whole bunch of paper shuffles from the broker to the

lender, from the lender to escrow, from escrow back to the lender, and

much more. Sometimes documents can be e-mailed, but the lending

industry does a good job of keeping messengers and UPS very busy.

Figure $50 to $100.

 Processing: Mortgage brokers charge this fee to cover their administra-

tive costs because most of the points go to loan officer commissions.

Many mortgage brokers use them as processor incentives to improve

service to the customer. Figure $350 to $500.

 Recording: A number of documents have to be recorded with the

county, including the trust deed securing the property, as well as the

construction loan agreement. This costs roughly $100.

 Tax service: The lender needs to know that you’re paying your property

taxes on time to ensure that the property doesn’t get attached (legally

taken) and sold at auction by the government. Independent companies

provide this service for $65.

 Wire transfer: The lender generally wires funds to the title company at

closing. Expect to pay roughly $25 using the federal wire transfer

system.

Letting the Lender Carry Your Burden

In his many years (and more than 800 successful projects) in the lending

industry, Kevin has discovered some philosophies for using construction

loan offerings that can benefit you in the long run. The following sections

explain it more in-depth.

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If someone offers you money, take it

Always apply for the highest loan you can qualify for. Ultimately, you don’t

know what this project will cost until it’s finished. As we explain in Chapter

20, nothing is worse than running out of money in the middle of the project.

In addition, you may have some last-minute surprises before the loan gets

started that require more money. You can usually cover these surprises with

a higher loan, but only if you have structured your loan to qualify for that

higher amount.

You may be the smartest construction estimator on the planet and think

you’re being smart saving two points by borrowing $100,000 less than the

bank offers. Chances are, something unexpected will occur and saving that

$2,000 will cost you $20,000 while your project sits because you ran out of

money, or it will cost you an additional $15,000 to get a new construction

loan — assuming you can find another lender that will accept your project.

There are benefits to borrowing more money than you think you need. Taking

a higher loan can reduce the amount of cash you have to put in the project at

the beginning. (See Chapter 9 for more details.) You don’t have to use all the

money from the loan if you don’t need to, and you can roll to a lower loan

amount as we explain in Chapter 15. Consider the extra points a tax-deductible,

low-cost insurance policy for your new home.

No payments — Taking an interest reserve

Some, but not all, construction lenders offer you the option of having an inter-

est reserve. (We explain how to calculate this reserve in Chapter 9.) An interest

reserve is a portion of the construction loan funds that are set aside for making

payments on the construction loan during the build. Every month, the lender

calculates how much money you have requested, multiplying this number by

the interest rate and dividing it by 12 to come up with the amount of interest

due for the month. If you have an interest reserve, the lender simply adds the

amount to your loan balance. If you don’t have an interest reserve, you need to

make this payment out of pocket.

Some lenders require the reserve, but for those that don’t, here are three rea-

sons why the interest reserve is a good choice:

 One less thing to worry about. You’ll be managing the project, your job,

and your family, and everything will be in transition. An interest reserve

gives you one less bill to keep track of and one less check to write. If you

miss a payment, it could be disaster for your credit.

 It can increase your loan amount. Lenders only provide a loan for items

covered in your budget, which we explain thoroughly in Chapter 9. The

interest reserve is a line item that the lender will happily accept.

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 It helps your cash flow. You’re going to make payments on the house

you live in during the build. Without the interest reserve, you have to

make two house payments along with any other money you have to

spend during construction.

Interest reserves are only offered as a part of a construction loan. If your

lender doesn’t require an interest reserve, ask it if an interest reserve is an

option. If your lender doesn’t require or offer an interest reserve, you can

always take the same amount of money from your savings and set it aside to

be used for payments.

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Chapter 9

Qualifying: It’s the Bank’s

Way or the Highway

In This Chapter

 Deciphering how construction lenders make decisions

 Uncovering your bank’s rules and guidelines

 Understanding how a construction loan works

 Creating a budget for financing

 Figuring out other budget problems

f you’re paying cash out of your pocket for your new home, then most of

the information in this chapter isn’t necessary. But, because only a very

small number of custom home projects are completely self-funded, you prob-

ably need a lender’s help to turn your new home into reality. If you’re like

most borrowers, you’ll probably begin with a local bank or national lender.

