Posts Tagged ‘Builder’

The Ultimate DIY Project: Owner Builder Construction

Saturday, August 28th, 2010

The Ultimate DIY Project: Owner Builder Construction

If you enjoy working around the home and doing various DIY projects, then maybe you’re ready for the Holy Grail of DIY – building your own home as an owner-builder. By eliminating the costs of a general contractor’s overhead, you will save tens of thousands of dollars on your next home. And it’s not as labor intensive as you might think.


Being an owner builder simply means you are overseeing the construction of your home without hiring a licensed builder. By eliminating the builder, you eliminate the builder’s profit, which translates to tens of thousands of dollars you get to keep for yourself.


For many DIY lovers, being an owner builder is a chance to put their skills to good use. When you act as your own general contractor, you can do as much of the work as you wish. There are many examples of owner builders who do the majority of the labor themselves, from framing all the way through to landscaping.


However, many owner builders contract out the bulk of the labor and focus on doing only the projects that they are comfortable with, such as hanging drywall or painting. Every bit of labor that you do yourself becomes extra sweat equity that you build into your home.


Once the house is built, it’s worth whatever a potential buyer is willing to pay for it. Therefore, cutting the costs of construction by being an owner-builder means your new home will be worth much more than you spend to build it.


But, don’t worry if you feel you’re not ready (or willing) to take on an entire construction project on your own. Being an owner builder is more about project management than it is about actual physical labor. In fact, plenty of owner builders never lift a hammer.


Even without doing any of the labor yourself, there is plenty of sweat equity to be made, because you will cut out the costs of the builder. Indeed, a lot of people don’t realize that their builder never actually does any labor himself. Instead, he typically manages the sub-contractors who do all the actual physical construction.


So, if you feel you have the management skills to oversee the project, then being an owner builder can still be very profitable.


Beyond having to understand the planning and project management involved in construction, a successful owner builder also understands the financing that is needed.


It’s fair to claim that most people who build a home do not have the cash on hand to complete the project without financing some (or all) of the construction. The trick is understanding how being an owner builder affects your chances for getting approved for a construction loan.


With the current belt-tightening by the mortgage industry, construction loans are getting harder to find, even if you are willing to hire and pay a fully licensed general contractor. As you might imagine, securing financing for a construction loan that will allow you to be an owner builder is even tougher. The good news, though, is that there are programs still available – you just need to understand some of the key points about the financing that may affect your ability to build your dream home.


First, it’s important to realize that the costs of the financing will typically be slightly higher than the costs of a regular construction loan. Step back and look at the big picture. If you feel you would be a successful owner builder, is it worth it to pay slightly more for the financing for the opportunity to save tens of thousands of dollars on your construction costs?


Owner builder construction loans are a specialty product that represent more work and more risk to the lender. On the other hand, they also represent a greater opportunity for you, the borrower, to save a ton of money. It should be a fair trade all around.


The second important thing to realize is that owner builder loans will typically have stricter requirements than a simple purchase or refinance loan. These requirements may mean you have to qualify based on stricter credit score guidelines or tougher debt-to-income ratios.


For example, if a borrower’s credit score is below 700, it is pretty common to require that borrower have a larger spread between the total construction line of credit and the appraised value of the future home. Sometimes, for the borrower with the lower credit score, this might require a down payment on the construction loan. But, that doesn’t mean the deal can’t be done. It’s just important to understand the financing will be different than the simple purchase loans that you may be accustomed to.


The third important point to recognize is that owner builder construction loans will always be designed to protect you and ensure there is enough money available in your construction loan (i.e., line of credit) to complete the project. Nobody, meaning neither the bank nor you, wants an unfinished home. So, it is pretty common for owner builder loans to require that you qualify for extra amounts of money in your construction line of credit on top of your land and budget numbers.


For instance, you may have a small pot of money wrapped into your loan as a contingency fund in case you slightly under budgeted. It’s a protective feature to make sure you don’t run out of money during construction and end up with a home without a roof. However, your permanent loan should only include the money that you actually use during construction. So, any extra funds or any extra budget money that you don’t spend during construction won’t count against you.


So, if you are a fan of DIY projects, and you think you have the management skills to oversee the project, then perhaps being an owner builder will be a good option for you. The large amounts of savings can make it a very profitable experience. Just make sure you understand the planning and the financing involved.

Chris Esposito provides owner-builder construction financing nationwide through his Owner Builder 101 program. Visit www.OwnerBuilder101.com to get all the information you need to be a successful owner-builder, saving tens of thousands on your next home. Or call Owner Builder 101 at (877) 876-3688.

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Shopping for an Owner Builder Construction Loan: The Features You Need to Look For Before Building

Monday, July 26th, 2010

Shopping for an Owner Builder Construction Loan: The Features You Need to Look For Before Building

Most new homes in America are built by builders or developers who build the new home with their own money or lines of credit in order to sell the finished home to the new customer. The new buyer simply obtains a regular “purchase money” loan and buys the house.


