Peter Economy - Building Your Custom Home For Dummies

Buying vacant land isn’t the only option for locating a custom home. Many people opt to buy a small or dilapidated house and tear it down or add to it significantly. Doing so can be an excellent way to move into a new home but still have all the benefits of an established neighborhood.

One immediate cost benefit to a teardown is the fact that all the utilities are already located on the property and connected, which can be a great cost savings, but you still have an old house connected to them. Contact a demolition contractor and get an estimate for the demolition and clearing of the property before you sign on the dotted line.

Demolishing an older home may have additional costs due to the removal of hazardous waste such as asbestos (often located in roofs, ceilings, or siding). Asbestos must be removed by professionals, and the process can be costly.

Before you decide to tear down the existing home, explore the possibility of donating it (or at least parts of it). There are organizations that will actually pick up the house and move it to a new site, making it available for a family in need. Alternatively, charitable organizations and even some businesses will come to the home to salvage cabinets, tubs, doors, windows, flooring, and more. And don’t forget about donating furniture and other equipment. You’ll get a sweet tax write-off. Plus, you’ll get good karma for helping those in need and being good to Mother Earth. A good place to start looking for information is the Habitat for Humanity website at www.habitat.org .

If you do demolish, leaving one or two walls of the old home standing may be cost-effective and worthwhile. Why not tear everything down and start fresh? Because many cities or counties offer a lower property tax rate for a remodel versus new construction. Depending on your community’s rules and regulations, leaving one or two existing walls establishes the project as a remodel and can save you thousands of dollars a year.

When you rebuild in an established neighborhood, you want to make sure the house conforms to the neighborhood. This action is critical to ensure a marketable property in the future. If you decide to locate your 3,000-square-foot home in a tract of 1,500-square-foot homes, you’ll never get the value you want out of your home. The neighborhood needs to support the value. Underbuilding can also be a problem because people looking to buy in the neighborhood will expect a comparably sized house.

Most established neighborhoods require community approval of any major remodels. The local planning department generally notifies the community, and residents have the opportunity to voice their opinions — good or bad. Some areas have a specific design review committee that has a significant say in what you can and can’t build.

Do your research and build a house that fits within the neighborhood tolerance or find another neighborhood that has houses closer to your desires and needs. You can find more information on the design review process in Chapter 6.

You may also encounter financing advantages if you buy a house that needs to be remodeled instead of buying a lot. If the house is still structurally sound, you may be able to buy the house with a small down payment, while a house with structural problems can create financing problems. Most lenders don’t loan money on a house that is in functional disrepair (if you default on your loan, the last thing the lender wants is to be the proud owner of a hunk of junk). Buying such houses requires a lot of cash or private money, which can be expensive. Even then, a large down payment is necessary.

Small houses on large parcels of land can also be a problem in neighborhoods where bigger houses are now being built. Lenders want to finance houses for living. House lenders want a property that conforms to the neighborhood, even if the borrower is well qualified. Many people, when faced with unwilling house lenders, look to lenders that lend on land only. If the property has any structure on it at all, most land lenders won’t provide a land loan. Talk to your real-estate agent and loan officer about the ability to lend on a particular property before you make an offer. Remember: The finished cost estimates of your project need to account for the purchase cost as well as the demolition cost in order to be realistic.

If you’ve found a structurally unsound house and a willing seller, you may be able to buy the home with a construction loan, which will finance the purchase of the property and the construction together based on the future completed value of the property. (These loans are sometimes referred to as renovation loans. ) Chapters 9and 10explain in detail the construction loan process and guidelines. You can apply the same construction loan information in this book as if you were working with a vacant lot. Simply have your seller agree to a long escrow that allows you the necessary time to design and permit your new house. Most construction lenders can fund the purchase as part of the construction loan, provided all their other guidelines are met.

After you find your dream lot, you need to buy it. Whether you pay cash (a big no-no — Chapter 8explains why) or finance, you can’t just write the owner a check and ask for a receipt. Okay, you can but you need to follow certain steps and make specific choices if you want to get the most for your money.

If you’ve ever purchased a home, you’re at least somewhat familiar with the process of buying real estate. Buying a lot is just like buying a house, but without all the house stuff. You can find a detailed explanation of the purchase process and the players involved in Kevin’s book What the Banks Won’t Tell You: How to Get the Most Out of Your Mortgage (Grady Parsons Publishing). For beginners, here’s a general step-by-step look at the process.

Using the information in this chapter about evaluating a property, you need to determine a price in your mind of what you’re willing to pay for the property. Your real-estate agent can give you additional information on the local market for land and examples of finished houses in the area. If you aren’t using an agent, you need to access this information through the local title company. You also must decide on the length of time until closing, as well as any other necessary terms, such as your desire for the owner to loan you the money in what’s called a seller carryback. This term means the seller, after transferring the property, retains a note or loan that you must pay them at an agreed time with interest. We talk more about this topic in the “ Finding other land loan alternatives” section later in this chapter.