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| ISBN-13: | 9781603425902 |
|---|---|
| Publisher: | Storey Publishing, LLC |
| Publication date: | 03/14/2012 |
| Sold by: | Hachette Digital, Inc. |
| Format: | eBook |
| Pages: | 176 |
| File size: | 14 MB |
| Note: | This product may take a few minutes to download. |
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CHAPTER 1
Be Your Own General Contractor and Save
This book will teach you how to be a general contractor for building your own house. There's one big reason for doing this — to save money. How much you save will vary considerably depending on local prices for labor and materials, land costs, building permits, the size of the house, and your ability to follow the steps outlined in this book.
If you do all that I suggest, you can save as much as 25 percent of the total market value of a house. If you think of how much you will have to earn — and pay taxes on — to accumulate the money to build, the savings are even greater. And by reducing the amount of money you will need to borrow and then pay back with interest, you will save even more money for years to come.
Let's look at what you can expect to save. Your savings are based on the difference between what the house would sell for when finished (the market value) and what it cost you to build.
The size of the house will be the largest determining factor, as most general contractors base their profit and overhead on a percentage of the total cost of the project. A larger house costs more and therefore will include a larger profit and greater overhead for the builder. You will also save more in real estate commissions as the size and value of the house increases.
You can determine the market value of your new home prior to making a final decision about building. Here's how. Once you select land, obtain your house plans, and complete a list of all the items you plan to put into your house, such as flooring and cabinets, a licensed fee appraiser can determine the fair market value of your future house. Your lender will order an appraisal as part of the loan process, so you could wait until then to make a final decision. If the appraisal shows that you aren't saving enough money based on your cost estimate, there's probably an error in your cost estimating efforts.
Say that as a contractor, I build a house that I am offering for sale to the general public. My costs would typically break down as follows: the land usually costs 25 percent of the selling price, with labor and materials taking another 50 percent. That gives me a gross profit of 25 percent.
Wow, you say. That's a lot of money to make off of one product. Well, if it were that simple, you would be right. But before you get outraged with the building industry in general, let me show you where that gross profit goes when you build professionally.
First, I have to pay related sales expense out of my gross profit. If that involves a commission to a real estate broker, it may cost as much as 6 or 7 percent of the selling price. Next, like any business owner, I have overhead expenses. This varies with each builder, but the National Association of Home Builders suggests that home-builders allocate 50 percent of their adjusted gross profit (after sales expense) for overhead expenses. These include, but are not limited to, phone, insurance, secretarial, transportation, rent, and office equipment. That leaves me with just 9 percent, which is half of the adjusted gross of 18 percent (25 percent minus 7 percent real estate commission). That is my real expected net (before taxes) profit. You can see that when builders say they make less than 10 percent, they're not wrong.
But you aren't building professionally. You don't have to pay sales expense. You don't have to worry about business-related overhead. You can take the entire gross profit of 25 percent and consider it yours. You may never even have to pay taxes on that gross profit if you follow the Internal Revenue Service guidelines for reinvesting your primary residence capital gains (check with your tax advisor). Imagine! You could actually "make" this kind of money while you go about your regular daily business.
What You Need to Know
You need to know very little about the actual building process to be a general contractor. You don't need to have technical knowledge about framing or bricklaying or wiring. Your subcontractors will know their business just as mine do. I'll help you make sure of that.
You may wish to pick up some information on various aspects of building, and that's fine. There are many excellent how-to books available for the do-it-yourselfer on almost all phases of construction. You may want to read some of them to better understand the process of building a home. But there's no way you can become a master of all trades. Your role as the general contractor is to be an organizer and a manager, not a tradesman. Your responsibility is to get the job done by other people.
If you can estimate your costs, control those costs, and deal with people in a fair manner, you can build your own house! The most difficult parts of the process will be behind you when you actually start construction. Sounds unbelievable, doesn't it? But it's true. Your job of planning, estimating costs, and organizing will be 90 percent complete when you break ground ... or it should be. At that point it is up to your team of experts — your subcontractors (subs) and suppliers — to do their job. If you choose them carefully, they will do their jobs correctly, even without you being physically at the building site.
Even though you don't need to be an expert, remember that there are no silly questions. Never be too proud to ask questions at any point in the project from either a supplier or subcontractor. Most of them are very willing to help. They don't make any money until they sell you something or perform a service.
