Author Topic: My crazy idea to build a house  (Read 4617 times)

NorCal

  • Pencil Stache
  • ****
  • Posts: 745
My crazy idea to build a house
« on: September 01, 2015, 09:58:04 PM »
Ok, so I have a crazy idea to build a house for early retirement.  This could either be my most brilliant financial move ever, or my dumbest.  Help me decide.

For background, I live in the SF Bay Area and make ridiculous SF Bay Area money.  Well, my wife makes most of it, and I contribute a decent chunk.  I'm close to quitting my job for a variety of reasons, and I'll share more on that in a future post if/when it happens.

One of our biggest life decisions has been whether to stay in the Bay Area or not.  Being here while working has turbo-charged our savings plans (our net worth increased $250K last year), but with real estate prices where they are, buying a house isn't even on the horizon.  Rent at $2,800/mo is a bargain here while working, but is ridiculous for retirement planning.

The biggest item holding us back from moving is family. My family lives close by, and my wife's family is in LA.  We see them often, and want our daughter to be a big part of their lives while they're still mobile.  That just won't happen out of state.

Enter the home building option.

My mom lives on a 1 acre lot in the deeper suburbs (~1hr from SF).  The house is on half the property, and the other half is essentially ranchland.  I may have the opportunity to buy the second half of the property (currently a single parcel) from the family for home construction.  This property is jointly owned between my mom and two of her siblings.

I'm just starting to do research, so this is pretty rough, but my estimates are:

-I would have to spend ~$50K in various fees and surveys to subdivide the land and get permits.  This could go up if the existing house needs to be disconnected from the existing septic system and moved to city sewer.
-I would probably have to pay my family ~$50K-$100K for the land, and give up future inheritance for the family to agree.  Similar buildable property just down the street sold for $500K just last month, so this is still a good deal.
-Building a 2,000sqft house would cost +/- $400K.  I realize some construction could be done cheaper, but I would pay more for things like roofs that will last as long as I do, passive solar design, and quality plumbing.  I don't really care about fancy fixtures and finish though.
-This gives an all-in total cost of $500-$550K.  Not great for ER calculations, but pretty impressive for remaining in the bay area.

Pros:
-It's an option to live close to family and still have some type of early retirement.  While this would delay FIRE more than moving out of state, it would allow it in the Bay Area (which is mostly unheard of)
-I would "build" significant home equity.  Comparable homes in the area are selling for $700-$800Kish.
-I could (maybe) build a separate in-law unit as a short term Airbnb unit for some side income.  Comparable Airbnb units look to have good economics at first glance.  Of course, this could turn into a major negative if the "in-law" aspect of the unit is taken too seriously.
-In case things don't work out, we could rent or sell the house for a profit (given the family dynamics, this is NOT an option unless the financial situation is dire).

Cons:
-$550K still ain't cheap, and the economics aren't certain
-Building a house is stressful and a pain.  And badass too (ok, half pro, half con).
-I want to live close to family, but having an adjoining yard might be over the line
-We are assuming (big assumption) that at least one of us can find good local employment in the suburbs.  My wife can probably start her own company doing what she does now for similar money, but that is a gamble.

Specific hurdles to get this done (that I know about so far):
-I have to get the three sibling owners to agree to this crazy plan.  They don't have a history of seeing eye-to-eye.
-The property is currently mortgaged for about 33% of estimated value.  I need to get the bank to agree to let the subdivision go through.
-I don't know how far the septic leech field extends on the property.  My best guess is that it's not on the area that I want to purchase, but I need to find out for sure.  Suburbs have now grown up around the house, so sewer would be available for a big price.
-The city and county I'm doing this in are known for Byzantine planning/permitting processes.

Thoughts?  Crazy or brilliant?

Ricky

  • Pencil Stache
  • ****
  • Posts: 842
Re: My crazy idea to build a house
« Reply #1 on: September 01, 2015, 10:22:40 PM »
I wouldn't say crazy.

If you're saving $250k/yr then I don't really think it matters what you do (half-joking). Of course, you have to think about maintenance and taxes on that $500k home and go plan for an additional perpetual income stream just to cover that. $200/sqft for basic finishes sounds pretty high though. Actually, very high, even for the Bay.

