Buying Land/Building House

[Razorback2424]

My girlfriend and I are currently renting a house that is much larger than we need, and is more expensive than we should be paying. Our dream is to buy 2+ acres outside of the Denver/Boulder area to build a much smaller log-cabin style home. This would help by building equity instead of renting, lower monthly payments, lower utility bills (less sq. ft. to heat/cool/etc.), but would obviously come with higher commuting costs. We also just love the idea of having the space and being in nature.

My question is, are we fooling ourselves thinking we can buy land and build a house for cheaper than we could buy an existing house? Or are we smart for trying to build some instant equity by doing the hard stuff (site prep, utilities, etc.) ourselves instead of letting someone else capture that profit?

Would love to hear some perspective from the MMM community on building your own house, and all the pros and cons that would come with it!

[daverobev]

My girlfriend and I are currently renting a house that is much larger than we need, and is more expensive than we should be paying. Our dream is to buy 2+ acres outside of the Denver/Boulder area to build a much smaller log-cabin style home. This would help by building equity instead of renting, lower monthly payments, lower utility bills (less sq. ft. to heat/cool/etc.), but would obviously come with higher commuting costs. We also just love the idea of having the space and being in nature.

My question is, are we fooling ourselves thinking we can buy land and build a house for cheaper than we could buy an existing house? Or are we smart for trying to build some instant equity by doing the hard stuff (site prep, utilities, etc.) ourselves instead of letting someone else capture that profit?

Would love to hear some perspective from the MMM community on building your own house, and all the pros and cons that would come with it!

Unless you put your own labour in, you will almost certainly be able to buy *a* house cheaper than you can build one.

But if you want a certain set of features, you may get them at the same price as buying.

Here, at least, new houses are WAY more expensive than older ones; and building a custom one will be even more expensive than one of the row homes.

Go and watch... mm, what's it called. Kevin McCloud. Grand Designs. Eg, https://www.youtube.com/watch?v=pgu87R3Khc4

[Spork]

I bought land and built on it.  I'd do it again.  But yes, you are possibly fooling yourself to think you can do it cheaper.

You *might* be able to if you went very simple and did most/all the labor yourself. 

Just for example: I built a nice (but NOT over the top) house that was ~2400 sqft. 
My father recently passed and has a HUGE house in town on a big lot.  It is about twice the size of mine and has really nice craftsmanship.  (There are crown moldings even in the closets). 

What I paid for my house is approximately what we're asking for dad's house.  And dad's includes a nice lot.  My house build price didn't include the lot.

A well built house from the 50s/60s in an area of town that isn't "the hot spot" will often go for pennies on the dollar for what a new build will cost.

[Razorback2424]

Thanks for the replies and the personal experience!!

As I stated before, our dream is really to build a really small log-cabin style home, probably only around 600-700 sq ft. The other option we've been exploring is buying the land, and then putting a "tiny home" (you know, one of the ones on wheels that's a glorified RV) on it until we can save to pay for the log-cabin. I know "tiny homes" are a relatively new concept, but does this seem like a much more practical way to go about it? Any other thoughts about buying land/building house, pros/cons, etc. are welcome!! Thanks!!!

[pbkmaine]

What about just buying a trailer or mobile home and living in that? Tiny houses are not cheap.

[Spork]

What we did:
We found a little under 8 acres out in the country that someone had built a "shop" on.  It was a 30x40 metal building.

It was already half partitioned off, so 600sqft apartment with toilet, shower and tiny kitchenette.  We lived there about 6 years.  With the money we saved living there and the money from the sale of our house in the big city, we were able to build our house for cash. 

We did do lots of slashing on the house budget.  We cut things off the plan.  We took on some subcontracting jobs ourselves (but hired a GC to oversee it). 

[Razorback2424]

The more I read on the subject and the more I think, I think this is probably going to be our best bet, assuming we can find something that fits into that sort of criteria. Not only from a standpoint of being able to get financing (gasp, I know, but it's better than renting), which would be much easier on an existing structure, but also from an uncertainty standpoint, as there's less unknown about how much a septic tank, well, etc. is going to cost.

I do ultimately plan on building my own house, but maybe just not for our first house.

I would love to hear any other experiences as well!!!

[Razorback2424]

What about just buying a trailer or mobile home and living in that? Tiny houses are not cheap.