Throughout this process, your bank will remind you of its own version of the

Golden Rule: Them that has the gold makes the rules!

Usually, that rule works out just fine, except, most of the time, your lender

doesn’t tell you what the rules are until after you’ve broken them, which is

why we include this chapter. Although every lender has its own unique take

on the rules, a number of elements are common that you need to familiarize

yourself with before beginning the loan process.

In this chapter we explain how banks make decisions on construction loans.

We give you a look at bank guidelines for approving construction loans, and

we provide you with the math formulas banks use to calculate construction

budgets. Finally, we address issues that can come up in the bank approval

process — and there are more than a few!

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Stepping Behind the Desk — How a

Construction Lender Views Your Project

When you apply for a construction loan, the bank doesn’t consider you to be a

customer in spite of the friendly smile on the loan officer’s face. What? How can

that be? Actually, the bank’s customers are the people who give it money to

invest. Banks make their profit by loaning money at higher rates than they pay

to investors with as little risk as possible. You’re a necessary “evil” involved in

making that profit. The money comes automatically when you make your pay-

ment, so the entire process for giving you a loan is centered around making

sure you and the project are a safe investment.

In this section we give you the banks’ perspective on risk and their approach

to business. We also explain their approach to your intent for the property.

Why some lenders may seem uncaring

Gone are the days when banks made decisions based upon relationships or

their personal knowledge of the borrower. Today, government regulators and

statistics control most of the policies and procedures in banking. The result

is that fewer institutions are loaning their own money for mortgages; Wall

Street actually backs most loans in some fashion, even construction loans.

The pooling and selling of money to Wall Street — combined with the savings

and loan debacle of the late ’80s — has created a much more regimented

system for underwriting, a term that means assessing the overall level of risk

on a particular loan.

Although today’s electronic underwriting may seem like a less personal

approach, it has allowed the underwriters to be a bit more consumer friendly.

The underwriting is now less arbitrary. With the computer modeling taking

most of the heat for denials or conditional approvals, the underwriter can

be more of a consumer advocate focused on getting as many loans that fit

through the system. Essentially, the underwriter can play the good cop while

the computer plays the bad cop. (Refer to the “Man versus machine” sidebar

in this chapter for more information on the underwriting computer system.)

Our recommendation is to not take the underwriting process personally. In

one case Kevin was asking his friend — president of a large bank — for an

exception on a loan, and the response was “Gee Kev, I would love to. Please

give me a reason I can give to the bank regulators when I get audited, other

than just doing a favor for a longtime friend.” At that point, Kevin understood

that today’s loan decisions go way beyond the local scene. Fortunately, with

aggressive production bonuses in place, most lending employees want your

loan to fit their guidelines as much as you do. The more you design your loan

to fit the rules, the smoother the process will go.

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Understanding risk assessment

So, what’s the risk? You know you’re going to make your payments, right?

Actually, so does the lender. The number of consumers that default on their

home loans is less then 1 percent according to the Mortgage Bankers

Association. In most of those cases, the bank takes back the property to

recoup its loss. Banks, however, aren’t in the real-estate sales business and

they don’t want to be. Even late payments affect their process of making

money on your loan. The underwriting criteria is designed to weed out the

people who have a higher probability of paying late or not paying at all.

The other assessment being analyzed on your file is the ability to sell the

loan to investors. Most loans are eventually sold to Wall Street investors that

have set specific criteria for loans to buy. If these loans go into default, then

the original lender may be forced to repurchase the loan from the investor.

Repurchasing a bad loan uses cash that the bank could have used to lend to

someone else. And if the sale of a recovered property takes a while for the

bank, a default can get very expensive indeed.

How banks view your property

Your property is the major security for the loan that the banks guarantee

against default. How much the property is worth in the banks’ eyes comes

down to marketability or the ability to resell your property if the bank has to

take the property back in a foreclosure. Banks love properties that are vanilla.