Is being so close to family necessarily a good thing? And are you going to enjoy 'burb living?


rufflina

  • 5 O'Clock Shadow
  • *
  • Posts: 41
  • Location: San Jose, CA
Re: My crazy idea to build a house
« Reply #2 on: September 02, 2015, 12:32:16 AM »
We've been thinking of building a house in Mountain View and $200/sf sounds LOW, not high. Of course, it might depend on exactly where you are...and generally the per square feet number includes garage. And include a 20% contingency fund on top of whatever estimates you get.

Scarter

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Re: My crazy idea to build a house
« Reply #3 on: September 02, 2015, 02:14:34 AM »
$200/sq ft is average to low cost for building a home in SF Bay Area.  Depending on the county you are in, the permits can be expensive and sometime tough to obtain.  Considering the shortage of skilled labor in this area, I would say add another $15-$20/ sq ft extra.  I am not a custom building contractor, but I work in new home building industry and that is typical costs for us.

Overall, it is not a crazy idea.  I see you have almost 30% of building cost.  You can get a bridge loan to cover the remaining building cost and at the rate you are saving, I would say possibly less than 10 years to retirement.  That of course depends on your maintained expenses after building the home.  For what you are building it is a good estimate at $700-$800k.  Remember appraisers add quite a bit to valuation of a home for being new.

The only drawback is the family situation.  You may be heading for drama within the families, especially if your aunts/uncles have children who may also think this is a great idea.  All the best! 

PFHC

  • Pencil Stache
  • ****
  • Posts: 617
  • Age: 39
  • Location: Midcoast Maine
  • Busy doing.
Re: My crazy idea to build a house
« Reply #4 on: September 02, 2015, 02:46:27 AM »
I'm voting crazy... but, I need to know more about you. Are you the hands on type? Do you know home construction? This would dictate how accurate your estimate is.

Unless you know construction well, or know the general contractor very well, construction tends to go over budget. With a budget as high as yours, you could see it go $100,000+ over.

I did construction for a lot of years. Still do it, but on my own home. If it were me, I wouldn't dream of spending $550k on building a 2000 sq ft house, especially not in the circumstances you outlined. Too much money, too big, and too many unknowns. I would keep renting until I was ridiculously loaded, then figure something out.

When you're loaded, you have lots of options. When you're tied to a $550,000+ money pit, not so much.

NorCal

  • Pencil Stache
  • ****
  • Posts: 745
Re: My crazy idea to build a house
« Reply #5 on: September 02, 2015, 07:22:34 AM »
Thanks for the input everyone!  A couple responses to items posed:

-We did do great on the savings front last year.  This is partially due to dual income, a large bonus that may not recur on the same scale (or it might), and good saving habits.  We'll still save a good amount, but I don't expect to continue saving at the same rate.  Particularly if I quit my job.  We might save $75K/yr if I quit my job.

-We can cover ~$350K of the expenses out of pocket, and would finance the rest.  We would pay down any construction loan before my wife started her own company.

-I still haven't talked to builders or architects about building costs yet.  My estimate of $200/sqft is based on internet research at this point.  Essentially, half of what I read says $200 is way too low, the other half says it is way too high.  Which is pretty much the same responses I get here.  I need to figure out exactly what I want to build before refining this.  I know I do want some things that are above-average quality (roof, insulation, windows, possibly solar), but would also go for simple fixtures, pre-built cabinets, and un-fancy floors.

-The location does appeal to us.  It's in a very nice neighborhood adjacent to a park.  I like the idea of being close to my family.  However, adjacent to a parent is a bit closer than my idea of perfection.  It's a trade-off.

-I don't have construction experience.  I want to take this as an opportunity to learn as much as possible, particularly if I'm not working.  Going over-budget is a particular concern of mine.

Argyle

  • Pencil Stache
  • ****
  • Posts: 909
Re: My crazy idea to build a house
« Reply #6 on: September 02, 2015, 08:40:28 AM »
Another question would be: if you built the house, and then a situation came up where you felt you wanted or needed to move, would the family be up in arms at the fact that now the half-acre of land next to theirs would be owned and lived in by strangers?

