Maybe you aren’t the kind of person who keeps a strict family budget or regularly balances a checkbook. But if you plan to risk your savings on a half-million-dollar new home, it’s time to start acting more like an accountant. You need to develop a budget and stick to it closely. If you borrow money to build, your lender will want to see one.
What’s disturbing about new-home budgets is that they are notoriously exceeded. That’s why lenders recommend adding a 15 to 20 percent contingency fee. You have hundreds of product decisions to make, and you may decide halfway through the project that you really want to upgrade to solid-surface countertops or multiple showerheads. Home-building chat boards are littered with stories about owners who forgot to budget for landscaping, garden walls, or beefed-up foundations.
Budgeting incorrectly for a new home, a topic covered in my book The Forever Home, can be such a significant source of buyer’s remorse that it will undermine an effort to live in a house forever.
Most house plans come with material quantity lists that builders can use to prepare bids. The best bids from builders – you want at least three – isolate material from labor costs so you can determine the cause if budgets are exceeded. Pay particular attention to the builder’s proposed finish level in the kitchen and bathrooms, which are the most expensive rooms to build. And remember: most house plans don’t include an HVAC or electrical plan. You or your builder will have to bid for that work separately.
Your winning builder’s bid document will form a big part of your budget. But it’s not enough to just come up with numbers – you need to keep track of deviations as they occur. So many purchasing decisions are made during a project that it’s easy to forget a big one. Most builders generate a change order when you deviate from your contract. You will have a record of whether you pay the change order now or later. The last thing you want is a big budget-busting surprise at the end.
Hard Versus Soft Costs
When it comes to budgeting, it’s convenient to think in terms of hard and soft costs. Hard costs would be the cost of building the structure, including what you pay the builder. Soft costs would be what you pay for land, engineering, government permits, taxes, and anything else that isn’t bricks and mortar. Soft costs can easily equal half the cost of the project.
A 2017 cost of construction survey by the National Association of Home Builders provides a detailed breakdown. It puts the average cost to build a new home at $427,892, including the builder’s profit and the price of the lot. These will account for an average of 21.5 percent of the finished home value, though they may be much higher in New England and Pacific regions. Here’s how the survey breaks things down if a builder were building a home on speculation and selling it to you.
The finished lot, including financing, cost $91,996 21.5%
Total construction cost $237,760 55.6%
Financing cost $7,636 1.8%
Overhead and profit $67,737 15.8%
Marketing cost $5,314 1.2%
Sales commission $17,448 4.1%
Total sales price $427,892 100%
The cost structure differs when you hire a builder to build a home plan. You won’t have the builder’s “marketing costs,” and you won’t have to pay a sales commission. But you will have the cost of buying a house plan and paying an engineer to stamp your drawings. You may also have additional landscaping expenses that aren’t captured in the survey.
Homing In on Key Variables
Of course, you could still build the house for less. In fact, you could change the finish level of the house—reduce the specs to economy—and build it for $379,000, including a $100,000 lot. But you’d have to move to a composition roof, replace hardwood flooring with carpet, use fewer energy-conserving appliances, and include fewer built-in cabinets and shelves. Some of these changes may increase long-term maintenance and cost you more in utilities.
The other thing missing from this budget is the total landscaping cost. Many new-home budgets are broken by what happens in the yard. Determine upfront how much landscaping your builder plans to perform as part of his bid. It’s a good idea to develop a landscape plan before you start the project; that way, you can better understand the full scope and cost. How will you build the driveway – with concrete, asphalt, or pavers? That’s a significant variable and good to know in advance.
Don’t forget the cost of clearing the lot for construction. In the NAHB survey, site work costs on average $14,355, though it ranges as high as $25,000. Civil engineers must inspect the property, determine where the house should go, and how the site should be graded for drainage. Then, you’ll need a contractor to clear brush and trees, remove topsoil for the home and driveway, and grade the site for drainage.
They include the cost of building to local codes – some jurisdictions may have beefed up fire or wind requirements – and government fees. Most local governments publish a fee schedule, but deciphering it is difficult. Some jurisdictions, for instance, charge separate fees for building pools. Some charge hefty fees to cover the impact your home will have on public infrastructure. Your builder probably has a good idea of the government fees that you’d be expected to pay.
Of course, it’s impossible to budget precisely for a new home project. There are just too many complex variables. However, understanding the scope of expenses before the project begins reduces the potential for heartache and name-calling.
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