What Is It Going to Cost?
Are you thinking of building a new home? Do you wonder how much it will really cost? In many cases, the answer to this question is: “It depends.” Traditionally, the final cost of a new home can depend on several factors, which may or may not be fully known prior to the start of construction, such as allowances for Site Improvements or upgrades, unforeseen building conditions not specifically included in a building contract, weather-related issues, construction delays caused by labor or materials shortages, or even customer-selected changes. The fact is, many new home buyers won’t really know what their home will cost until it has been completed. One major factor in this uncertainty is time. With traditional owner-carried construction financing, the home buyer uses a construction loan. In this situation, the home owner is responsible for making interest payments throughout the construction period on the loan balance, which is increased each time the builder requests a “draw” as payment for work completed. As the loan balance increases and the period of time it takes the builder to complete the home, the more the home costs the homeowner in the end.
Can I live on my allowance?
The other major factor that makes the final price of many new homes a mystery is something called an allowance. When you were a kid, an allowance was something you asked your mom or dad for. Make no mistake that when you’re building a home, you don’t want one – an allowance is essentially an unknown price. When embarking on their search for a New Home and Lot, most buyers will know exactly what their lot price will be. Many builders will also give their customers a “base” price for the “sticks and bricks” of the home itself. What many consumers do not realize, however, is that there is a third item, something called Site Improvements, and that Site Improvements are often included in a builder’s contract as a variable allowance. Site Improvements are things that are neither house nor lot, but that are required to connect one to the other. Things like Building Permits, Sewer, Water, Well or Septic Systems, Erosion Control, Driveway Stone, Dirt Hauling and Trash Removal are all examples of Site Improvements; neither “sticks and bricks” – a.k.a. the house, nor “dirt” – the home site, but improvements needed to complete the package nonetheless. Having Site Improvements included in a building contract as allowances is the major contributing factor to the most famous and dreaded building nightmare, the Cost Overrun. So just how do these things called allowances contribute to home buyer headaches? In the simplest terms, an allowance is a guess at what the price will be. Simply put, an allowance is an adjustable dollar figure for a specific item included in a builder’s contract. The dollar figure is included in the contract as a placeholder but is subject to adjustment based on the actual cost of construction. Any time you’re looking at an itemized price preceded by the words “up to,” you’re dealing with an allowance. For example, if the allowance for sewer and water connections is $2000, but the bill comes in at $2700, the contract requires the buyer to pay the $700 difference. You can almost hear the quotes from backyard barbeque horror stories: “They actually called and said we had to pay $XXX more for YYY because we went over our allowance!” Allowance overruns become especially challenging for buyers because the total amount of the construction loan is determined prior to the start of construction. If overruns occur, the cost may not just be “tacked on” to the loan amount; instead the buyer may have to pay cash right out of their own pocket for over-allowance items. Without a doubt, allowances are the major culprit responsible for the time-honored advice from veteran new home buyers to first-timers: “Thinking about building? Make sure to budget 10% more than the price they told you!!” Can you imagine ordering a new car from any automaker and receiving a call prior to delivery: “well, the price of steel just went up so your car is now going to cost $XXX more”?????
Is There an Alternative?
Lately, the term “Turn-key Financing” has started to find its way into the vocabulary of today’s new home buyer. Turn-key Financing is an important departure from the traditional methods of pricing, buying, and building a home. When a home is built Turn-key, the buyer and builder agree on the price before construction begins, but the buyer doesn’t pay for home and land until after construction is complete! The home AND lot are financed with a purchase-money mortgage at a pre-determined price. Because the price is set up front and the buyer’s lender approves a mortgage for that set amount, the builder must insure that there will be no cost overruns. With Turn-key, the builder assumes the risk of cost overruns, not the buyer. Additionally, the buyer is not responsible for interest payments during construction; they will begin making payments on the home only after they move in. When you build with a builder who does Turn-key, you’re really placing an order for a new home. The builder bears all of the necessary expenses for procuring the land, building materials and labor required for constructing your new home, while you pay only for the completed real estate upon delivery, at the price you agreed to up front. At Brookstone Homes, we’ve been building Turn-key homes since our company was founded almost 15 years ago. Today, you’re hearing more and more about Turn-key because it just makes sense; other builders have even begun offering Turn-key as an “option”, meaning that for an additional fee, you won’t make payments until the building is complete. At a Brookstone Homes community, there is no extra fee to build your home Turn-key.
It’s the only way we do it because it’s So Much Easier for you – the customer – and at Brookstone Homes, that’s what we’re all about! You owe it to yourself to learn more about building Turn-key with Brookstone Homes – visit www.brookstonehomes.com to take the next step.
