How to live during building

This is a question that has probably been asked here before, but I would love to hear more comments, suggestions, suggested reading, etc.

My wife and I are seriously thinking about building and we want to know how the average Joe gets it done. One of the first questions is how do you juggle paying to live somewhere, buying land and paying the interest on a construction loan. Is this simply a matter of having enough dough or are there some tricks? Is there any suggested reading out there?

here's a sickening thought that works (i did it to get my place built). two words: credit cards. and look for the no payment no interest types. then hurry fast and get things done before it gets out of hand. when you're finished, you can mortgage it all out and pay them off. and hey, if you managed to use a card that has airline miles attached, you're likely to get a free trip or two out of it.
i realize that this is a crappy way to go. last resort. they dont make it easy to build your own place unless you hire out all of the work or you're filthy rich to begin with in which case you could hire out all the work anyway.
-kk

I sit here at my desk chair, simply trying to keep my face from making contact with my keyboard. My wife and I are finishing up building our first house right now, and we are totally exhausted since we chose to work full time and be the general contractor.

$ aspects,
Mintdesign makes a good point. I have about 50k leveraged out on 0% credit cards right now. I essentially use that as my cash pile, then I re-imburse myself from the bank from time to time. This way, it makes paying subs in a timely fashion easy, which keeps them on your job and happy. Indymac (and many others) offer a interest-reserve account for construction loans. This means that all your interest during construction essentially gets lumped on your final mortgage at the end. That way, you dont have to worry about covering rent and mortgage each month. Other tricks include opening up accounts at building supply places. That way, you have 30-60 days to pay materials off.

Living aspects,
I used to think money was the name of the building game. Now I believe that time management is key. How to hold down a job so that you can secure that construction loan and be a general contractor is difficult. Of course, it would be nice to hire a GC, but they are Expensive.

However, managing subs, county/city officials, bank, neighbors, etc is simply overwhelming. I would recommend going the GC route. That is my only advise. Building manufactured or modular (LV, Glide) really seems to be the right choice and would probably facilitate being your own GC. Building totally custom means working out endless details. My wife and I have pulled several all nighters drawing details in Autocad to keep the work going the next day. We quickly learned that there is a reason custom homes are on the market in the millions.

Hmmm interesting! We're kind of doing the credit thing with our current house projects. We'll just pay them off with equity from this house when we sell.

I'll be working as the GC on a remodel/addition I'm doing on an investment property so I guess I'll see how well I can manage it. Project management is a big part of my job so who knows, maybe I can squeeze in one more thing.

Sounds stressful, but it's gotta be worth it to have the house you want?

Keep the advice comin!

As a self-GCing owner of a house in progress, I agree with everything that's been said. Find a construction to perm. loan that lets you roll the interest into your final mortgage. What this means in $$ is that the interest for the presumed term of construction, usually a year, is acutally included as a line item on your Sworn Construction Statement, i.e. it's deducted from what you can spend to build the house right off the top. Everything I read suggested having some kind of ready cash reserve, and I don't see how it would be possible NOT to have this in some form.
Rather than credit cards, we're exploiting our home equity loan in the manner stated above. It's not ideal but it's what works for those of us that are not bajillionaires.
I think the most important idea I failed to fully understand before starting this process is that the quicker you can get it built the less it is going to cost. I would advise to factor this in to any and all decision making.

While we're building, we've put our student loan payments in deferment, subleased the apartment in the groundfloor of our rental home and saved enough money to get us through the construction period while we pay on our construction loan. We also don't eat out as often and generally have cut back in everyday expenses. Our construction loan payments will total about 6 or 7 months. We pay 1% of the total amount that has been drawn per month; that includes our land too.

We live a mile from our building site and our rent is low to begin with. The tradeoff is that we live in 850 s/f of living space with a 2 year old and a dog. But, it's much better than living on a rented modular unit on site like some people often do.

-sara

Stress!!! honestly, getting a credit card bill for like 10's of thousands of dollars every month is enough to make you crazy, let alone 3 or 4. and then trying to transfer balances onto new no interest cards when the first period of no interest runs out is even worse. the trick is to always pay and pay on time. my lender wouldnt give me a construction loan since it was my first house and i was going to do much of the work. but when i went back in there to get the mortgage when it was done, he had no problem with it, mostly because i never missed a payment. i have good credit. it didnt screw me up for life or anything.
it was worth every all nighter that i had to pull and every ounce of stress just to prove that i could do it physically and financially. in fact, i liked it so much that i'm starting on another one!
any way you can swing it, go for it. just dont let it kill you.

What kind of down payment are they looking for on construction loans? How do you buy the land at the same time you aquire the construction loan? Do you just end up with a budget and find a plan to fit it, or do you need to have the plans and land in hand when you talk to the lender? Is the cost of preparing the site included in the loan?

i cant believe anyone hasnt mentioned this, or maybe its just because i am the pup on the forum.. i moved back in with my mom =) best way for me to save $$$.. takes away any rush, the longer i take to get everything together the more money i save..

Check out some of the blogs for more detailed info about how it's worked for some of us. We're building a Glidehouse in Seattle by Ami McElroy has a particularly detailed account of their financing stuff.

In our case, we got one loan for land and construction that we'll be able to roll into a permanent loan when we're done. We only had to pay the closing costs up front, so technically no down payment but they do account for the fact that we'll be using the equity from our current home once we sell it as a down payment on the new mortgage.

You should start by figuring out what you'll qualify for mortgage-wise and/or what you want to spend on a new home. That will give you an idea of what size home you can afford and you can start looking for designs or an architect from there.

Site prep costs will come out of a construction loan.