For example, the more the house is like every other house in the neighbor-

hood, the happier the banks are. Banks love suburbia. A house resembling all

others in the neighborhood may of course be the exact opposite of the adobe

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Man versus machine

For years, underwriting was considered an art

and not a science, but today, science and tech-

nology are quickly catching up. Since the turn

of the century, most loans go through an elec-

tronic underwriting system before being passed

over to a human being. These risk-assessment

systems take into account data from the perfor-

mance of thousands of loans over past

decades. Based upon credit scores and asset

and income information, computer programs

determine the likelihood of default on your part.

The computer program may raise the interest

rate accordingly or suggest denial altogether. In

Big Brother fashion, human underwriters are

rarely allowed to override the computer deci-

sion. The human underwriter’s job instead is to

verify the accuracy of the input information and

review documents that are more visual in

nature, such as appraisals and tax returns.

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igloo with the moat and castlelike turrets on the 120-acre estate you have

dreamed about since childhood. And there lies the problem for custom home

borrowers.

Ultimately, the lender wants the same thing as you. The lender wants to be able

to sell the house fast for the highest price in the worst of economic markets. In

order for that scenario to happen, the lender requires a property that has the

broadest possible interest to potential buyers. The more unique (or odd) the

house is, the more the house requires a buyer with unique taste, someone who

is relatively rare compared to the vast majority of home buyers. Fewer buyers

mean a longer selling time and lower resale. Lenders have years of data that

tell them what houses sell fast and what issues can leave a property desper-

ately waiting for a buyer. Ultimately, the security of the money you invest in

your property will be better protected by approaching your design and consid-

ering the lender’s point of view. You can read more about the design process in

Chapter 5.

How lenders view contractors

Lenders have loosened their requirements for contractors considerably over

the last few years. They used to require full financial review, including tax

returns, bank statements, and a first-born child or two. Some lenders still

have a rigorous approval process for contractors because of their concerns

about a contractor’s financial ability to manage the project’s funds. However,

because most banks have adopted the draw reimbursement system we

describe in Chapter 10, banks are at less risk now that money only gets paid

after the work is done.

Most banks simply want to see that the contractor isn’t a deadbeat and that

he has solid experience building houses, indicating that the home will be fin-

ished in a workmanlike manner. Banks also like to see that the contractor’s

license and insurance (liability, workers’ compensation, and so forth) are in

order. (See our discussion in Chapter 2 for more information on insurance.)

Although the bank provides some level of scrutiny for picking a contractor,

you’ll want to dig deeper as we discuss in Chapter 2.

How lenders view occupancy

Did you ever imagine that your lender would care who was planning to live in

your new home? Well, your lender does care — and your answer has a major

impact on your loan. If you, the borrower, are going to live in the house, then

the house is considered to be owner occupied. This type of occupancy earns

you the very best rates and the most flexible underwriting terms. Why?

Because people rarely walk away from the home they live in, so the lender

has relatively little risk that you’ll default on your loan.

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If you’re planning to use the home as a vacation house, then it’s referred to

as a second home. The lender looks to make sure that the house is in a likely

vacation area or resort town and not next door or across town. This loan may

have terms that are slightly less favorable than owner-occupied homes, but

second homes add minimal risk statistically, and you can usually find a vari-

ety of good loan programs available.

If you intend, however, to sell your home immediately after it is built, then the

lender will consider it as a speculative or spec home. Even if you plan to rent it

or use it as an investment, the lender still calls it nonowner occupied and treats

it as a spec home. Most conventional lenders don’t offer consumers construc-

tion loans for spec or nonowner-occupied homes because of the added risk of

default. These homes require commercial funding that we outline in the next

section, “How lenders view spec projects.”

If you aren’t sure what you’re going to do with the house after it’s completed,

you can finance it intending to owner occupy and defer the decision to sell

until later. To meet the terms required by most lenders, you must agree to

occupy the property within 30 days of the home’s completion. But few loan

agreements specify exactly what occupancy means, or even how long the

occupancy must be. Lenders do become suspicious, however, if the property

is listed for sale before the loan has been converted to permanent financing.

Most construction lenders take a dim view of someone who uses this

approach more than once.

