Sweat Equity: The Key to Saving Money on Construction
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, which is something no bank likes to do. They give individuals three options:
- Hire a General Contractor (GC)
- Hire an onsite project manager
- Hire a construction management company
If you hire a GC, they will build the entire home for you. There are less headaches, but it comes at a price, which is usually 20% of the total project cost. This fee cuts into your potential equity. The other 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. 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. If you rent a sprayer and do it yourself, you would have an extra $4,000 in the bank. It is that simple!
The only 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, it means financing $4,000 over 30 years at a 6.5% interest rate.
Common areas to participate include:
• Finish carpentry
• Installing flooring
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 your project, be realistic about what you can complete. Consider 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. 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.