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Tips on New Home Construction

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THE CONSTRUCTION PROCESS

TIME for a custom home is typically 10 to 14 months depending upon the complexity and size of the home.

CONSTRUCTION INSPECTIONS - With a complete set of plans detailing the home as agreed and complete specifications detailing what is in the home and what is not in the home the construction of your home will be inspected by your lender at the following times, prior to funds being disbursed to the builder. The same inspections are performed by the city or county building department.

1. Slab of the home is complete
2. All exterior walls are constructed
3. Roof system is complete
4. All framing, plumbing, electrical, heating, insulation, etc. is complete (This inspection is made prior to the drywall being installed.)
5. When the drywall is complete
6. When the cabinets, trim, driveway, and other finish materials are complete
7. The final inspection is made when the home is complete. You will also inspect the home at this point and will have the opportunity to point out any areas that need to be corrected.

COST - The typical builder works on a margin of 18% to 20% of the sales price of the home. This margin represents the gross profit remaining after all direct construction costs are paid. The Builder must pay all overhead expense, all current and future warranty cost, all supervision cost, and much more out of this amount. Furthermore, there are normally numerous unforeseen cost items plus increased costs due to inflation during the building process that the builder must absorb. This also comes out of the gross profit.

There are a limited number of suppliers and labor providers for luxury residential construction. We have one of the oldest track records in Orlando as well as a sterling credit rating. I would love to tell you that our purchasing power allows us to purchase items at a much lower price than others. However, in reality it is a very competitive industry and most credit worthy builders pay about the same price for the goods and services that they purchase. Therefore, it is hard to understand why one builder could offer any special cost advantage over another. If there is a cost advantage it is typically because one builder is purchasing and providing a lower quality service or product than another.

If three different builders were to prepare a bid on the same home with the exact same finishes and level of quality I would be shocked if there was more than a 2% variance in price between those builders. The problem is that this never happens. Each builder will include different items in the home as standard and their trades will have different quality levels than the other builder which make a very real difference in the price. This makes comparing builders prices almost impossible.

The important point is to find a builder that you trust. Everyone should agree exactly what will be included in the home as well as the quality level that can be expected. The end cost of the home will be a function of the home to which you have agreed.

COST PER SQUARE FOOT - Cost per square foot is a commonly asked question of builders. It is impossible to give an accurate answer to this question until the plan is chosen, finishes are agreed to, and the homesite has been evaluated.

Each home is quite different and the items included or not included make a major difference in the cost per square foot. There are probably 10,000 variables that can impact square footage cost due to home design, specifications, site conditions, and much more.

Typically, as the square footage rises, the cost per square foot will decrease. This is because the same home, regardless if it is 3,000 or 9,000 SF or whatever size, built on the same lot with the same quality will have the same amount spent for landscaping, utility impact and tap fees, driveway, mailbox, appliances, pool, garage, and many more major items. As the square footage increases those common costs are spread over more square footage which reduces the actual cost per square foot.

There are many areas in a home where footage can be added quite inexpensively. If the budget allows, this should be done since there will be a major spread between the cost of the footage and the appraised value of the footage. Your builder will be happy to point those areas out to you.

Our preferred manner of operation is to assume that all of our customers are expecting an executive style home with executive finishes included as standard. If we offer a cost per square foot it is to build that type of home. Many builders offer a low price per square foot with minimal specifications for the home assuming that the Buyer's will upgrade to their expected quality level once the home has been started. Personally, I do not like to be on either side of this type of surprise and I doubt that you would either. If there is a major difference in another builder's cost per square foot for the same home you can be sure that there is a difference in the quality, features and finishes included, or some other tangible item.

FINANCING- Once you have decided upon the builder, the home design, and the cost of the home there are 2 ways to finance.

First, your builder can obtain a construction loan and complete the home as agreed. The builder will purchase the lot and your closing will occur when the home is complete. The builder is assuming the risk in this type of financing and he will ask for a deposit commensurate with that risk.

Second, you may purchase the lot and the builder will construct the home on your lot. From a local financial institution you would obtain a construction/permanent loan. The builder is paid in draws as the construction progresses according to the draw schedule of the lender. The lender will inspect the home as it progresses prior to disbursing funds to the builder. All funds are paid direct to the builder except for the final draw which must be countersigned by you prior to occupancy of the home. When the home is complete the lender will convert the construction loan to a permanent mortgage loan.

My preference is the second method. This type of arrangement will eliminate a second closing on the property, saving closing costs which is a savings to you and is tax deductible. You will be responsible for construction period interest which is also a deductible expense. If the builder pays the interest expense and closing costs, these cost will be added to the price of the home and will not be deductible to you. If your employer is relocating you, often times you can recover some of these costs from them.

dave brever