If you're doing the land+consruction loan in one route, you should be ready to start building the day after you close on the land. The bank gets crabby when your project doesn't progress accoding to their time schedule and you run the risk of having to make interest payments on the funds you've drawn for the land. The problem with paying for land out with a construction loan is that it's difficult to have a hard and fast design plan without knowing what the site will be like and it's a considerable risk to spend money on a design and finalizing plans when your land is still in escrow.

I can definitely back-up splatgirl's assertion that the sooner you build, the cheaper! I have been hemorraging a little every month since going to settlement on my land-construction loan last July, as I have had to pay the interest on the funds drawn (as opposed to the full loan amount) every month. This will convert to a 15-year mortgage once I can deliver a Certificate of Occupancy to the Bank. So it is in my best interest (no pun intended) to get this wrapped up quickly.

Although I knew going into the process that the construction loan disbursements would occur AFTER certain line items are completed (i.e., septic installed, walls painted, finish flooring installed, etc.), I was not fully aware of how payments are made to the trades. As a rule, every trade/material provider requires partial or full payment upfront or upon delivery! And if you want the best prices, you have to be prepared to pay cash; paying by credit is sometimes possible, but they will assess a surcharge to offset the transaction fees. And unfortunately, it is not like you can complete the project as a series of neat, discrete events. It seems that every trade needs a little deposit to get the work started, and much of the work needs to be started in parallel. As such, by hook or by crook, at least with my construction loan, you need to have some significant cash reserves to get things started. Depending on the type and expense of the project and loan amount, I would venture to guess that you will need at least $50K-$100K in liquidity.

Oh, by the way, another potential source for funds is your 401(k) account! Most 401(k) plans allow you to borrow up to 50% of your vested balance for a fairly reasonable interest rate. But the beauty of this is that you are paying the interest back to your 401(k) account since you are technically borrowing your own money. I did this previously when I bought a coop apartment, and it worked out really well. I am hoping I will not have to do this again for my current construction project, but it's nice to know it's there for the taking.

[quote:hejiranyc format=text/plain]I would venture to guess that you will need at least $50K-$100K in liquidity.[/quote]


I think 50k to 100k is of reserves is quite excessive. But I guess it depends on the particulars of one's circumstances.

I don't know why banks make it so hard for you to pay your subcontractors. You can make it work; determination and organization go a long way. This is another reason building modularly is more convenient. The factory builds as the bank pays or vice versa. We've struggled with the bank draft situation as well but we've found reputable subcontractors who will bill[em]and[/em] we're in greater L.A.

Failing that, there's always American Express.

-Sara

Stuff I read suggested having a cash reserve equal to 10-15% of your total budget and I think that's a good guideline. Our bank wants the entire project to be paid in four draws which is possible but difficult. We had an existing home equity line of credit that we've maxxed out and paid off from a later draw at least twice. While I think we could have figured out how get around doing that, when you're knee deep in all of the other details of building, the last thing you want is the additional stress of trying to figure out how to float $20 or $30K for a couple of weeks or have subs get pissy because they're waiting to get paid.
Using a pro GC would exclude this as an issue entirely, I presume since they're the one paying the subs and materials invoices.

I guess the amount of liquidity is proportional to your building costs.

I think 50-75k is about right for my project. The interesting thing to note here is that you need this money on top of the amount you have to put down to close the loan. In my research, banks were requiring 20-25% down. Some lenders advertised the 90 or 100% loans, but you pay for that in your rate.

I'm surprised this option hasn't been presented: Live in an RV on the site! I know lots of people who do this, and it works well for them. Not sure if they rent or buy it, but I've seen it done.

Most urban/suburban places wont allow one to live in an RV on their land as they construct. Given the poor interactions Ive had with some of the selfish neighbors in the area Im trying to build, I can guarantee I would have the county at my RV in a half day.

Actually, this might make for an interesting thread. I wonder how other people in construction of new homes on infill lots are getting along with their neighbors. For the most part, most of my neighbors are nice. However, it only takes a couple rotten ones to really increase the stress on such a project. It would seriously be worth the time to go door-to-door prior to buying a piece of land.

we always meet the neighbors, present the project so they know what is going on, and leave them with phone numbers to call in case anything goes awry. it goes a long way to eliminating that stress.

we always meet the neighbors, present the project so they know what is going on, and leave them with phone numbers to call in case anything goes awry. it goes a long way to eliminating that stress.

Yea, we met our neighbors too. We dropped off renderings and the such to about 10 of the nearest houses and persisted to shake hands with about 6 of the neighbors within 2 houses in all directions. Low and behold, neighbors 10 houses down, that had nothing but compliments on my project the first time I met him at a xmas party, is managing to call the county daily. He is trying to get the county to make me pave an entire unmaintained road that has been slowly degrading over the past 15 years.

Hmmm, I seemed to have forgotten that 90k line item for replacing a road when I was setting up my budget with the bank.

Anyhow, I would recommend talking to as many neighbors as possible. It will help the live during building experience to know if your neighbors will be bad apples or not!

Actually, let me re-phrase my earlier post. We meet with only the immediate neighbors to either side, ones that will feel the impact of the construction, because they are ones who will be bothered most by the dust, noise, and nuisance of the construction process. And only after permits are in hand. For a private project on private property, you don't want to open the door for neighbors to comment on the design or suggest public amenities, as in this case (because municipalities are always looking for ways to subsidize public infrastructure with private dollars).

Actually, let me re-phrase my earlier post. We meet with only the immediate neighbors to either side, ones that will feel the impact of the construction, because they are ones who will be bothered most by the dust, noise, and nuisance of the construction process. And only after permits are in hand. For a private project on private property, you don't want to open the door for neighbors to comment on the design or suggest public amenities, as in this case (because municipalities are always looking for ways to subsidize public infrastructure with private dollars).