The finances of it all: What I wish I knew before we decided to build our house

June 13, 2017

 

Don't get me wrong, we still would have done exactly what we did but it would have been so nice to actually know and be prepared for what was going to happen.  Instead we hit obstacles every step of the way and had an unrealistic view of the steps and the timeline.

 

When we decided to build there was nobody we knew and no resources out there to really help us understand what exactly we were getting ourselves into.  The people we knew who had built had bought their houses directly from the builder who had developed the street.  This means you put down a deposit, work with the builder to customize the floorplan and finishes throughout the build then close on the mortgage once the build is complete, that's the best way to do it.  

 

That's the best way to do it if you aren't dead set on having a large piece of land, the land offered by developers are typically on ~1 acre lots or less. The one and only thing my husband was dead set on was to have a lot of land, at least 10 acres.  He said he wanted to be able to walk outside in the buff and not have any neighbors around (really, who does that! I hoping he just likes having the option and doesn't really do that).  

 

It didn't take too much arm twisting on my part either. Our last house was on .25 acre lot, we would hear our back yard neighbors fighting while trying to enjoy a glass of wine on the patio.  In the evening, our next door neighbors would put their 3 yappy dog's in their three season porch that was about 10 feet from our heads in bed, always when we were trying to fall asleep. Yeah babe, land sounds great! Plus there are some beautiful lots available in the area, how hard could it be?

 

If I could go back in time, this is exactly what I would have wanted to know.

 

Determine Location

First things first, where do you want to live?  For us it was a combination of commute to work, school system a smaller rural farm type community. Then we looked at the available lots to see if they had what we were interested in.  We liked 3 towns very much, only two of them had the large lots we like and we had another town in mind only in the event the perfect piece of happened to come up.  TIP: Looking at the recently sold lots versus the available ones was really helpful because you can get a better sense of how long it was on the market and the true value. With land in our area many of the bad lots sit for a long time, others are way over priced and sit making just looking at the available ones misleading.

 

Determine your budget then talk to multiple banks

We did our homework as far as what we thought we would spend on land, what we could sell our house for, the estimated cost to build from our builder, estimated property taxes and used all that to get and idea of the total costs.  We then agreed on our limit for monthly payments considering other household expenses. 

 

I always favor local credit unions for any type of loan, they typically offer the best service, competitive interest rates and there is a lot to say for keeping your money local. I called a few of the credit unions in the area I liked but none of them offered construction loans.  Then we ended up meeting with two local banks and our experiences with them couldn't have been any more different.  

 

The first bank we met with a loan officer who has been doing this for decades, she knew exactly what figures she needed, popped them all into her spreadsheet, gave us a mind numbing amount of information and really helpful tips.  We talked about using our cash down payment to buy the land to make a more competitive offer and that was something they could work around. Best of all we walked away with answers, she told us exactly what we were pre approved for, she ran our credit and did the debt to income ratio for us and the rate was a little better than we expected.

 

Next, we met with another local bank that has a really great reputation for conventional mortgages.  I called to make an appointment for a construction loan, when we got to our appointment we realized the loan officer couldn't answer any of our questions, she was calling others to get answers, those people didn't have the answers and then I finally stopped asking. It turned out none of their loan officers work with construction loans, it's all done by someone in the back office. The loan officer abruptly wrapped up after we answered her questions and before she even ran our credit.  I asked where the pre approval and the rate information was, she explained they run it all after since it's construction and we will be getting a note in the mail.  

 

The letter came in the mail a couple weeks later, we were approved for the wrong amount there was a miscommunication between the front and back office.  On top of that the interest rate was a full 1% over what the other bank offered with no explanation as to why it was so much higher than the market rate.  When I contacted the loan officer to ask (yes, she had to email the back office to get the answer) they explained that construction loans are considered a "portfolio account" and therefore they charge a premium.  What a waste of time.  TIP : Save yourself a lot of running around and ask the bank their construction rates  and ask if they do a lot of construction loans.  If they don't, there is a reason.

 

Sellers and the information they should have prepared 

Once you are confident in what you can budget for land and you've decided how you plan to pay (wrap the land up in your mortgage or pay cash for land and use the bank appraisal to apply the value to your down payment) it's time to go shopping. We knew that good land sells fast and we are competing with builders who have cash on hand so we felt like we had to go the cash route.  The downside with cash is that you'll have to have multiple closes, one for the land then another for the mortgage and there is a cost to that. 

 

We looked at so many lots with our agent and our builder.  It seemed like every day we were driving around checking land out.  The pictures and walking around the lots only get you so far. Sellers should have a site plan and an order of conditions from the town prepared and provided before you even think about getting excited.  

 

The site plan is a drawing showing the shape of the lot, the measurements, where the house can go, where the septic can go, how many bedrooms the septic plan is approved for and any wetlands.  On some plans you would see the proposed house hundreds of yards from the street and realize you have the pay to put a driveway and telephone poles every 100 feet in to get electricity to the house.  

 

Beautiful pieces of land started to look not so nice. The wetlands were the big problem on many of the lots.  You have to have to protect the wetlands and work around them which is $$ in site work.  We saw land that has the septic systems hundreds of yards away from the house to avoid wetlands, another that had to have a bridge built as part of the driveway to go over a wetland (sounds charming but we have a budget).  

 

The order of conditions (OOC) comes from the towns conservation commission and tells you exactly what prep work needs to be done to the land before you are granted a building permit. There is a significant amount of time that goes into getting that order, and you need it to see if the land is a viable option on not.  If the seller doesn't have one yet, there really is no point in moving forward as you'll just be dragged along as they go through the process and you do not want to purchase a lot without one as you may find it's not build-able.

