BUILD VS. BUY - BLOG SERIES
Since so many of our readers ask us about this topic, we decided to write a blog series!
Step #1 - Buying a Good Lot! (Click to read)
Step #2 - Getting Your Permits (Click to read)
Step #3 - Part A: Contractors (Click to read)
Step #3 - Part B: Financing (Click to read)
Step #4 Let the Building Begin (Click to read)
Final Step #5 - Permanent Financing and Moving into your Dream Home
Here you are! Almost at the end of what was certainly an epic journey that challenged your patience, endurance, imagination, creativity AND your finances!
Yes, there were lots of twists and turns and a number of times when the frustration level was at a very high level but you persevered and got through the tough times.
Don't forget these milestones!
While there were plenty of challenges along the way, there were also some amazing highs in the process too.
Did you go the route of a construction loan with an automatic roll-over into permanent financing? If you went that route, then you are pretty much done! Congratulations!
If your construction loan does not automatically "roll-over" into permanent financing you will need to obtain an new loan so that you can pay off the amount you owe to your construction lender.
Hopefully, interest rates did not rise too much from when you started this journey. In any case, you really don't have any option other than to obtain permanent financing because construction loans are "short term" and most likely you are just about "out of time".
The good news is that it's likely that the value of your new home will significantly exceed the amount that you have spent so far.
For example, maybe you paid $250k for the land + $100k to get your permits (soft costs) + $700k for the build (hard costs) so you are "all in" for about $1,050,000. In order to get approved for your new loan you will need to find out the appraised value of your new home.
In all likelihood, your home will be worth much more than you have spent.
Using this example, it's likely that your new home could be worth about $1.4M so that means that you have earned about $350,000 in equity.
It's only appropriate that you are rewarded with some equity because this long process was NOT EASY! So if you are applying for a loan with a 20% equity position, and your new home is appraised for $1.4M that means that your lender could lend you $1,120,000 which is actually MORE than your total "all in" costs.
Keep in mind, that unless you want to finance the maximum amount possible, you can always elect to request to borrow a lower principal amount and thereby lower your monthly loan payment, that decision is totally up to you.
The good thing, though, is that you have great options and have earned equity through the process of building your own home.
YOU ARE LIKELY TO SAVE $$$$$ EVERY MONTH ON YOUR PROPERTY TAXES.
For those that were not brave enough build their own home, in Los Angeles County, you can expect to pay annual property taxes that are 1.25% of the purchase price. So if you had purchased a $1.4M home that means that your property taxes would be about $1.4M x 1.25% = $17,500/year (= ~$1,458/month)
What will likely be a very pleasant surprise is that even though you new home might be worth $1.4M your property taxes will be MUCH less than expected! In fact, with this example, you might save about $1,000 per month on your average property taxes.
I had no idea about this "silver lining" when I built my home and when I received my first property tax bill I thought there must be some sort of mistake. I actually contacted the tax assessor to see if indeed there was a mistake and to my pleasant surprise there was NOT A MISTAKE.
I was told that the assessor goes through a process using their internal "cost books" and come up with a tax basis that does not take into account "the builder's profit".
So the result is that your "tax basis" is considerably lower than the market value of your new home. This is the gift that keeps on giving for all the years that you own your custom-built home.
Okay, at the beginning of this week’s article there were some milestones listed but I left out the biggest one.
There is a final milestone that is very difficult to forget.
THE FIRST NIGHT YOU SPEND IN YOUR NEW HOME!
What a feeling it is to spend your first night- you are so proud, so much more knowledgeable about things you never knew before and you get the best night's sleep because...
YOU ARE EXHAUSTED - YOU BUILT YOUR DREAM HOME!
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The Fitzburgh Realty Team