Building a Custom Home: Outsmarting the Risks

In our previous blog, we discussed the financial benefits of building your dream home. But we wouldn’t be doing our job if we didn’t also give you a complete picture of the risks involved. As always, we advise spending at least as much time, if not more, thinking about the risks as you do about the gains. Only when you’re comfortable with the potential downsides should you take action. Let’s dive in.

The Risks:

Risk #1: Choosing the Right Professionals

This is the most common risk and one of the biggest. The wrong contractor can make your life extremely difficult. Beware, switching contractors mid-project can be costly. A job that looks 50% done to you may only be 25% done in a new contractor’s eyes.

And it’s not just the contractor you need to worry about. Your entire team (including your architect, engineers, designers, etc..) needs to be the right fit to align with your goals. A designer who primarily works on ten million dollar homes, for example, can easily blow up your budget.

Risk #2: Changing Your Mind

The entire purpose of the planning phase is to ensure a smooth and efficient construction process. Constantly changing your mind on finishes or layout decisions during the build can quickly become costly and cause major delays. The good news is this one is 100% within your control.

Risk #3: The Real Estate Market

This risk is a bit more out of your control. The real estate market is a living, breathing entity that changes constantly. The value of your completed home might be projected at $1,300,000 when you purchase the land, but 21 months later, that value could be very different.

If you started this process in late 2020 and finished in early 2022, you probably knocked it out of the park. Your property value likely increased, and you secured lower debt. However, if you started in mid-2007 and finished in early 2009, you likely found yourself underwater, meaning your property was worth less than your total investment.

Risk #4: Financing

Few people have enough cash on hand to finance an entire build themselves, and obtaining a loan as a homeowner rather than an investor can be challenging. However, we have worked with financial institutions that fund deals just like the one described in our last blog, and we’re happy to make the right connections.

For example, we recently helped a client secure a financing product that covers up to 80% of total costs. In our previous blog’s example, with total costs of $1,160,000, that would mean $928,000 in financing, leaving only $232,000 to cover out of pocket. Some people turn to private funding sources, such as friends and family, for that remaining amount, offering a return in exchange. But keep in mind, this increases your leverage and adds risk, especially in a volatile market. We will discuss this in more detail below.

Mitigating the Risks

Advice for Risk #1: Choosing the Right Professionals

Simple, call us. But in all seriousness, if we are not the ones doing the job, make sure to tour projects your contractor has completed and always ask for references. Transparency is key. Everything should be on the table when you are considering a sizable project together.

We go the extra mile by offering full transparency, opening our books to share financial reports from past jobs and allowing clients to see every quote, receipt, and invoice. We do not hide anything, which means from day one, we are on your team, fully focused on delivering a successful project.

Advice for Risk #2: Minimize Changes

Be intentional during the design phase. Treat it seriously. Operate under the assumption that once the design is finalized, you cannot change it. We do not want to charge you for change orders. Our goal is a well planned, streamlined construction process with minimal surprises.

Advice for Risks #3 and #4: 

• Do not assume appreciation.

• Do not assume interest rates will drop.

• Do not overextend yourself.

• Lock in construction debt that converts into permanent financing.

The financing option we mentioned above is a 30 year mortgage with a 12 month interest only construction period that automatically transitions into a 29 year amortization schedule once construction is complete.

In the worst case scenario with this loan, your cash investment remains in the property, and you are left with the exact loan you expected. In our previous example, that would mean a $928,000 loan with your $232,000 in equity remaining in the home. Even if the market dips and your property is technically underwater, it does not matter unless you sell. History has shown that real estate values bounce back over time. Even if you bought at the peak of the market in 2008, you were back in the green by 2018. Time is the ultimate risk mitigator – Real estate has never lost value over a 10 year time horizon.

Final Thoughts

Be intentional in the planning process. Take a strategic approach to financing. And most importantly, hire us.

When all the right pieces come together, your worst case scenario is that you end up exactly where you expected, moving into your dream home in about a year and a half. Your best case scenario? Market values rise or interest rates drop, allowing you to refinance and walk away with six figures in equity, sometimes without even leaving a single cent of your own money in the deal.

So yeah, basically, my advice is just call us.