A Construction Conundrum

With inventory still low, more home buyers are looking at a plan B: new construction. But that too has become tough with the availability of land and labor growing more scarce and lingering supply chain issues.

As the pandemic housing boom continues, many buyers are still losing out on homes as they go up against higher bids. Some are now seeking out land and new construction to get the home they want. This strategy also has some of its own annoyances including a shortage of buildable sites which many agents say is not a new issue. As well as that, land prices have climbed and are experiencing bidding wars. To cope, some home buyers are looking to the popular 1980’s alternative of tearing down an existing home on a good lot to build the home they desire.

Unfortunately, this isn’t a great solution either since builders, architects and contractors are swamped with requests and building materials and appliances are priced higher and are frequently out of stock. Those performing the work can charge more or take only jobs they prefer. So what is a frustrated buyer to do? Here are a few options to explore.

Buy a Stock Building Plan

One way to shorten the process and pare down costs is to go with an existing house plan, similar to buying off the shelf versus having a custom build. Many builders have multiple plans in their collections so you will be able to get a home that suits your needs even though it is a pre-designed plan. This can takes months off your process and cut the design costs by $5,000 to $10,000 depending on the complexity of the build.

Though the design won’t be custom, choices are sufficiently varied in the number of bedrooms, bathrooms, style of layout, number of levels, amount of outdoor space and many other features. Exteriors can also be diverse from the popular modern farmhouse look to more traditional tudors or colonials. One drawback can be moving structural walls which incurs some added costs. If you think you may want more space, it is usually easier to choose a larger house plan instead.

Build Custom

Hiring an architect or builder to design your home from the ground up can be a major undertaking including a countless number of decisions such as the size of the kitchen, height of ceilings and windows, number of bedrooms and bathrooms, type of doorknobs and even width of the hallways. The advantage of this route is that the homeowners can get more of what they want for their budget for example putting solar panels on a home to lower costs and make it environmentally friendly.

The downside to building custom is that the process to design typically takes three to six months as well as securing permits, and approvals and under normal conditions can take 12-16 months to build with non-pandemic conditions. Costs are generally higher, even the architect may charge a design fee of 4% to 10% of the construction costs and a 10% contingency fee. On top of this, materials and appliances have gone up as much as 20% per month in the frenzies climate we are in.

Go With a Spec Home

Buyers may have another possibility – selecting a house that a builder is construction or has finished as a stand-alone residence or as part of a planned development. Depending on when clients decide to buy in the process will determine how many choices they will get to make. If the build is finished, they will get what the builder has selected. If framing has just begun, they may get to make choices in terms of tiles, countertops, vanities, floors, cabinets, lighting and more. Some builders offer different choices at different price points such as laminate at a certain level or pricier marble at another cost. One distinct advantage here is that the price point may be 10% to 20% less than a custom home based on economies of scale – though that is not guaranteed based on COVID-19.

Think Prefab

Prefabricated home options have increased significantly with more companies building houses in a factory because the companies are seeing more demand, including houses to help those experiencing homelessness. Because of the housing boom, the supply chain for this sector has also been disrupted. That being said, modular still tends to be faster than stick building since the labor is still present though the lead times are still leaving would be homebuyers on the sidelines.

Factors to Weigh Before Buying a Home

How much will a house cost? Buyers must be realistic – they should budget 15% to 20% more than they expect the house to cost especially as the pandemic has increased the cost of materials, appliances and labor. When getting a mortgage, it is best to not spend more than 28% of your gross monthly income. Some think this percentage should be based on overall life goals which is why it is wise to consult a financial planner. New construction requires a construction or bridge loan that converts to a traditional mortgage when the home is complete.

How much square footage is needed? Figuring out size can be tough in the abstract. Some 2,500 square foot homes seem much smaller than others based on the way they are laid out or features such as widths of hallways, heights of ceilings or amount of windows and natural light. It is best to walk through existing homes and list which rooms they want with dimensions. You can easily work with a not-so-big house and emphasize the importance of every inch counts and using items that do double duty, which can cut costs. Buyers should also be aware that square footage can be the biggest driver in determining building costs. According to 2019 Census Bureau data, the median price per square foot for a contractor single build home is $114/sqft but these days cite prices upwards of $300 to $400 with certain cities like San Francisco hitting closer to $600. Finishes also affect pricing.