 

Normal and workable OOC's tell you what trees have to stay,  how far you can build from the wetland, what type of protection you had to put up (i.e. silt fence, hay, etc.).   One lot had a sighting of the protected box turtle so we would have had to build a barrier and pay for the state turtle people to come around periodically and look for signs of the turtles, it didn't help on the particular lot that the neighbors didn't want anyone building and were likely the ones reporting the turtle sightings (small town drama).  

 

Another wanted very specific (and expensive) drainage systems in two locations on the lot.  The lot we ended up buying had an order that an engineer must do daily inspections of the construction process, and we would have had to pay for that.  Fortunately the town waived that condition because they have worked with our builder. There is no way to tell by walking a lot what the OOC will have, that's why it's so important to have it in hand before making and offer or at a minimum, putting a contingency in an offer that the seller must produce the OOC in x days and it is up to the buyers if they want to move forward after reviewing.

 

By the end of our search we had looked at dozens of lots, put offers on 4 of them.  Three of the four had multiple offers.  We were under contract on one for 4 months before it fell through. We did end up getting the exact kind of land we wanted, it had the most acreage, a beautiful view off the back.  It's mostly flat, the street isn't very hilly (safe winter driving) and the neighborhood has the most beautiful houses; a nice mix of old and tastefully new.  Best of all the OOC was very doable and from what we could see there was minimal site-work needed aside from bringing in fill soil.  As an extra special bonus the lot allowed for a walk out basement, something hubs dreamed of.

 

Our lot came on the market during the holidays when many buyers weren't focused, the seller had all the documentation prepared and we put in a full asking cash offer right away.  This lot was not appealing to builders as it only had frontage for 1 house with most of the land behind it going up the mountain.  We were hopeful to have at least a shot as we weren't going up against all the builders who easily outbid us.  It was another multiple offer situation with buyers like us looking to build their dream house.  We found out after that we both offered the same amount, we offered cash and the other party required bank approval (which would take months and is subject to an appraisal).  We said we could close as soon as the lawyers can schedule it and our offer was accepted!   It was a combination of planning, patience, our amazing realtor and really good luck that got us our land.

 

Getting the mortgage prepared with the bank

Once we closed on the land it was time to get back with the bank to draw up the exact figures for the loan.  Sounds easy right?  Remember when we decided to buy the land outright and use the appraised value as part of our down payment - well that's about to come back an haunt us.

 

The bank appraiser called hubs very confused about if this is a new construction or an existing house.  We were alarmed with the odd questions since he had been sent all the info, he advised he was standing in our land and had the plans but wasn't sure so he called.  Huh?  We knew it was going to be a disaster.  And it was. 

 

A few days later, I got a call from the loan officer who was in disbelief.  She said she had the appraisal back and she has never seen anything like this before (remember, this is the one whose been in the biz for decades), it came in $100,000 under, yes $100,000.  What a pickle.   We reviewed the process to dispute and she advised that disputes typically do not result in the appraiser changing the figure but it must be done in order to get another appraiser.  

 

I began reviewing the report line by line and found so many problems.  He decided the quality of construction was on par with a trac house despite the contract clearly showing we were paying for premium product and finishes with an established custom builder.  The recently sold comps were way off, it didn't make sense why he picked the houses he did.  I won't get into all the details but I went line by line on each comp and explained where and why I had concerns.  I then, with our agent did our own review of comparable sales and asked the appraiser to consider those.  It was written in a respectful but fact based manner and boy was it long at 12 pages, no fluff.  

 

We submitted and settled in for the 10 day turn around from the appraiser.  Thankfully, we heard back the next day and he came up significantly, not to where we wanted, but workable. He was reasonable in reviewing and adjusting nearly every concern I raised.  Once again, our loan officer had never seen this before either.  Because he didn't come up all the way we would have to put more $ in the down payment to keep to the 86/25 loan to value ratio and our interest rate.  Bummer, that was the furniture fund.  The other option was to go back out with another appraiser but we would be forced to use whatever the new appraiser came up with.  We thought about it for a couple of days and in the end decided to stick with what we had because it was forcing us to put a bit more down, lowering our principle (our future selves will thank us) and because we just couldn't stomach the idea of getting a worse figure with someone else.  

 

Site Prep

Now the honeymoon is over, the ground has thawed and we are ready to build! Insert break screeching sound.  Not so fast, there is still site work.  The OOC only told us part of the story, once the subs started looking at the plan there were surprises.  The first was with the fill soil, we knew we had to bring it in but didn't realize the there is a special (special = expensive) type of fill that has to go around the septic.  

 

The next one was the deck we would need to factor in with the addition of the walk out basement. We got prices for wood and for trex, we were really leaning towards the more inexpensive option as this is already out of hand but did some soul searching and realized the deck in the back with the view is really our favorite feature of the home and decided we didn't want the maintenance of the wood and to go big with the trex.

 

The latest was the well.  Wells in our area usually cost about $10,000 and go somewhere around 200 feet.  No, not us, no way.  We got a call on the 3rd day of drilling, 523 feet and only 1.5 gal/min which is extremely weak.  Our options were to hydro-frack to get more pressure for another 3k so we would have enough water for irrigation or keep it as is.  Even with the low pressure there is a 500 foot well filled with enough water to easily get us through normal household usage.   No fracking will happen for now now, we decided to try and save for any suprises that might come up inside the house and we can go back and dig deeper if we decided to after the build. 

 

We are currently in the middle of site prep, waiting on the town for the permit then the spetic, fill and foundation will be going in.  

 

 

 

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