Find a Good Carpentry Crew
Perhaps the most important step in building your own home, and maybe even in helping you make the decision to do so, is finding a good carpentry crew. Also known as a framing contractor or framer, the carpenter, along with his crew, is your key subcontractor. An experienced, reliable carpenter, hired at the beginning of the process, will help you make many intelligent decisions and will help your local lender make a decision to lend you money.
A personal visit to a few lumberyards or building supply houses (especially smaller, locally based ones) to ask for recommendations will give you more than enough leads to find a good carpentry crew. Asking friends and acquaintances who have been through the building process or a major renovation is another way to gather names of good carpenters (and to avoid bad ones). If the first carpenter you find is too busy, ask him to recommend another. But usually another house can be worked into the first carpenter's schedule, and it is worth waiting for a good crew. Your carpenter will be one of your best sources for finding many of your other subcontractors.
After selecting a good candidate for this job, but before hiring him, check him out. He should give you a list of four or five jobs he's handled. Talk to the owners. Look at the work he did for them. Other sources to check for references with are building suppliers that have dealt with him.
Most experienced carpenters have a thorough knowledge of most phases of construction. These job-site veterans are experts on getting a house framed up and closed in quickly, with all doorways, stairways, and window openings sized and located correctly. A good carpenter may be hard to find and hard to get, but is always worth waiting for. He may cost you a bit more up front, but in the long run will save you money and time.
Time Involved
How much time is involved in being your own contractor? This will differ for each individual, but you'll spend more hours planning and preparing than you will on the construction site — that is, if you let the subs do their jobs without feeling that you must be there every minute. (After all, does your boss stand and watch over you?)
You may spend a month or several months of your spare time in the planning stages, depending on how quickly you are able to make decisions on all the various aspects of the project. For example, settling on house plans can take an hour, a month, or even longer, and the same thing is true when you are choosing land, specifications, and subcontractors.
You won't need to spend a great deal of time on the project after construction starts. Your maximum time commitment ought not to exceed two hours a day, which need not interfere with your job or normal activities. You will have many helpers and will be able to take advantage of some free management by other people. For example, you can have the real estate agents (the ones you are dealing with on your lot) do some legwork by checking on restrictions and getting information on septic systems and wells. Your suppliers can also help you save time by finding some of your subs for you, preparing a list of the materials you need that they hope to sell you (this is called a takeoff), and giving technical advice.
Work by Phone
As a contractor, the success of your house-building venture depends on good communication. Subcontractors have cell phones and/or pagers, making communication a lot easier than it used to be. Frequent phone calls to subs are the key to this business. Make those calls before you leave for work or in the evening when you are not working. You can make on-site inspections before or after work or on your lunch hour.
Daily on-site inspections usually aren't necessary. If you believe they are, and you can't do it, ask your spouse or a friend to check in, but you don't have to be there every minute. There isn't a general contractor alive who is. That would mean that he could build only one house at a time, but most contractors have five or six homes under construction at once.
You don't have to watch masons lay every brick or your carpenters pound every nail. Allow them to do their jobs. Mistakes may be made from time to time. Chances are they would have been made if you were there. There isn't a mistake in the whole process that can't be rectified. It should be your individual decision on how much time you want to spend at the site.
Years ago I built a vacation home in the mountains about 140 miles from our permanent residence. I made only three trips to supervise and check on the progress the entire time the house was being built, from the staking of the lot to the final inside trim. While I don't recommend this, I mention it to show that you don't have to be there every minute or every day. My mountain house was built by phone. This was far cheaper and much less tiring than driving 140 miles each way. The subs did a beautiful job. They wouldn't have done any better if I had been there watching them.
You Can Get a Loan
Unless you are paying cash for your house, you will need a loan. Almost all loans for houses are made by banks, mortgage companies, and credit unions. Shop the Internet or use a mortgage broker. A good broker will knowledgeably research all sources for your specific loan needs, saving you time, money, and a lot of headaches.
Obtaining a loan is crucial. No money, no house. You must determine very early in your decision-making process whether you qualify for a loan.
The intricacies of financing are explained in chapter 4, where I discuss how a loan works and how much you can borrow. Lenders used to be somewhat reluctant to lend to an individual who plans to be his or her own general contractor. Not any more! But lenders do want to be sure the house will be built properly and, most important, finished. They don't want to step in and finish a house. They are lenders, not builders, and that's the way they would like to keep it. It will still be a challenging sales job to convince them you can be your own general contractor, but with the knowledge from this book, you can do it.