This is the simplest form of construction financing. Of course, the builder’s borrowing costs are built into the price the new home buyer pays.


Increasingly, however, this form of financing is becoming rarer. Often, builders are becoming more reluctant to use their own funds to build for someone else as their banks are tightening their lines of credit and making it more difficult and expensive for them to get the needed funds.


As builders become less likely to fund your new construction, prospective new home owners who wish to build a custom home are forced to fend for themselves when it comes to construction financing.


Enter the construction to permanent (CTP) loan.


There are a wide variety of construction loan choices out there. And many of them are woefully inadequate for most people – especially if you want to act as your own general contractor (known as owner-builder construction).


Local banks tend to be very conservative and will not even consider lending their money unless you fit exactly into their guidelines. This typically means having a fixed price contract with a licensed and approved builder, selling your current home prior to qualifying, and even making a large down payment or owning the land first.


Occasionally, a local bank will give you permission to be your own contractor, if you jump through enough hoops for them. They may require an extra large down payment or that you own the land free and clear before they lend you the money to build. In the end, most local bank’s construction loan programs will have one or more restrictions that make their programs unusable, more restrictive and even more expensive than a good alternative.


As an owner-builder, your search for a construction loan should be focused on finding the loan features that will best fit your scenario. Finding this type of program gives you the greatest chance of success and your best opportunity to save money on your project.


Within the world of owner-builder construction loans, there are only a handful of options that make sense. Some of the features that should be most important are:


o Ability to be your own contractor without needing to make a large down payment – if any at all. “Large” means anything more than 5% for a conventional size loan and 10% for a loan up to ,000,000.


o No “consulting fees” or monthly “administrative” fees charged to you just for doing a loan. Please understand, you need to expect to pay for an owner-builder loan in the form of origination or discount fees, but you should not also need to pay a consulting fee.


o No requirement to sell your current home before you can qualify for the new construction loan. Many lenders will force you to sell your current home before you start building the new one, meaning you will be forced to move twice in a short time just to get the loan.


o No payments, interest or other, while you build. The best CTP loans allow for an “interest reserve” to be built right into your new loan so you are not forced to make both your current home’s payment plus the new one. Most programs that allow for an interest reserve also allow you to choose to make the monthly interest payment if you want.


o No upfront or “application” fees. Avoid any lender who requires any kind of upfront fee or “deposit” of any kind.


o Easy draw administration and unlimited draws. This means easy for you, the owner-builder, not the bank or your sub-contractors. After all, if you can’t get access to and control your money, all the other terms really don’t matter.


o One-Time closing. The best construction loans allow you to close only once for both your construction funds and your permanent mortgage. This will save you several thousand dollars in the long run.


o A staff of professionals who understand both construction and construction financing. Ask the person you are speaking with how many homes they have built themselves as an owner-builder. If you are dealing with a loan officer who has never built his or her own home and cannot speak to you from specific experience, you should look elsewhere.


The importance of working with knowledgeable professionals cannot be stressed enough. Half of the battle is learning to ask the right questions.


Note that the above list did not mention anything about construction interest rates. It is not that rates are not important; it is just that they are among the least important features of a good owner-builder construction loan.


This does not mean that owner-builder loan interest rates are necessarily higher than other construction loan rates – they will probably be about the same. But, who cares? It really shouldn’t matter to you if the interest rate during the period of construction is the same, a little lower, or even a little higher than a construction loan in which you are required to hire a builder.


Why? There are a couple of reasons, actually.


First and foremost, you are seeking a loan that will enable you to save tens of thousands of dollars by acting as your own contractor. The tiny (and it is tiny) difference in interest you will pay over a six to twelve month period is meaningless when compared to what you will save by being your own GC.


Second – and this is important to remember – despite the fact that every potential owner-builder is positive that he or she will build successfully on time and under budget, the reality is that owner-builder loans represent the most risky category of construction loan a lender can make. That is why there are so few available to start with. And, that is why you need to be prepared to pay a little more for the privilege of getting one of these loans.


Smart owner-builders understand that they need to focus on that “big picture.” Your goal is to build the exact home you want, your way, while saving tens of thousands of dollars. If the vehicle you need to reach that goal costs a little more, why should it matter? It is important to remember that:


A) Construction loans are short-term loans and the rates are therefore tied to short term funds – typically the prime rate. As the prime rate goes up, construction rates* will follow. And, vice-versa.


B) Owner-builder construction loans are very risky and very specialized. Accept this fact and the fact that you may pay a little more for the privilege of having access to this type of money.


C) Your permanent rate, and the choices you have related to that, is the more important thing to consider when looking at rates.


D) Rates are the least important feature to shop for. Remember to focus on the features that will benefit you the most and help you accomplish your goal – the big picture!


The smart shopper shops for loan features, not interest rates. The features that an owner builder needs are not necessarily the same as those a borrower hiring a general contractor needs. Refer back to the list of important features above as you examine loan programs. And always remember that you are in charge during this process.