If the lender suspects that you’re building a property for speculation on an

owner-occupied program, your loan may be turned down or, at the very least,

you may be hit with a prepayment penalty (a fee charged if you sell the house

or refinance it within a specified period, usually three years). On a $600,000

house, this penalty could amount to as much as $25,000! In addition, if the

lender makes you the loan as owner occupied, and you put the house on the

market before it is finished — or, worse, default — your lender can require

the note to be paid off in full immediately and sue you for fraud, depending

upon state laws. Take our word for it; fraud is one path down which you don’t

want to walk!

How lenders view spec projects

If you’re definitely planning to sell your home immediately after it’s built and

not occupy it yourself, then you need spec financing. Spec financing comes in

two forms: well-qualified and unqualified.

Well-qualified people have

 Excellent credit

 Income that is three times the amount of their monthly expenses

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 Liquid assets equal to roughly

⁄3 the amount they’re intending to borrow

 A track record of building and selling houses successfully

If you meet these criteria, then you can walk into almost any bank and get a

spec loan for your house and begin a strong banking relationship. The loan

will probably be at an interest rate of roughly prime plus 1 percent, and the

lender will charge you 1 percent of the loan amount in loan fees called points.

(See Chapter 8 for more information on points.) The lender loans you roughly

75 percent of the value of the finished property as long as you have put in a

good chunk of cash as a down payment.

For individuals who don’t meet these requirements — that is, unqualified

borrowers — private money is the likely path, because banks are unlikely to

provide spec financing to this category of borrower. (We discuss private or

hard-money financing further in Chapter 3.)

Recognizing What a Construction

Lender Really Wants to See

Underwriters are looking for reasons to turn a loan down, not for ways to

make sure you qualify. They are given exact “deal killer” rules that can’t be

broken under any circumstance, and they do check first to make sure that

the borrower’s package meets all these rules. Rules can include such

absolute requirements as:

 Borrowers must have a credit score of 620 or above.

 The loan-to-value ratio must be 80 percent or below.

 The property can’t be off the grid (not connected to a conventional elec-

tricity utility).

If the borrower passes this first test, then the underwriters look at guidelines

that may be a bit more gray in nature. Guidelines can include such flexible

requirements as:

 The borrower’s debt-to-income ratio must be less than 42 percent.

 The borrower needs to have an average bank balance of, say, $5,000.

 The borrower needs to have some previous experience in building a

custom home.

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Unlike the case of rules, underwriters have some discretion where guidelines

are concerned. They can examine the file to see if it fits both rules and guide-

lines in all areas — credit, income, assets, and the construction project —

and then make a decision to either approve or deny the loan, based on their

best judgment.

With any given lender, you only have one chance to show off your stuff. If your

information doesn’t fit a lender’s rules and guidelines, you can’t usually go

back and resubmit your loan application with different information unless you

can document reasonable and specific reasons for the change. Submitting your

package through many different brokers can also cause problems. If two loan

applications from two different brokers are submitted with contradictory infor-

mation, the lender will be forced to turn down both applications.

We recommend that you find a knowledgeable, honest broker who will openly

communicate information about your application. She can prescreen your file

and suggest ways to meet the lender’s guidelines in an ethical manner. Stick

with that loan officer and make her earn her money. Do keep in mind, how-

ever, that what may be a hard rule for one lender, may be a flexible guideline

for another. A good mortgage broker knows these differences and can submit

your loan package accordingly, which is even more reason to be very careful

when you decide which broker to cast your lot with. We talk more about

mortgage brokers in Chapter 8.

On your credit report

Most lenders use credit scoring for underwriting. They use the three major

bureaus in the United States that report credit: Experian, TransUnion, and

Equifax. These companies all use a computer modeling system to assess your

credit and predict how you’ll perform on your loan.

The Fair Isaacs Company created the system for Experian, and your credit

score is commonly referred to as a FICO score (the other bureaus have their

own brand names for credit scores, including Beacon and Empirica).

The underwriter looks at the scores reported by the three bureaus for both

you and your spouse. She then determines the middle score of the three for

each of you and uses the lower of the two scores. Scores fall into the follow-

ing categories:

 Excellent (720+): This score qualifies you for just about any program

offered today.