How much detailing is included in a plan? After interviewing two or three architects or builders to design the house, home buyers should check references, licenses, insurance and referrals and decide – or go with a design from a plan company. It is critical to read the plan to be sure everything is included and in the right place, including windows, electrical outlets, roofing trusses, stairs, doors, and plumbing. A bank may need detailed construction drawings and a site plan. If a buyer doesn’t understand how to read a plan, there are sites to help you read and understand plans.

Why is the site key? The spec house builder will have vetted the land choice, but a custom home requires a buyer to find a suitable lot. Not all lots – even those that are the same size – are created equal. Some will require trees to be removed, septic systems, and power lines should be added and soil to be tested. The geological makeup should be studied because it may cost more to excavate a rocky or wetlands site, if allowed, information about the area’s broadband capability is important, specifically if you work from home.

A professional on your team also should check town rules about land records to be certain there are no liens and checking all setback limits. To curtail costs, it may make sense to look at undervalued land which may be a site farther from the city or may have fewer features such as views. Also, avoid overbuilding for the area as the value may not hold as well.

Why secure multiple bids? For the actual design, buyers should secure three bids that compare apples to apples. Any contractor or builder hired should have experience building in that area so they understand the topography and local building codes. Sometimes a bank may ask a builder to complete a review application to be sure they are licensed and insured and has a history of success.

Take Time to Draft a Detailed Contract

With so many details to consider, and so many work crews involved in the process – including subcontractors to landscapers – it’s critical to that a homeowner have contracts with all those involved, which a real estate attorney should review. Some think bringing an attorney on board earlier in the process the better.

The contract should specify the amount of down payment, how much to pay at specific time periods, how to handle change orders, the amount to hold back until everything on the punch list is completed satisfactorily, for what reasons the contract can be cancelled. and for how long the warranty guarantees work such as a house settling.

At the same time, the pandemic requires flexibility. When it comes to construction, it is almost impossible to establish construction costs which are used to keep designs within a client’s budget. What you could buy a year ago is different than now since prices keep going up with almost weekly price increases. With that in mind, it may be good to be as flexible as possible. Keep a list of alternates in materials and scope and even construction methods such as some prefab components.

Some of the former ways homeowners could protect themselves in their contract may no longer be included. With delays, work shut downs and price increases, it may be nearly impossible for an architect and general contractor to agree to include financial penalties known as liquidated punitive damages, if someone gets sick or is off the job for a while or if prices rise higher than expected. Building is so much market driven, so to resolve any potential problems on either side, it may be best if mediation can be stipulated as recourse rather than litigation due to lawyer costs and court time.

What about those rising lumber costs? Lumber prices – plywood, hardwood and softwood – have soared across the board. Costs are up 130% since the start of the pandemic more than a year ago, adding $30,000 to the cost of a new home. Because of the prices, as well as significant shortages, many architects, builders and homebuyers are asking how long with these prices be in place and why did it happen in the first place?

CEO’s around the industry report that the situation has been long in the making. The Canadian lumber supply that we’ve been relying on has diminished in recent years, tariffs have increased and these together with the price increases have caused demand to dwindle. With lower demand, some of the Canadian lumber mills have shut down to protect themselves from loss of revenue with those shut downs being amplified at the beginning of the pandemic. With many people at home more during this time, they started to reevaluate their living spaces where some bought causing a major housing spike in residential and new construction. All of these factors of demand on an already fragile lumber supply chain drove prices to an all time high.

The continuing results are that some builders are pausing work on new construction projects and others are saying even though they are paying those high prices, they are having difficulty sourcing supply. There is good news though, that most sawmills have increased output year over year and more increase is expected still. Prices have slowly begun to fall recently but it is anyone’s guess what the prices will do over time. If you are looking to renovate or build a new home, be sure to keep a close eye on those prices.

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