Sweat Equity: The Key to Saving Money on Construction

By the DoItYourself.com Staff

If you are financing the construction of your home, cost-control will be a major factor. Most people simply buy a home and forget about it. But there are others who wish to save money in the process. Instead of buying a home, they decide to build it themselves. Banks do not loan hundreds of thousands of dollars to individuals and wish them luck in building. In fact, they are quite weary of people building it themselves for a number of reasons. Chief among them is that they will never finish the house and the bank will have to keep extending the loan. In some cases, they may even have to foreclose on the property – something no bank likes to do. So, they give individuals three options:

1.) They can hire a General Contractor (GC)
2.) They can hire an onsite project manager
3.) They can hire a construction management company

If you hire a GC, they will build the entire home for you. There are few headaches, but this comes at a price. Usually 20% of the total project cost. This fee cuts into your potential equity. The other two options allow you to reduce the fee (thus giving you more equity) and allow you to participate in the project. This participation is referred to as “sweat equity” and it can save you thousands of dollars!

Sweat equity allows you to get more for your money. For example, most people are capable of painting, installing moulding, and even flooring materials. But what if you were to hire a contractor to paint your home? An average home would cost at least $4,000 in labor and materials to paint the exterior. But what if you and some friends rented a sprayer and did it yourself? You would have an extra $4,000 in the bank. It is that simple! The drawback is that you would have to spend several days outside dealing with paint all over your clothes. Most people do not earn $4,000 for three days worth of work, but you can by participating in building your home! The alternative is to pay a contractor $4,000 and pull funds from the loan. In essence, this means financing $4,000 over 30 years at a 6.5% interest rate.

Common areas to participate include:

• Painting
• Finish carpentry (installing trim, interior doors, and cabinets)
• Installing flooring
• Landscaping
• Cleanup

If you have participated in construction before, you may be able to do more complicated work such as framing, roofing, insulation or drywall. When planning for your project, be realistic in the areas you can complete. You will have to take into consideration work schedules and family matters. It is also important to remember that sweat equity may not be used for financing purposes. Each bank has different requirements in regards to owner participation. When budgeting for your process, they may require you receive a bid for every phase. However, when it comes time to do the actual work, they may be lenient. Make sure to inquire about sweat equity with your particular lending institution.

© Doityourself.com 2006