You've been looking at houses forever, faithfully doing the weekend around new and existing homes. But you can not seem to find what you want: the right house in the right location. Getting frustrated and discouraged, you're believing that perhaps you should buy vacant land and have somebody build the house you've always wanted. Is that a no-lose proposition? Probably not.
Although several issues are essential to consider, the first question may be what is it really likely to set you back if you purchase a great deal and also have a home built. Understand in advance that the expenses will likely be substantially greater than should you bought a current home or one in a builder's new construction community. Here's why.
You could not take advantage of a builder's economies of scale.
You are paying a retail price for that lot. When builders buy land for development, they pay wholesale because they subdivide one parcel into several lots and spreading the purchase price and their additional fees across all of the lots. Since they are building many houses and not simply one house, their construction costs per square foot are less. If you buy one ream of multi-purpose paper, you may be paying $6.50 per ream. But if you bought an instance of that paper, it would cost you around $4.50/ream. The same principle applies to buying one lot and building one house.
Your real estate investing involves financing three separate phases.
Your building lot, house construction, and completed property are essentially separate parts of the project and you will need financing for them. Not all banks and mortgage companies offer lot loans and construction financing. Lenders usually require more down money for lot loans, so you may need to come up with cash for 20-25% of the cost from the lot. You'd require a loan for the site work and home building. When the construction was completed, another two loans would be substituted with a permanent loan or mortgage on the entire property. You'd be paying points along with other fees for that loans and shutting costs whenever you settle on the lot.
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You'd require a builder, real estate attorney and perhaps an architect.
Plans for a true custom home designed by an architect may cost thousands of dollars. (You could save money by utilizing plans that the builder already has.) You will need a builder. If you do not build houses for a living, this isn't the time to begin! And don't use Uncle Charlie unless he's an experienced home builder. Most production (i.e., high volume) building organizations won't be interested in building just one home, so you will need a smaller builder. Your relationship using the builder is going to be specified by the development contract. This will contain all the details and specifications for the job and provisions for cost overruns, punchlist items, and periods for completion. Enter your attorney. When you're interviewing builders, get a copy of the proposed contract so that your attorney will have time to evaluate it before you decide to have to sign it. Also, you should not purchase a lot until your builder inspects it to estimate construction costs and determine when the lot is suitable.
Think about this real scenario. A builder is selling 3,750 sq. ft. homes on lots for $515,950 in a new house community. That's a combined purchase price for that house and large amount of $138/sq. ft. Each home has a three-car garage, full unfinished basement, fireplace, skylights, cathedral ceilings, rear staircase, public utilities, central air along with other bells and whistles. A similarly sized building lot inside a comparable area in the same township is for sale for $225,000 (which does not include about $10,000 for utility hook-up and enable fees, lot grading along with other preparation costs). Putting away financing, settlement, architectural and legal costs, the only way you'd come close to the cost of the builder's package is that if you can get a home designed for around $75/sq. ft. ($225,000 $10,000 3,750 sq. ft. x $75 per sq. ft. = $516,250). However, you would not have the ability to duplicate what the builder is offering. You'd probably wind up having a stripped-down, barebones house.
