This contract is simple and straightforward. Take the total of the cost breakdown and put that fixed number into the contract. The builder will provide a list of responsibilities.
Cost plus Contract. This type of contract is usually for large construction loan projects.
The customer wants to make a lot of changes to their home as it's being built.
The construction loan period to build the home is 18 months so construction costs can change drastically. The builder prefers this contract to protect the costs and profits.
Know how your builder gets paid. There are two methods that banks use to make sure your builder gets paid while building your home.
The Voucher Reimbursement system has been around for quite a while. As usual, you'll have some builders that are very familiar with this method of payment and do not like change. Most banks find that the voucher system is simply too much paperwork to deal with anymore. The builder is given a big book of vouchers that looks like a checkbook and when they want to get paid or need to pay a contractor they need to fill out a voucher form. This voucher form is a request for payment and as long as the contractor has signed the lien release, the bank will pay the amount requested. The bank will also request an inspection throughout the construction loan to make sure that the work is completed.
The Draw Reimbursement system is becoming the standard for construction loan funding for most banks. The main difference is that the bank puts the accounting responsibility on you or your contractor. The bank uses your cost breakdown as the guide for the draws. Some banks use specific schedules of 4 to 7 draws based on completed construction milestones, such as foundation or framing. The draw systems also allow the choice of taking draws on a monthly basis, collecting partial payment for work and material items that have been completed.
Get construction insurance. There are three types of insurance needed to build. All banks require the first two insurances, course of construction and general liability. Workman's compensation is only required if your builder has employees.
Course of Construction Insurance. This policy is an all risk policy to include, fire, extended coverage, builder's risk, replacement cost, vandalism and malicious mischief insurance coverage.
General Liability Insurance. You or your builder can provide this policy. This policy is a comprehensive general policy or a broad form liability endorsement. The minimum amount of $300,000 for each occurrence is required. If the builder provides the insurance a general policy of $1,000,000 or a broad form liability endorsement is required.
Workman's Compensation Insurance. If your builder owns his own company and has employees that are helping to build your home, workman's compensation is required. If the builder simply subcontracts out the work and does not have employees per se, they will need to write a letter acknowledging that they do not have employees and are not required to have WCI.
If your builder tells you he is not required to provide any insurance whatsoever, he is most likely correct because it is not a law to have insurance to build a house. This requirement is set forth by the bank. So make sure you hire a reputable builder with insurance, it will help your construction loan close much faster. Ask your builder upfront if they have general liability insurance. If they do not ask if they have a problem providing the insurance. Some builder's cannot afford or simply do not want to pay for the insurance and then guess who has to provide it, yes, you do. You can save yourself a lot of headaches and money if you work with a builder that has insurance.
I hope this hellps, building your own home can be done in a timely fashion if you know what you are doing 6 months is possible. However, a year is more likely the real time frame.
Steps 1. Buy land if you don't already own some. You will need to either pay cash for the land, get a land loan from a bank, buy land from the seller with owner financing, or find a seller willing to wait for you to get house plans a building permit and a realtor willing to wait months for their commission (highly unlikely). Buying the land with a land loan first allows you to take the land off the market so others cannot buy it before you do. It also allows you plenty of time to pick out house plans, submit the plans to the county for approval and obtain a building permit all while obtaining the best construction loan. Construction loans can include the land into the construction loan only if you already own the land with a land balance to add into the construction loan.
Pick out a house plan. There are some great house plan resources on the internet. Just go to Google and type in "house plans" or "architect" for your local area and you will have more sources than you can handle. Once you pick out a house plan that fits your needs and expected budget, simply buy a few sets and start getting estimated bids from builders.
