Before You Build Your New Home: 5 Preparation Steps

Illustration of puzzle pieces and coins forming the two dimensional image of a house

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The process of building a new home long before the foundation is poured. The construction process is most efficient and exciting if you first develop a good plan and find an honest, competent builder. To avoid costly mistakes during the construction process, start with these five important steps. As you move from dream house to real house, be sure to ask questions and share your progress with people who have gone through the process.

Plan Your Budget

Begin considering the budget from the very moment you start thinking about building your house. Develop a realistic idea of how much you can afford to spend and how much it will cost to build a new home. The budgeting phase is really about balancing your wants with a realistic assessment of what you can afford.

Chances are you will need a construction loan and a mortgage. It's not too early to find out how large a loan you can qualify for, based on your income and other financial obligations. Today, most banks and other financial institutions are eager to prequalify you for a construction loan, which will give you a ballpark idea of the maximum amount of money you can spend. At the same time, this early stage involves looking at what different elements of your new home will cost, including the land itself, the architect or designer, the general contractor who will manage the project, the construction materials, and appliances and interior features.

This is a complicated, time-consuming process that really should begin many months before construction begins. It's not uncommon to take as much as two years to thoroughly research the issues before you sign a construction contract with a builder.

Tips for Budgeting

  • Beware of banks who want to lend you more money than you can afford—this was one of the reasons behind the 2008 financial crisis. There is no reason to build a house that costs the maximum loan amount the bank approves. In fact, it is a very good idea to stay well under that amount. Talking to an independent financial advisor is a great way to determine how much you can comfortably spend to build your house.
  • Plan for cost overruns. Virtually all construction ends of costing more than initially planned. This often occurs because the costs of building materials change, or because of changes you request during the design and construction phase. Make sure you build in a buffer to your budget so that the inevitable overruns don't break the bank.
  • Get at least three contractor bids (and check references). In most cases, the bulk of the expense of building a home is the money you'll pay to a general contractor (GC), who will manage all the laborers and subcontractors who work on the construction of your home. There is a delicate balance between picking a contractor who is affordable but one who does quality work using good materials. Start with getting references from people you know who were satisfied with their builder, then carefully interview at least three. This process will give you a pretty good idea of what your home will cost to build.
  • Comparison shop for materials. While the general contractor typically picks most of the building materials, appliances, and amenities, you will want to involved in this process. If you are in love with granite countertops, for example, take note of this now so that such preferences can be communicated to the builder you eventually choose.

Hidden Costs of Building a New Home

First-time homeowners are often startled when they begin to recognize the hidden costs of owning their own homes. There are many one-time start-up costs to building your first home—furniture, lawn and garden equipment, window treatments, internet and media wiring. And home ownership comes with ongoing monthly expenses that can catch you off-guard if you're not prepared for them—expenses such as homeowner's insurance, property taxes, and lawn-care services. If you've been a renter up to now, these expenses can be a shocking surprise.

Choose Your Lot

If you have not yet purchased a building lot for your new home, talk with realtors to get a rough estimate of land costs in the areas you are considering. Although land costs vary greatly depending on local land costs, in general, you plan for 20 to 25 percent of your new home cost to go toward the purchase of the land.

Whether you are building your home in a suburban development or a site with sweeping ocean views, you will almost always need to choose the land before you select floor plans or other details. You (and any pros you hire) will need to investigate factors such as soil condition, drainage, zoning, and building codes in the region. Costs will be higher if your house design needs to be customized to fit the lot. If the house can be built on the lot using stock blueprints, it will help your budget.

Pick a House Plan

Many new homes are built using stock plans from a printed catalog or an online source. Finding the right plan can take some time. One place to begin might be deciding on your favorite house style. Get ideas from the many catalogs available, and if necessary, have a builder or another building professional—an architect or designer—help you choose the best stock plan for your needs. A home designer can also make minor modifications to the stock plans in terms of room size, window styles, or other details. Some builders can make slight modifications to stock home plans.

A custom-designed home, on the other hand, is created specifically for the family who will live there and the site it sits upon. In most cases, custom-designed homes require the services of a licensed architect. They ask questions like "Where is the sun in relation to the lot? Where do the prevailing breezes come from? How can we save money on long-term heating and cooling costs?" The architect should also ask exhaustive questions about your lifestyle and preferences.

Whether you opt for a stock or a custom design, it's wise to choose a plan that will meet your needs for many years to come. A young couple may want to plan for more family members, for example, while an older homeowner should anticipate aging-in-place needs.

Line Up Your Team

Once a working budget, a building site, and home design are selected, you can now begin assembling the team of experts to design and construct your house. Key players can include a builder, an excavator, a surveyor, and a home designer or an architect, if needed. In most cases, homeowners begin by selecting the builder (general contractor). That pro then selects other members of the team. However, you may also opt to hire an architect or designer first.

The big question is this: How involved will you be (can you be) in the process? While most homeowners hire a general contractor/builder to coordinate most or all of the work, it is also possible for a homeowner who wants to be deeply involved in the process to serve as his or her own GC. In this case, you will be hiring and supervising all the subcontractors—excavators, carpenters, concrete contractors, etc.—yourself. Working this way is not for the faint-of-heart, but for the right person, it can be a rewarding way to build a house, as well as one that saves money.

What About Nontraditional Construction?

What your house looks like does not necessarily dictate how the house is constructed. Traditional frame construction is not the only option. Many people have become intrigued with straw-bale houses, rammed earth construction, and even cob houses. But you cannot expect traditional builders—or even all architects—to be experts in everything. Building traditional houses using a nontraditional method requires a team that specializes in that type of construction. Do your homework and find the right architect and builder who can realize your vision.

Negotiate a Contract

Be sure to get written, signed contracts for each building professional involved in building your home. At the very least, this means a contract with the general contractor/builder, as well as the home designer or architect, if they are part of the process.

What goes into a building contract? A contract for new home construction will describe the project in detail and include a listing of all the parts to be included in the house—the "specs." Without detailed specifications, your house will likely be built with "builder's grade" materials, which can be on the cheaper side. Be sure to hash out the specs as part of the negotiation before the contract is written as part of the negotiation—and then make sure everything is clearly listed. Remember to amend the contract later on if you or your contractor makes any changes to the project.

The Bottom Line

The time spent completing the preliminary steps to building a new home can be an exciting period, but this is also a time to evaluate if new construction is the right choice. The process is a lot of hard work and it brings disruption in your life and the lives of those around you. You may well find that it is less stressful to shop for an existing home—either a pre-existing home or a newly constructed home that has been built "on-spec." Or you may find that remaining in your existing home and remodeling it is a better option.

The decision to build your own home is sometimes undertaken for the wrong reasons. Building a new home rarely "fixes" a troubled life or a relationship. An important first step is to analyze your motives. Are you building a house because somebody else wants you to? Is it a diversion from some other life problem? Can you handle the additional stress in your life? Why do you want to build a home? Self-reflection may bring about self-awareness—and save you from many headaches.

But if your self-scrutiny passes these tests, then carefully following five key preparation steps will ensure that your project produces the home that you and your family deserve.