He has always been looking at houses, faithfully doing the weekend tours of new and existing houses. But you can’t seem to find what you’re looking for – the right house in the right place. Frustrated and discouraged, he thinks that maybe he should buy a vacant lot and have someone build the house he has always wanted. Is it a proposal that is not lost? Probably not.
Although it is important to consider several aspects, your first question may be how much it will really cost you if you buy a lot and have a house built for you. Understand early on that your expenses will likely be substantially higher than if you purchased an existing home or one in a new construction community from a builder. This is why.
You couldn’t take advantage of a builder’s economies of scale.
You are paying a retail price for the lot. When builders buy land for development, they pay wholesale because they subdivide a parcel into several lots and spread the purchase price and its other costs among all the lots. Because they are building many houses and not just one, their construction costs per square foot are lower. If you buy a ream of multipurpose paper, you may be paying $ 6.50 per ream. But if you bought a box of that paper, it would cost you about $ 4.50 / ream. The same principle applies to buying a lot and building a house.
Your real estate investment involves financing three separate phases.
The building lot, home construction, and finished property are essentially separate parts of the project and you will need financing for them. Not all banks and mortgage companies offer lot loans and construction financing. Lenders generally require more starting money for lot loans, so you may have to get cash for 20-25% of the lot purchase price. You would need a loan for the site work and the construction of the house. After construction is complete, the other two loans would be replaced by a permanent loan or a mortgage on the entire property. You would be paying points and other fees for the loans and closing costs when you liquidate the lot.
You would need a builder, a real estate attorney, and possibly an architect.
Plans for a true custom home designed by an architect can cost thousands of dollars. (You could save money by using plans that your builder already has.) You will need a constructor. If you don’t build houses for a living, this is not the time to start! And don’t use Uncle Charlie unless you’re an experienced home builder. Most production (i.e. high-volume) construction organizations will not be interested in building a single house, so you will need a smaller builder. Your relationship with the builder will be established in the construction contract. This should contain all details and specifications of the job and provisions for cost overruns, checklist items, and timelines for completion. Enter your attorney. When interviewing builders, obtain a copy of the proposed contract so that your attorney has time to review it before you have to sign it. Also, you shouldn’t buy much until your builder inspects it to estimate construction costs and determine if the lot is suitable.
Consider this real scenario. A builder sells 3,750 square feet. foot homes on lots for $ 515,950 in a new home community. That’s a combined purchase price for the house and lot of $ 138 / sq. foot Each home has a three-car garage, full unfinished basement, fireplace, skylights, high ceilings, back staircase, utilities, central air conditioning, and other bells and whistles. A construction lot of similar size in a comparable area in the same township is for sale for $ 225,000 (which does not include about $ 10,000 for utility hookups and permit fees, lot grading, and other preparation costs). Financial, settlement, architectural, and legal costs aside, the only way you’d come close to the builder’s package price is if you could build a home for around $ 75 / sq. foot ($ 225,000 + $ 10,000 + 3,750 square feet X $ 75 per square foot = $ 516,250). However, you will not be able to duplicate what the builder offers. You would probably end up with a bare and plain house.
So what is the solution? Stay tuned for my next article (“Ways to Get a Building Lot for Your Home”).