JLee

  • Walrus Stache
  • *******
  • Posts: 5634
Re: My crazy idea to build a house
« Reply #7 on: September 02, 2015, 08:52:20 AM »
Buy a $150k property in AZ or NV and drive to LA for weekends when you're FI? :P

I come from a land of cheap houses, though - I can't really comprehend building/buying a house that costs  ~75% of my FI number. So...my thought pattern is a bit skewed. :)

NorCal

  • Pencil Stache
  • ****
  • Posts: 745
Re: My crazy idea to build a house
« Reply #8 on: September 03, 2015, 05:09:11 PM »
Buy a $150k property in AZ or NV and drive to LA for weekends when you're FI? :P

I come from a land of cheap houses, though - I can't really comprehend building/buying a house that costs  ~75% of my FI number. So...my thought pattern is a bit skewed. :)

Yes, it's crazy how perspectives get skewed by where we come from.  Where we live now, a $700-$800K house would be amazingly cheap (and amazingly unrealistic).  For perspective, our current 70 year old 1100sqft rented house with lots of deferred maintenance would probably sell for $1.3M.  And it would need $100K-$200K of serious maintenance to be truly livable (foundation, wiring, plumbing, retaining walls).  I view building a $500-$600K house as an incredibly bargain.

I would personally be on board with retiring to a lower COL state, by my wife is a little pickier about where we go.  Staying local in a relatively cheaper location is a good compromise for our divergent views.  If we can't build the house for a reasonable price, we will be looking for employment in either Seattle, or the Denver/Boulder area.

TheOldestYoungMan

  • Pencil Stache
  • ****
  • Posts: 751
Re: My crazy idea to build a house
« Reply #9 on: September 04, 2015, 08:14:34 PM »
If you can try to learn as much as you can about the construction industry, acting as your own GC can reduce the costs quite a bit.  I'm toying with the idea myself, once I'm FI, to buy a piece of land and build a couple of houses on it, have a nice little local real estate empire I can manage from my own porch.  I'm pretty tapped into the construction industry now, so I have a good handle on what I'd be getting in to.

In ten years of being on construction sites every day, talking to contractors every day, I have not had more than an hour go by where they have not lied to me.  So if you go that route, remember the golden rule of dealing with contractors:

Trust, but verify.

In the house I'm in now, I snuck onto the job site at night and installed all kinds of extra fasteners and network outlets and stuff.  They want like $250.00 per outlet and stupid stuff like that you can do with a handful of nails and $4.00 per outlet box.




Another question would be: if you built the house, and then a situation came up where you felt you wanted or needed to move, would the family be up in arms at the fact that now the half-acre of land next to theirs would be owned and lived in by strangers?

+1  Many conversations need to be had with any and all claimants discussing different options.  I really like the concept of generational housing as a mustachian way to go, maybe just add on to the Gparents house and everyone live it up like it's 1776.

NorCal

  • Pencil Stache
  • ****
  • Posts: 745
Re: My crazy idea to build a house
« Reply #10 on: September 04, 2015, 08:55:12 PM »
If you can try to learn as much as you can about the construction industry, acting as your own GC can reduce the costs quite a bit.  I'm toying with the idea myself, once I'm FI, to buy a piece of land and build a couple of houses on it, have a nice little local real estate empire I can manage from my own porch.  I'm pretty tapped into the construction industry now, so I have a good handle on what I'd be getting in to.

In ten years of being on construction sites every day, talking to contractors every day, I have not had more than an hour go by where they have not lied to me.  So if you go that route, remember the golden rule of dealing with contractors:

Trust, but verify.

In the house I'm in now, I snuck onto the job site at night and installed all kinds of extra fasteners and network outlets and stuff.  They want like $250.00 per outlet and stupid stuff like that you can do with a handful of nails and $4.00 per outlet box.


Another question would be: if you built the house, and then a situation came up where you felt you wanted or needed to move, would the family be up in arms at the fact that now the half-acre of land next to theirs would be owned and lived in by strangers?

