Building Your Custom Home For Dummies. Peter Economy

officer in Chapters 9 and 10.)

      

Many people who claim to be loan specialists may have only arranged one or two construction loans in their careers. Educate yourself, and be prepared to be flexible, because circumstances may be unusual and guidelines may change throughout the course of your project.

      After you have a loan amount, you need to account for the cash available. As we discuss in Chapter 8, 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’ve 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 the 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 will use the term dollars per square foot throughout your home-building process. Interestingly enough, however, no one uses a specific widely accepted definition. A real-estate agent may state 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 their 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 one helpful approach to try.

      Step 1: Define square footage

      First, create a definition of square footage. Square footage, for this purpose, needs to include all living space enclosed by walls that is completely finished. Your definition of square footage needs to include the square footage of the following:

       Bathrooms

       Bedrooms and closets

       Den

       Dining room

       Family room/great room

       Fully finished basement

       Guesthouse

       Hallways and entryways

       Home theater and/or game room

       Kitchen, laundry room, and 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 the total square footage, you need to define the dollars necessary in the budget to define dollars per square foot. You don’t want to include all the construction costs in this dollar amount; many costs need to be evaluated independently. Exclude the following costs 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 materials 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 the following:

       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

      Divide the total dollars from Step 2 by the square footage from Step 1 to establish your dollars per square foot. Easy, huh?

      Alternatively, you can take your total construction budget, subtract the excluded items from Step 2, and divide by the square footage to determine how much you have available to spend per square foot.

      For example, if you have a total budget of $350,000 available and your square footage is 2,500 square feet, your budget would be $140 per square foot. You can 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.

      Using a budgeting template

To put all this information together, we suggest using the following 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, like this:Cash$175,000Loan amount$650,000a. Total budget$825,000

       Cost-to-build: Add all your costs together for your total cost.Land$200,000Soft costs (permits, plans, and fees)$40,000Hard costs ($160 × 2,650 square feet)$424,000Financing (interest and closing costs)$35,000Landscaping$40,000Hardscaping$25,000b. 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 project’s costs. (Check out the Table of Contents to see where we discuss each topic for more information.)

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 contractor involved in some capacity. Many people find great comfort in having someone with experience managing the job while they earn the money to pay for the project. If you’re considering being an owner-builder and not