Decide whether to hire a builder or be an owner-builder. The goal of being an owner builder is mainly to save money. Some people can save quite a bit of money if done correctly. However, some people are not meant to be owner-builders, as it takes a strong personality to manage contractors. Possible problems when acting as owner builder:
Construction cost overruns
The best banks with the best rates require a builder or supervisor
Managing contractors to finish on time or to show up for work
Depleting your personal savings
The need to borrow more money
Loan extension penalties
Being taken by unscrupulous contractors
The need to refinance your construction loan
If you have never built a home before and absolutely need to act as owner-builder, hire a reputable builder to supervise you and the building of your new home, for a much smaller fee than their normal fee. The builder/supervisor will help you with the cost breakdown and manage the subcontracting on an as needed basis. If one of your contractors gets out of hand or you need help of any kind, you can call the supervisor for assistance.
If you decide on hiring a builder to do everything, make sure you hire a reputable builder or supervisor with a good reputation and plenty of references. Ask your friends if they know of good builders, and when you start to hear the same name over and over you know you've found a good one. Ask the building inspector for a list of reputable builders. The most important point is shop around until you find a builder with the most reputable and honest background.
Know what goes into the Estimated Cost Breakdown of your home. This is the breakdown of each particular cost of construction of the home. The foundation, lumber, framing, plumbing, heating, electrical, painting, and builder's profit, etc. The builder usually completes this form to show you exactly what it will cost to build your new home. The most important thing to remember here is that you do not want to underbid any line item and you do not want to overbid any line item. You want accurate numbers from real bids (not guesses) and a 5% contingency for cost overruns. Most banks add a 5% contingency over and above the builder's contingency for added protection. Good builders will send out the house plans to their contractors for specific bidding on each main item or can estimate the home themselves. The builder will send one set of plans to the foundation contractor, one set of plans to the framer, one set of plans to the plumber, etc, etc. When all the numbers come in, the builder will fill out the cost breakdown and come up with a total cost to build your new home. Bad builders will use a method of estimating the cost of building your new home. The WAG method stands for "Wild A. Guesses". This method is the most dangerous since it can lead to under and over bidding. The last method of bidding is simply to over inflate every single line item on the cost breakdown. This is the most profitable method for the builder and the most expensive to the customer. This is why you want to find an honest, reputable builder with a good reputation in your community. Once the cost breakdown is completed and you plan on hiring this builder to build you new home you will need to type up a contract. The contract needs to equal the added total of the cost breakdown.
Read the contract carefully. There are two types of contracts:
Fixed Contract: This contract is simple and straightforward. Take the total of the cost breakdown and put that fixed number into the contract. Continued...
Kidding aside, choosing the right contractor would be the toughest task. 2nd to that is the planning and permitting process. Depending on where what to build, you cold get hell from Planning Commissions. We have families in Los Gatos who have been fighting the commission for 2 years to add 800 sqft to their home and they are do not approving!! My suggestion, buy in the county pockets or un-incorporated areas which are much easier when it comes to permitting process.
Yes, in some towns it;'s easier to rob a bank than get building permits. Find architects who have contacts and relationships with the planning commission. Finally, the money which these days is a much tougher deal since construction loans have practically disappeared.
I would suggest that you start interviewing reputable contrators and/or architects. They can and will take care of everything for you from creating plans that will fit the footprint of the location to permitting and building. The length of time needed cannot be answered until you have a location and house in mind. The size of the house will certainly play a role in determining the build time. The location may also require special grading or prepartion again adding to the overall build time. Are you looking to tear down and rebuild or are you looking for a lot? The type of home in a given location may require city variances, which adds time. I think the best first step is to partner with an architect and/or contractor who can help fill in the blanks and help you understand the positives and negataives of all the options.
April Tavares, GRI, ASP
Realtor, DRE License #01742179
Most planning departments are more than happy to assist you and answer any questions you may have.
To find a good architect, a good place to start is at the local chapter of the American Institute of Architects. The Santa Clara Valley Chapter is located in San Jose, CA and has over 500 members.
As far as how long it takes to build a home? Well, in Saratoga expect to spend up to one year in the planning process (which will include a few months of waiting for the City to review your project) and one year of construction for homes over 2000 square feet. Smaller homes may have a faster timeline.