With the advent of spring, many an entrepreneur's fancy turns toward that most enduring of all loves--the love of real estate.
If you've been nursing hopes of building your dream house someday, you'll be interested to hear that weather isn't the only thing you have going for you this season. For one thing, the cost of vacant land is down in many areas. A survey by the Grubb & Ellis (NYSE:GBE) brokerage firm found that the median cost per acre for a single-family lot fell to $69,018 in mid-2006, down from $98,500 a year earlier, and in another sure sign of falling prices, big homebuilders have been writing down the value of their real estate inventories.
The sky-high price of building materials, particularly lumber, has also eased a little. Random Lengths, a trade newsletter, reports that its composite framing lumber index fell from $367 per thousand feet of board last April to $295 in January. The slowdown in the real estate market also means that, in many areas, experienced contractors, carpenters, and other construction personnel are more readily available than they've been in the recent past. The result is that building your own home is suddenly a less crazy idea than it's been in a while.
But only a little less crazy. This is a personal finance column, after all, and so it's my solemn duty to offer the single most important piece of advice anyone could give a business owner planning to build a home. That advice is: Don't do it. Building a home is more expensive than it looks, especially if you count the cost of the time it consumes (enormous), the stresses involved (variable but potentially significant), and the cost overruns (inevitable). From a financial perspective, it's usually cheaper to buy a house than to build one, especially if the one you buy was constructed by a production builder with experience and economies of scale.
Consider this tale of two entrepreneurs. First, let's meet Lance Moreland, the affable co-owner of a Houston financial-planning firm. Moreland isn't just paying somebody to build a home for him. He's saving a ton of money by acting as his own general contractor, relying for help on the local UBuildit franchise, which is in business for just this purpose. When last we checked, Moreland said he was on schedule and under budget. But Lance Moreland isn't only a disciplined financial pro, he's also supremely well organized, has a background in aeronautical engineering, and is pretty handy around the house.
Will you be like Lance Moreland? Or are you more like Stephanie Sokolove, the high-energy owner of Stephanie's on Newbury, a popular Boston restaurant that has grossed more than $8 million annually? With the help of a contractor brother-in-law, Sokolove set about building her dream house on a lake in nearby Newton, where she was a little less disciplined than our friend in Texas. "The budget went wild," she acknowledges sheepishly. The initial budget for land and construction was $4 million; the final cost exceeded $6 million even though some framing was retained from the original house that stood on the lakefront property (which cost $2.1 million). She spent $700,000 just on landscaping.
But, of course, life isn't only about money, and neither is building a house. Sokolove, for example, is deliriously happy with hers in spite of the cost, and she regularly films TV programs in her lavish home kitchen. So if you insist on building and think you would enjoy the experience, take some sensible steps to minimize the risk of financial heartache. The most important is to educate yourself. Even if you have experience with houses, read up on the subject, talk to people in the business, and think long and hard about what you want in a house.
With a little learning, it will be easier to estimate what building a new home is going to cost--and whether you can afford it. It's almost impossible to provide a rule of thumb on the cost per square foot, since the number varies drastically depending on where you live, what you want in the house, who designs and builds it, and even how big it is (bigger houses can be built at a lower cost per foot). Once you've figured out what you're going to spend, listen to Sokolove: "Whatever you're thinking, double it."
If that sounds extreme, a 20 percent cushion for extras isn't. The reasons are many, and they include unexpected expenses, mission creep ("Well, while we're doing this we might as well..."), and changes of mind in midstream. To control costs, you've got to decide what you want and stick to it. If you build on a fixed-contract basis, chances are your builder bid your job competitively. But once he's got the job, any change orders will cost you dearly. (You can save a lot by building on a cost-plus basis, but it's risky. Without a fixed-price contract, you're the one who'll pay if your contractor's estimate was wildly low.)
Speaking of costs, consider how you will finance the project. A typical route is a construction loan, but these tend to carry high rates and hefty fees and require a lot of back-and-forth with the bank. So if you're sitting on a pile of cash or have access to low-cost credit through your business, those alternatives are worth considering. When I built our house, I used money from the sale of our old place--plus $50,000 obtained thanks to introductory offers for zero-percent credit cards. By the time these ran out, I had a certificate of occupancy from the building inspector, which opened the door to a cheap conventional mortgage.
For the design of your house you can use a stock plan purchased mail order, but I recommend hiring an architect to create something from scratch. Otherwise, why build? Besides, a good architect can add a lot of value. Either way, it helps to write a "program," which is a kind of memo outlining who you are and what you need in the way of shelter. The mere process of drafting this document will force you to figure things out--and help you avoid conflicts later. Make sure your program addresses energy efficiency, too; building a new home, although energy intensive in itself, offers a golden opportunity to build in fuel savings from the ground up, without building underground or resorting to walls made of hay.
Perhaps the most important step is hiring a good contractor. Paul Deffenbaugh, editorial director of Custom Builder and other publications for contractors, says obtaining personal referrals is crucial, as is talking to previous clients and visiting homes built by your prospective contractor. He notes that many states license contractors, and in such cases you sometimes can check credentials on the Web, but this is no substitute for checking with previous customers. Note too that the best contractors are often the busiest, meaning you'll need patience to wait your turn. One important but overlooked talent to seek in a contractor, especially if you're building a high-end home, is business management skills, which you of all people should recognize. "Don't base the decision solely on money," Deffenbaugh warns. "If money is such an issue then you probably shouldn't be doing the project."