 Good (680–719): With a few exceptions, most programs from most

lenders can be had with this score, including no-income-qualifier (NIQ)

loans that we address in Chapter 8.

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 Fair (620–679): This score limits your choice of lenders and programs.

Many NIQ programs require scores higher than 680 or 640 for full docu-

mentation. A couple of lenders do consider scores down to 620 for both,

including IndyMac and First Horizon Bank.

 Subprime (619 or less): This category is sometimes referred to as B-

paper. Almost no institutional lenders write construction loans for

people with this credit score.

Credit scores are heavily impacted by three issues in order of importance:

 Derogatory (bad) credit: Late mortgage payments within the last 12

months do the most damage, with late payments on car or student loans

also doing major damage. Late payments on revolving debt (credit cards

or store accounts) may not be deal killers, but collection accounts, tax

liens, bankruptcies, and foreclosures do affect you if they’re recent. If

you have these problems, consult with your loan officer before paying

off anything. If you try to fix the wrong thing at the wrong time, you can

cause your score to drop even more.

 Credit card balances: The best scores go to individuals who use credit

wisely, and who keep their credit card balances under control. Ideally,

you need to have a fair amount of credit available with the balances

equaling about 35 percent of the available credit limits. Maxing out your

cards can drop your scores 20 to 50 points, so try and avoid those half-

yearly Nordstrom sales (or at least be sure to pay back your credit card

quickly!).

 Inquiries: Whenever you apply for credit — for a car loan, a credit card,

or even to rent an apartment — your prospective lender makes an

inquiry to check your credit report. This inquiry has an impact on your

credit scores. The more inquiries you have, the more you smell like

someone in financial trouble to the computers. Keep your new credit

inquiries to a minimum. You can shop an unlimited number of mortgage

companies within a 30-day period, but you always need to know who is

looking at your credit. After you know your scores, you can tell anyone

who needs to know without running it again. Beware of Internet credit-

checking services because they also generate unwanted inquiries.

Fortunately, even if you have less than stellar credit scores, you can improve

them — often, in a matter of days. The following list describes the best ways

to repair your credit if you’ve broken it somewhere along the way:

 For derogatories: If your credit report contains some incorrect informa-

tion, get a letter saying so from the reporting company. Sometimes, you

can call a company and plead for a letter; just don’t bother pleading

through the regular customer service number — they have heard it all

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before. Call the CEO’s office. You won’t get the CEO, but you may get a

letter from a sympathetic vice president if you paint the right sob story

and appeal to his humanity. Getting mad doesn’t work, but crying can be

very effective (we’re not joking here!). Always make sure the letter is on

the company letterhead, references the account number, and says the

account was paid as agreed.

 For balances: Only two of the three major credit bureaus change their

scores if you pay down the balances, but that’s okay because you only

need to boost two scores to increase the middle one. If you’re in a hurry,

make an electronic payment by phone or Internet. Next, call customer

service for the creditor that you just sent the payment to and have a rep-

resentative fax you a letter on company letterhead referencing the

account number and stating the new balance.

If these methods don’t work for you, or if your issues relate to inquiries, tax

liens, bankruptcies, foreclosures, and the like, have no fear. Time is always on

your side. The credit bureaus sweep their records every 90 days or so, and

everything negative drops off your report in seven to ten years. You may think

that length of time seems like a long time, but it beats forever! More good

news: Most issues older than two years — even foreclosures and bankrupt-

cies —have minimum impact on your credit score, especially if you have re-

established a solid record of on-time payments and kept the level of your

overall debt under control. Talk to your loan officer about ways that you can

raise your scores and the necessary time frame.

On your tax returns

Income is important to construction lenders, but less so when your credit is

good and the proposed loan amount is a low percentage of the property

value. Full-documentation loans still get the best rates and terms, but not by

much. No-income qualifier loans (see Chapter 8) provide a simple alternative

when full documentation is too cumbersome, or won’t support the income

necessary for qualification. Not every lender looks at full documentation the

same, but at least most lenders look for some standards when calculating

your gross monthly income (GMI):

 Salaried: Lenders look at two years’ W-2s and tax returns accompanied

by the most recent pay stub. Lenders want stable employment for two

years and give full value to the current salary. Bonuses and overtime are

averaged over 24 months.