Chris Esposito provides owner-builder construction financing nationwide through his Owner Builder 101 program. Visit www.OwnerBuilder101.com to get all the information you need to be a successful owner-builder, saving tens of thousands on your next home. Or call Owner Builder 101 at (877) 876-3688.

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Owner Builder Construction Loans: The Three Imperatives

Sunday, July 4th, 2010

Owner Builder Construction Loans: The Three Imperatives

Owner Builder construction is a great way to build instant equity into your new home by eliminating the costs of a general contractor. In fact, cutting the overhead of a licensed general contractor can save an owner builder anywhere from ten to thirty percent on construction costs. That’s tens of thousands of dollars in instant equity for an owner builder.


However, owner builder construction loans are a tricky animal. Not only are the very difficult to find, but they can also be a lot more complicated than the typical purchase or refinance loan. Indeed, owner builder construction loans can be a lot more complicated than even a regular construction loan.


Therefore, if you are considering being an owner builder and managing the construction of your new home, then you need to make sure your owner builder financing has the following three features. These three owner builder construction loan features are imperative to the success of your project.


1. Owner Builder Loan Imperative One: A Line Item Budget with Unlimited Draws


Owner builders don’t sign a contract with a licensed general contractor to build their home for them. Instead, an owner builder must put together a detailed budget of the costs to build their new home.


If you are building your home with a licensed general contractor, the construction loan will typically have a fixed number of construction draws to fund the project. For example, the loan may have only five draws that are issued based on the percentage of completion of the home. Therefore, the builder will have to fund the construction until a draw can be taken.


For owner builders, though, this is usually not possible. Owner builders can’t fund construction out of pocket, relying on taking only five draws during the course of the project.


Instead, if you are going to be an owner builder, you are going to need the ability to take an unlimited number of draws during construction, based on the specific itemized budget that you put together during the planning phase.


With an owner-builder line item budget, you can take loan draws every step of the way. When you clear your land, you can take a draw. When dig the hole for your foundation, you can take a draw. This way, owner builders don’t have to carry the costs of construction out of their own pockets. Not having an itemized budget with unlimited draws is a recipe for disaster for owner builders.


2. Owner Builder Loan Imperative Two: The Owner Builder is in Control of the Draws


With typical construction loans, the general contractor will request the loan draws. Many times, the borrower will be required to sign for the draws in addition to the general contractor. However, even in this case, the general contractor has fifty percent of the control of the construction loan draws.


For owner builders, this is not an option. An owner builder needs to be in complete control of the loan draws. The sub-contractors should not be allowed to have any say over the draw process.


As long as the owner builder is the only person who can request the draws, without input from the sub-contractors, then there is no chance of the sub-contractors getting paid until the owner builder is fully satisfied with the work that they did.


If a sub-contractor gets paid prior to doing satisfactory work, the poor owner builder will never get his house built. Instead, you’ll be out of money before the roof is on.


Therefore, if you want to be an owner builder, ensure your construction loan is designed to keep you, and only you, in charge of the construction draw process. If you can do this, then you will never have to worry about giving money to one of your sub-contractors before they have finished the job.


3. Owner Builder Loan Imperative Three: Minimizing Your Loan Down Payment


Every construction project has cost over-runs. Sometimes, those extra costs won’t be fully covered by your construction loan. Therefore, it’s imperative that an owner builder has some cash set aside to be fully prepared for any small cost overages.


If your owner builder construction loan requires no down payment, or even a very small down payment, then you can keep as much cash as possible in your own pocket for the construction phase.


If you want to put the money into your construction loan to keep your monthly mortgage payments as low as possible and keep your equity as high as possible, then make sure your owner builder loan will allow you to pay down the balance at any point during construction.


Therefore, if you have no down payment, you can keep the money in your bank account to protect yourself from cost overages. And, when you are safely finishing your construction on budget, you can use that money to pay down the balance of your owner builder construction loan prior to converting over to your permanent mortgage. This way, you’ll be protected and have a smaller monthly mortgage payment.


Most construction loans require at least a ten percent down payment. In fact, many require a twenty percent down payment. However, if you can find an owner builder construction loan that will require little to no down payment, you will be well ahead of the game.


It’s possible for owner builders to minimize their down payments, because a good owner builder construction loan will cover up to 100% of their costs as long as there is a large spread between the cost to build and the finished value. (There should be a very large spread between the cost to build and the finished value if you are an owner builder, cutting out the overhead of a general contractor.)


Therefore, if you want to save tens of thousands of dollars by building your own home without hiring a general contractor, then you will need to find the right owner builder construction loan.


These loans can be difficult to find, and they are almost always a bit more complicated than a typical purchase loan. However, a good owner builder construction loan will always have these three essential features: a line item budget with unlimited draws, owner builder control over those draws, and a minimal down payment requirement.

Chris Esposito provides owner-builder construction financing nationwide through his Owner Builder 101 program. Visit www.OwnerBuilder101.com to get all the information you need to be a successful owner-builder, saving tens of thousands on your next home. Or call Owner Builder 101 at (877) 876-3688.

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