Budget Process for Your New Custom Home

HOW MUCH WILL THIS HOUSE COST?

No one can accurately predict what your new home will cost until the design and selections are complete. Understandably, many home buyers are uncomfortable with this ambiguity, but expecting an exact price on the new home before your decisions are finalized is like going into a restaurant and asking how much your dinner will cost before you have selected from the menu.

Your home builder can assist with a rough budget in the beginning. The cost fluctuates with the choices you make and the interaction of design elements; few decisions operate in isolation. For instance, deciding that you want a side-entry garage can affect foundation, concrete flatwork, framing, windows, exterior trim, grading, and landscaping costs. Self-discipline and well-thought-out priorities are essential to staying within your target budget.

Statistics show most home buyers spend 10 to 15 percent more than they originally intended.

DEVELOPING THE BUDGET

Once drawings and specifications are finalized, the builder begins the pricing process, sending copies of your house plans and specifications to trade contractors and suppliers for bids.

The builder must represent everything in the house budget to obtain construction financing, but you may not have finalized all selections. You and the home builder may agree to use allowances. An allowance is the estimated cost of the listed item. If the cost of your selection exceeds the allowance, you will pay the difference in cash at the time you finalize the choice. (An alternative is to ask your lender to approve a higher mortgage amount and include the cost in your financing.)

Precise pricing is impossible for some categories. For example, on some sites, until the excavator begins digging, no one knows what conditions exist—ground water or rock can impact the cost of digging the foundation. You will pay the difference between the estimate for such work and the actual cost to the builder. Most contracts refer to such costs as reimbursable expenses.

The new construction budget evolves as prices come in from trades and suppliers. Permits, fees, taxes, insurance, and allowances are entered. Builders include a contingency amount, usually two to five percent. They calculate and include commissions for real estate agents and, if applicable, builder overhead and margin.

Builders use three basic methods to price homes:

Fixed-price. This means you and the builder both know the cost of the home described in the plans and that is the price you pay unless you and the builder agree to changes later.

Cost plus. The plus is a percentage of the cost of building the home, the builder’s margin for overhead and profit. The percentage is fixed but the dollar amount may change, depending on material prices and decisions you make during construction.

Fixed-fee. The builder sets a fee for managing construction of your home and that fee remains unchanged. The cost of the home itself can change if you make changes or site conditions result in extra charges.

However it is calculated, the price of the home appears in the purchase or construction agreement along with a draw schedule as determined by the construction lender. A draw schedule sets out the timetable and procedures for paying bills during construction. The final cost of your home may change due to items such as the following:

Allowances. If you have not made final decisions in certain areas—for instance, floor coverings—an “allowance” will be included in the pricing. This gives you more time to consider these selections while a definite price for the new home can be set. If the allowance is $1500 and your final choice totals $1650, you will pay the additional $150 when you sign the order. If the total is $1400, the difference is credited to you at closing.

Reimbursable Expenses. The cost of some aspects of construction cannot be determined in advance. Your contract might provide for reimbursable expenses. These include such items as establishing a well for your water supply or handling unexpected site conditions such as large rock formations.

CUSTOM CHANGES

Many builders will consider changes you might want to make in your floor plan, especially if they are nonstructural—that is they do not affect the load-bearing portions of the home. Be prepared to describe the result you want to achieve to your builder. Alternative methods for achieving the same effect may be available at less cost.

Change Orders. Although changes are possible during the building process, once blueprints have been drawn, engineering completed, and a building permit obtained, even a minor change can necessitate redrawing, re-engineering, and re-approval by the building department and homeowners association—costing both time and money. Take full advantage of your design meetings to arrive at a plan that expresses your new home dream and minimize changes to avoid extra costs or extending your homes construction schedule.