 Commissioned: People with variable income have to provide their most

recent two years’ tax returns. Their income is averaged, and business

expenses listed on the tax returns are deducted from income. Lenders

want to see consistent or increasing income.

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 Self-employed: Anyone who owns 25+ percent of a company is consid-

ered self-employed. The lender asks for two years’ personal and busi-

ness tax returns, as well as a year-to-date profit and loss statement (YTD

P&L). The lender adds all three totals together, as well as any deprecia-

tion. The total is divided by 24 plus the months covered in the P&L and

added to personal income.

 Other income: Nothing gets missed by lenders; they look at any other

income or losses you have from rental properties, investments, partner-

ships, and other sources. Two years’ averages are used, and your

income will be adjusted by the profits or losses.

Construction lenders want to make sure you have enough income to make

timely payments for your new home, as well as any other payments you have

to make, such as for cars and student loans. To figure this amount, they use

debt-to-income (DTI) ratios. Two ratios are represented, but only the second

ratio — the back-end ratio — really matters. This ratio tells the bank what

percentage of your income will be needed to cover PITI (principal, interest,

taxes, and insurance), as well as all your other monthly credit payments.

Here are the steps to calculating the back-end ratio:

1. You need to know the loan payment.

Estimate a loan amount (you have to start somewhere) and find out the

current interest rates from your loan officer. Have your loan officer cal-

culate the principal and interest payment, or you can use one of the

many Internet calculators like

www.mortgage-calc.com.

2. Calculate the property taxes.

Take the house’s projected future value and multiply it by 1.25 percent.

This amount is the annual tax rate in most areas; you may need to adjust

it slightly in your own neighborhood. Divide this number by 12 to get the

monthly amount.

3. Calculate the insurance.

Take the loan amount and multiply it by 0.35 percent. (Lenders use this

number as an estimate.) Divide by 12 for the monthly amount. Add the

amounts from the first three steps to get your PITI.

4. Add in any installment payments that still have ten months or more to

go, such as car and student loans, as well as minimum payments on

your credit cards.

If you have your own business that pays for these items, they don’t

figure into the ratio.

5. Take the total and divide by your gross monthly income.

If the number is bigger than 0.45, you probably need to consider a no-

income qualifier loan of some kind.

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This step-by-step version is a simplified, back-of-the-envelope description of

debt-to-income assessment, and many more variables can affect it, depending

on the complexity of your income and investments. If you’re at all unsure of

where you stand, meet with an experienced loan officer and walk through the

information until you both understand it. By doing so you can avoid sur-

prises when the loan is underwritten.

In your bank accounts

When it comes to your bank accounts, you need cash, cash, and more cash!

(You can also take a closer look at Chapter 7 to discover how important cash

is.) Banks know that the surest way to protect a construction project from

utter disaster is a big pile of readily available money, which means cash in

your bank account. Note the following areas of concern related to underwrit-

ing for cash:

 Cash in the project: The bank evaluates all other cash requirements

after it accounts for any money needed for the project. The section

“Calculating the Loan Amount and Cash,” later in this chapter, can help

you determine this number. This money needs to be deposited in escrow

before the bank will fund the loan.

 Cash-reserve requirements: Some bank guidelines require very specific

cash reserves. Cash reserves are the funds you have left in savings or

investment after you put all the required funds into the project. The

guidelines vary depending upon the loan type and the institution making

the loan. Banks commonly base reserves on multiples of the PITI. Most

lenders want to see anywhere from 2 to 24 months PITI verified as

reserves. The number of months depends on the loan product’s risk. No-

income qualifier loans and low credit scores can boost the amount of

reserves required.

 Money to support income: The banks want to know that the cash you

have in the bank reflects your earnings. This information is especially

important when using a loan where you aren’t providing any income

documentation. The guidelines for this amount vary from bank to bank.