+1  Many conversations need to be had with any and all claimants discussing different options.  I really like the concept of generational housing as a mustachian way to go, maybe just add on to the Gparents house and everyone live it up like it's 1776.


Very good insights.  I'm debating how much to get involved, and I need to do a lot more research before making decisions here.  I very much want to be involved on a day-to-day basis, and I'd even like to swing a hammer depending on the exact situation. The challenge is that the construction site is 90 minutes away during rush hour traffic with a toll bridge, and I'd be paying for daycare on days I went out there.  That expense and hassle of being there near daily could easily add up to the cost of a GC.  In an ideal world, I'd find an arrangement to pay someone to make sure I didn't make any truly major mistakes, but keep the freedom to make small stupid mistakes myself.  That's the best way to learn.

As for the family, I think that can be managed.  That's actually the reason I'm insisting on buying the land.  My family has a history of keeping land jointly owned while building houses and generating income from the property.  The extended family now has five jointly owned properties, three of which have family living on them, three of which have some form of rental income, and three of which have some type of ranch income.  It's a complete disaster that I want no part of.  This only works for me if I can buy the property outright, and do what I want with it.  I'm making that clear up-front.

On the bright side, the new house wouldn't be adjacent to family, it would be directly behind on the opposite street.  So there would be an adjoining back fence instead of a next-door neighbor aspect to it.

ehbkf

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Re: My crazy idea to build a house
« Reply #11 on: September 09, 2015, 05:51:21 PM »
I finally stopped lurking to post after reading this topic. Norcal, I was in a similar situation to you (1 kid, work in SF Bay, 350K+ combined income in the tech industry before I became a freelancer, now more, considered the suburbs vs stay in city and rent, etc..I've been FI for a long time now but I would be bored if I didn't work.). Happy to type out my experience and recommendations if you're interested. Just one question, do you have more than the one child you mentioned in the original post?
« Last Edit: September 09, 2015, 06:09:30 PM by ehbkf »

CowboyAndIndian

  • Handlebar Stache
  • *****
  • Posts: 1503
  • Location: NJ, USA
    • KOWines: Deep discount wine/spirits store.
Re: My crazy idea to build a house
« Reply #12 on: September 10, 2015, 06:59:46 AM »
Check the shipping container home http://www.montainer.org/

Looks like your cost will be fixed, and this can quickly be setup on your property.


calimom

  • Pencil Stache
  • ****
  • Posts: 988
  • Location: Northern California
Re: My crazy idea to build a house
« Reply #13 on: September 12, 2015, 12:22:51 PM »
This is an interesting scenario.  Ex Menlo Park resident here, and can completely relate to the out of whack Bay Area prices.  Just wondering, if you do get the lot, would something like a Blu Home or some similar upscale prefab work there?  They seem cool and modern, I really don't know the costs involved, or the zoning in your particular area of course, but seems like something to possibly investigate.

NorCal

  • Pencil Stache
  • ****
  • Posts: 745
Re: My crazy idea to build a house
« Reply #14 on: September 12, 2015, 05:15:31 PM »
Thank you for the ideas everyone!

For an update, I've had some initial conversations with the family, and they're all supportive in concept.  However, tons of details remain. 

My next step is to do research on the project feasibility.  The little bit of internet research I've done is encouraging, as it's zoned residential, and it's close to other homes, so utilities shouldn't be a major issue.  The biggest possible issue is the septic system on the existing house, which may cross over where we want to draw dividing lines.

This is an interesting scenario.  Ex Menlo Park resident here, and can completely relate to the out of whack Bay Area prices.  Just wondering, if you do get the lot, would something like a Blu Home or some similar upscale prefab work there?  They seem cool and modern, I really don't know the costs involved, or the zoning in your particular area of course, but seems like something to possibly investigate.

I did look into the websites for Blu homes and Stillwater dwellings.  While interesting conceptually, they are priced to be alternatives to much more expensive custom homes.  I don't think you could get one of those built for less than $500K, and would probably be looking at ~$1M depending on the lot, size, and details.  A lot of the cost of those homes is wrapped up in high-end fixtures and finishes, which I'm not really interested in.