Plan your loan application process carefully. Before meeting with a loan officer, you need to have thought through all the steps in the construction of the house, to understand the problems, and have solutions to them. If the lender isn't enthusiastic about your decision to be your own contractor, you must do all in your power to present this approach as an asset, not a liability. Your projected savings can make it an asset.
The lender will want to know that you are an organized person who can handle the details of home construction. You will be convincing if you have all of your homework completed when you reach the bank.
Be Persistent!
After you become familiar with the material in this book, there should be no reason for you not to get a loan if you have good credit. It costs very little to go through the initial stages of discussion with a lender and get a commitment for a loan. Keep in mind, however, that one or two lenders may turn you down before you get an approval. Don't be discouraged. Sometimes it has nothing to do with your ability. Sometimes you pick a lender who is not interested in your situation. That's just the way the lending industry is.
In building my first house, I was turned down by four lending institutions before I found two who would permit me to be my own general contractor. If I hadn't been persistent, who knows where I would be right now? I was turned down because I wasn't thoroughly prepared for the loan application. Each time I was rejected, I would do a little more homework and be better prepared for the next appointment. I didn't have a book to guide me — you do. You can do it.
Three Alternatives to Being Your Own House Contractor
Let's suppose that for one reason or another you (or a lender) decide you can't go forward with your plan to act as your own contractor. Here are three other ways you can build, each using a professional general contractor (builder) in a position of increasing responsibility and at correspondingly greater cost to you. (The first two options should still save you money overall.)
1. A manager's or site supervisor's contract
2. Cost plus a percentage, or a fixed fee contract
3. Contract bid
Because each option increases the contractor's responsibility, the cost of using that contractor also increases. The cost of the land, the materials to build the house, and other fixed expenses should remain the same.
For all practical purposes, options 2 and 3 are readily available contracts that are used by most builders with varying degrees of legalese and varying degrees of slant favoring one or the other party. (Samples of contracts for all three options are shown in Appendix 2.)
The least expensive way to go — and the one by which you can still be considered the general contractor, be accepted by your lender, and possibly feel more comfortable dealing with subs — is the first option, the manager's or site supervisor's contract.
Under this arrangement, you hire a licensed general contractor whose one responsibility is to act as your manager with the subs. This contractor, in return for about one-third of the normal fee or profit and overhead, will assist in finding the subs (although you can still find your own), schedule the subs, check the quality of their work, approve the quality of materials, and order materials, when needed, in your name. You will still be responsible for selecting and buying the land; figuring out all cost estimates; securing suppliers, permits, and loans; paying all bills, including those from subs; and ensuring inspections for quality and approval. You will be responsible for the final job and its overall acceptance.
One advantage of this contract is that the general contractor will work with you in the following ways:
* Assist in cost estimating
* Help find subs
* Schedule your time better
* Help cut red tape and get the necessary permits
* Schedule subs, from survey to landscaping
* Assist in reviewing bills when requested
The manager's or site supervisor's contract shown in the appendix can be modified to include more or fewer of the responsibilities of the general contractor. The cost, of course, will vary with the number of responsibilities listed.
If you decide to use any of the sample contracts provided, you or an attorney can modify it for applicability and to make certain it conforms to local laws.
CHAPTER 2
Where to Start
These are the basic steps in deciding whether to proceed with your building project.
1. Make a budget.
2. Deduct the cost of the land.
3. Determine what size and style of house you can afford.
4. Find house plans that meet your criteria.
5. Determine the cost to build this particular house.
6. Get an appraisal of the finished house and land together.
7. Now you can make your decision.
The Budget Comes First
Making a budget has to be your first step, even if you are a billionaire! Making a budget for housing is simple. Don't complicate it. The formula is: Cash + Loan = Budget!
First, add up all your available cash and any assets you want to convert to cash for your dream home. Second, determine your maximum "borrowing power." These two steps determine how much you can spend. It's that simple.
(Continues…)
Excerpted from "Be Your Own House Contractor"
by .
Copyright © 1982 Carl Heldmann.
Excerpted by permission of Storey Publishing.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
Chapter 1 Be Your Own General Contractor and Save (3)Chapter 2 Where to Start (14)
Chapter 3 Financing (30)
Chapter 4 Cost Estimating (41)
Chapter 5 Further Preparations (52)
Chapter 6 Subcontractors (57)
Chapter 7 Suppliers (65)
Chapter 8 Building the House (69)
Chapter 9 Additions to an Existing Home (88)