Building Your Custom Home For Dummies. Peter Economy

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 dollars per square foot number you established in Step 3.The contractors you call at this point can be referrals, names you find online, or business cards you find at The Home Depot. 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 choosing a contractor, check out Chapter 2.)

      Taking these steps can give you a rough idea whether 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, 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 neighborhood. Frank Smith looked at one of the lots and was concerned because he thought the lot was too expensive. He was absolutely right. Maria Garcia came in the same day and looked at the same lot and quickly determined the lot was a great deal. She 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 $600,000. The total cost of the house including the land penciled out to $650,000, making the project too expensive to build on this lot. Frank wouldn’t be able to borrow enough money to build his house.

      Maria’s house was going to be 4,500 square feet. Her cost per square foot was the same as Frank’s, so her total cost for the project including land would be $875,000. Houses of this size in the same neighborhood were selling for $950,000, allowing Maria a $75,000 profit on her house, which allowed Maria to borrow plenty of money to build it.

      

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 Teardown 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 teardown 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 demolition 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 roofs, ceilings, or siding). Asbestos must be removed by professionals, and the process can be costly.

      

Before you decide to tear down the existing home, explore the possibility of donating it (or at least parts of it). There are organizations that will actually pick up the house and move it to a new site, making it available for a family in need. Alternatively, charitable organizations and even some businesses will come to the home to salvage cabinets, tubs, doors, windows, flooring, and more. And don’t forget about donating furniture and other equipment. You’ll get a sweet tax write-off. Plus, you’ll get good karma for helping those in need and being good to Mother Earth. A good place to start looking for information is the Habitat for Humanity website at www.habitat.org.

      

If you do demolish, 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 marketable 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.

      

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 tolerance 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 6.

      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 a small down payment, while a house with structural problems can create financing problems. Most lenders don’t loan money on a house that is in functional disrepair (if you default on your loan, the last thing the lender 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 particular 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 demolition cost in order to be realistic.

      

If you’ve 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 purchase of the property and the construction together based on the future completed