Storm wrote:
Wonk wrote:
This is one of the reasons we decided to purchase a lot and GC the new house rather than buy an existing house at retail. If you manage the project well, you build 25% equity in your residence the moment you get the C.O. Of course it does require some time to manage the project along with cash to purchase a building lot, but I think it's worth it. No PMI, and the capital gain is tax free when you sell after 2 years. You'll never pay PMI on a house you build acting as the GC as long as you manage each part of the process properly.
Wonk, knowing what you know from going through this, would you attempt to do this without basic GC knowledge or construction skills? I've heard this is a way to save money, but my expertise lies in computer related fields, not the trade skills required to build a house. I would be concerned that subs would BS me, and I wouldn't know the difference between truth and lies. Also, it would be hard to tell if I was being overcharged.
Do you have experience in the GC industry enough to know who the good subs are, and how to tell if they're being honest or how to get good prices?
I read Carl Heldmann's book a few years ago and decided to take the plunge:
http://www.byoh.com/thebook.htm
He's got GREAT free information on the site and on his blog. You can also email him questions which he'll answer on his blog. Just a great guy. The only experience I had prior was a basic rehab of a commercial kitchen facility. To be honest, I didn't learn much on that job. I don't know how to run electric or plumbing, etc. What I did do is bring in a friend who is a builder to do spot consulting--Q & A once a week. If you don't have such a resource, there are consulting companies that will guide you through every step of the GC process for about 5% of the project. So you are looking at 20% equity rather than 25%. When I ran the numbers on a $400K house in our neighborhood, the equity represented about $200-$250/hr in tax-free earnings after 2 years of using it as a primary residence.
As Heldmann puts it, you don't have to know how to do a trade in order to hire a tradesman. This is true. You need to be a decent project manager (scheduling, paperwork, budgeting) and you need to know your numbers. Good subs are all over the place right now since homebuilding is in rough shape. You can find good subs at builder supply stores, existing construction sites and believe it or not--craigslist. Angieslist.com and servicemagic.com could be great resources too. Just contact lots of subs and get lots of bids. Be sure to pick subs with good references and will meet your terms for payment schedules. The big inspections (foundations, plumbing, electrical, etc) are done by the building officials in your municipality so everything checks out. You'll know if someone did a crappy job drywalling, installing flooring and painting.
You will need to be a good researcher and a good shopper. I'm fortunate that our public records are online, so I can search just about every detail on every house in my neighborhood. You'll need to establish what builders pay for a lot (usually through public records of recent new construction) along with the building costs of the house. It would be easy to buy a lot and then let costs run wild. What I did was figure out the typical style of house being built in my neighborhood and find plans that were similar in style, size and finish. Then I took the retail market value of the end product, took 25% off and had my budget for land and construction. Don't try and go custom--your appraisal will be a crapshoot. Blend in with the neighborhood.
As mentioned, more of your time will be spent planning, shopping, filling out paperwork, etc than actually managing the project while its in construction. It's a big project--to be sure--but the reward can also be big. To be honest, my decision stemmed from a compromise I had with my wife. I wanted to rent a few more years because I'm pretty certain "house" prices will go down another 10% in real terms. She wanted a "home" right now. The ladybird wanted a nest and there's little I can do to convince her otherwise with spreadsheets and logic. So I decided to build so that we'd have positive equity all the way through the bottom if necessary. I'm also in the process of trying to sell her on the idea of building and moving every 2 years to pocket the tax-free equity while the primary residence exclusion is still on the books. She doesn't like the idea, but I'm trying to convince her with promises of more vacations with the proceeds.
Don't worry about lack of experience. Like I said--worst case--if you simply hire a consulting firm to help you in the process, you'll be leveraging their experience for 5% of the project cost. After your first build, you won't need them anymore. I highly recommend Carl's book as a starting point.