Common Owner-Builder Mistakes to Avoid

By DoItYourself.com Staff

Building your own home is a rewarding and risky proposition. Building a home is usually a first-time venture, and most of the time it is difficult to know what to do and when to do it. This article will explain some of the most common challenges faced by owner-builders.

Budgeting for and hiring the cheapest contractors may provide more problems than savings. If you are financing the construction of your home, the lender will require written bids for various phases of construction. You will be responsible for finding contractors and soliciting bids for items like excavation, foundation, framing, etc. A common mistake made is budgeting for and hiring the cheapest bid provided by a contractor. As the old saying goes, "You get what you pay for." Is the contractor bidding low because he is doing you a favor or because he does not understand the scope of your project? Did he leave out a key phase of the construction? This is not to say the least expensive contractor is the worst - just that you should investigate why he is the cheapest. Hiring a quality contractor to do the job right will save you money in the long run.

The most common reason construction projects fail is due to improper budgets. A budget is not fluid and changing, it's a series of fixed costs. This means the fixed costs must be accurate or you will run out of money at one or all stages. Hastily assembling a construction budget has derailed many projects. The keys to assembling a proper budget are:

Accurately defining soft costs such as utility connection, permit, plan check, and impact fees.
Selecting bids you plan on using for the project (not just the cheapest one).
Receiving accurate material estimates for all components of construction.
Structuring the budget to optimize cash flow.

Construction budgets are the "hub" of everything - financing, land payoffs, labor and materials. Each component is vital to a homeowner's success. Following these techniques will help you develop a strong, accurate budget.

Building lots can also provide many pitfalls. Some of the most beautiful building lots can cost a fortune to prepare for construction. Sure, building on the side of a mountain may provide the scenery you dreamed of - but at what cost? Excavation for hauling dirt to and from the site, digging for utilities, and preparing the house pad can drain a construction budget. This makes it important to investigate the feasibility of preparing a lot for construction. Real estate agents will be eager to show you these sites, as they command a hefty price. But the last thing you want is to buy a lot which cannot be built upon or whose excavation costs are sky high.

Another reason projects fail is that they are not completed in a timely fashion. Most construction lenders offer a 12 month period in which to complete the home. If you exceed this period, several problems will arise. The first is that all construction loans have an interest reserve built into the loan. This reserve makes interest payments on the loan while you are building. However, after months the reserve is depleted, and you would need to start making payments out of pocket to avoid foreclosure. The interest on a $370,000 loan can be cumbersome to pay each month. The second problem is that to extend the loan, you will have to pay extension fees. These fees vary from lender to lender, but can cost as much as several thousand dollars a month. The money will have to be paid either out of pocket or through existing budget funds. Either way, not finishing within the construction term can drain your personal finances.

To ensure a successful project, you will want to prepare thoroughly before starting construction. This includes:

Gathering the fees imposed by the building department or any other entity with jurisdiction over your project (HOA, Fish and Game, etc).
Defining the cost of the building lot - utilities, excavation, hauling of dirt, etc.
Selecting bids that have a detailed scope of work.
Accurately pricing materials (and allowing for price increases).
Making sure you can finish within 12 months. If you anticipate the project taking longer, inquire about 15 or 18 month loans with your lender. This will enable you to avoid interest or extension fees.

People build their own homes to control the project, get more for their money, and fulfill a dream. Building a home is not for everyone. It takes lots of hard work, time and the ability to manage others. If you cannot dedicate 10-20 hours per week to handling this project, it may be best to buy a home or hire a general contractor. Construction projects fail due to a variety of reasons, but the tips listed in this article can help you be successful.