Often the bank doesn’t have clear guidelines, simply saying that the

situation needs to make sense. For example, if you’re claiming to make

$12,000 every month, the bank may be concerned that you average less

than $5,000 in cash in your bank account. Sometimes the bank sets a

specific rule, such as having two months’ stated income in the bank

(in this example, $24,000).

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Ask your loan officer to help you determine the specific amount of cash nec-

essary to qualify before you provide any asset information such as bank

statements. If you show the bank that your assets are insufficient, you may be

stuck — no matter what you do to build them up later. Discussing the guide-

lines with the bank in the abstract is okay, but the bank must use any docu-

mentation that you give it. A mortgage broker may have more flexibility in

only providing the most recent information to prospective lenders.

When banks verify your liquid assets (cash and assets that can be turned into

cash quickly, such as stock or money market funds), they want to make sure

the money has been there for a period of time and not recently borrowed to

beef up your account, causing the need to make payments or pay it back.

When new money magically appears, the bank always wants to identify the

source of funds. The underwriter looks for the 60-day average balance to

determine if the money is seasoned. If you don’t currently have seasoned

funds, you may have to wait 60 days before applying for the loan.

An experienced loan officer knows the banks’ quirks they’re working with and

can guide you through the best process to meet their particular cash guide-

lines. For example, some banks accept unseasoned funds if they came from a

line of credit secured by real estate. The earlier you address the issue of cash

with your loan officer, the better chance you have of fixing the problem

before the lender sees it.

Lenders don’t treat all money equally. Lenders give different values to your

liquid assets:

 Checking and savings accounts: Lenders accept 100 percent of the sea-

soned balance in these accounts.

 Stock: Lenders accept 100 percent of the vested, seasoned balance in

these accounts, provided they’re publicly traded and verifiable.

 Retirement and 401(k): Lenders accept only 50 to 60 percent of these

balances, accounting for taxes and penalties assessed by the govern-

ment on early distributions.

 Company accounts for self-employed: Some lenders accept 100 percent

of the seasoned balance in these accounts, others only accept 50 per-

cent, and still others don’t let you use them at all. You can sometimes

move the money out of your business and into your personal account

with documentation and a letter from your company’s CPA stating it will

do no harm to the company.

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On the appraisal

The appraisal represents the marketable value of the lender’s security —

your new home. Custom home appraisers have the difficult job of determin-

ing the value of a house that doesn’t yet exist. Truthfully, appraisers can’t tell

you what the real value is for a house, because the only true, real value is

what someone is willing to pay for it. What they can do is give you an assess-

ment of your home’s probable value based upon comparable properties that

have sold in the area within the not-too-distant past.

An appraisal is a regulated form that describes every detail of your property

based upon the appraiser’s physical inspection, as well as the plans that you

provide. The appraiser probably also asks you for a breakdown of the cost

for your build and a description of the materials you’re going to use. The

bank looks at the appraisal’s first page to make sure that the property’s

planned construction satisfies bank guidelines.

Lenders require the appraiser to find comparable properties, that is, proper-

ties that are close in size to your own, that are within a mile in location, and

that have sold within the last six months. Finding properties that meet these

rules isn’t always possible, but the appraiser needs to get as close as he can.

Perhaps the most important page of an appraisal is a graph of three or more

comparable properties, adjusting their values based upon the ways they are

better or worse than your custom home. Look at Figure 9-1 for an example of

how these adjustments impact the adjusted value of the subject property.

The appraisal is the most subjective part of the loan process, and the bank

often reviews an independent appraisal and decides to use a value that is

somewhat less than what is stated. If the bank uses a reduced value to qualify

your loan, the bank lowers your loan amount forcing you to make up the dif-

ference out of pocket. Never assume that the bank will take the appraisal at

face value — the process can sometimes be arbitrary and perhaps even a bit

unfair.

Many people pressure appraisers to push their property’s value as high as

possible, which can backfire, however, when word of these tactics gets back

to the lender. If the lender feels the property value is stretched, you can be

sure that the value will be drastically cut, lowering the loan amount. Our

advice is to let the appraiser be a bit more conservative, if the value is

enough to support your loan. It works even better when your loan officer

knows which appraisers your lenders favor the most.

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