This may be a possibility too. We've stayed in a tiny home before and know that we can be comfortable in 200 sq ft or so, so I think a mobile home could be an option as well.

[Rural]

We lived onsite in a single wide mobile home that was already on the property we bought for four years while we built. We came in much cheaper than comparable houses in this area because my husband and my father did virtually everything themselves, up to and including digging the foundation and putting in the access road. But we could have bought a house nearby for less, still. Not as nice a house, and not on the 25 acres we have here, but for less. Consider what you really want. If you start to think about DIY, also, I need to send you a link to a thread where that was discussed a couple of years ago - it's not to be undertaken lightly.

[Spork]

The more I read on the subject and the more I think, I think this is probably going to be our best bet, assuming we can find something that fits into that sort of criteria. Not only from a standpoint of being able to get financing (gasp, I know, but it's better than renting), which would be much easier on an existing structure, but also from an uncertainty standpoint, as there's less unknown about how much a septic tank, well, etc. is going to cost.

I do ultimately plan on building my own house, but maybe just not for our first house.

I would love to hear any other experiences as well!!!

In our case, financing was interesting as well.  The land was worth more than the structure, which pretty much tossed any traditional financiers out the window.  If you start having problems with financing, look for a local small bank or savings and loan.  They are much more likely to do things that don't fit into normal boxes.

[Cassie]

If you build I would have the house be at least 1000 sq ft or if you need to sell it most buyers won't want it.

[Rural]

The more I read on the subject and the more I think, I think this is probably going to be our best bet, assuming we can find something that fits into that sort of criteria. Not only from a standpoint of being able to get financing (gasp, I know, but it's better than renting), which would be much easier on an existing structure, but also from an uncertainty standpoint, as there's less unknown about how much a septic tank, well, etc. is going to cost.

I do ultimately plan on building my own house, but maybe just not for our first house.

I would love to hear any other experiences as well!!!

In our case, financing was interesting as well.  The land was worth more than the structure, which pretty much tossed any traditional financiers out the window.  If you start having problems with financing, look for a local small bank or savings and loan.  They are much more likely to do things that don't fit into normal boxes.

Yeah, second this. We financed onlythe land (much harder to get a land loan, by the way, and higher interest) and cash flowed the house. We went with a small local bank, though we were also approved by Navy FederalCredit Union - credit unions are somewhere else to check.

[Razorback2424]

Thanks for all the replies! Reminds me that this isn't something to be taken lightly. After some more research into financing, I came across the USDA Single Family Guaranteed loan. Does anybody have any experience with that? Seems like banks are willing to give them out because they're 90% guaranteed for the government, and I meet all the basics requirements set forth on the site, but it seems like a "too good to be true" situation, so I'm wondering what experience you all have with them. Thanks again!!! You guys are amazing!!

[adamcollin]

Why don’t you consult a real estate agent for assistance?

[Landlady]

I'm building a house now. We've hired a general contractor to handle most of it and we will do the finishing aspects like flooring and cabinets etc ourselves which ends up saving us around $100k in the end. My husband is a licensed and bonded carpenter. I'm writing to relay what I've learned about the construction loan process so far. I live in Washington so take it with a grain of salt in case Colorado is different.

1. We were forced to pay an extra fee ~$2k for a owner build construction loan even though we were only planning on building about 10% of the house.
2. We will be paying cash for much of the house as we go, yet the bank has pushed us into a jumbo loan rate because they must have the cash on hand at the bank to finish the home in case we croak. So essentially we are getting a worse rate over 30 years reduce their risk for 9 months while we build. It's a raw deal. We will ultimately have to refi immediately once the build is complete to save on the interest rate.

Good luck! Even though it's a rocky road, it's still fun which is part of the goal, right?

[Spork]

I'm building a house now. We've hired a general contractor to handle most of it and we will do the finishing aspects like flooring and cabinets etc ourselves which ends up saving us around $100k in the end. My husband is a licensed and bonded carpenter. I'm writing to relay what I've learned about the construction loan process so far. I live in Washington so take it with a grain of salt in case Colorado is different.

1. We were forced to pay an extra fee ~$2k for a owner build construction loan even though we were only planning on building about 10% of the house.
2. We will be paying cash for much of the house as we go, yet the bank has pushed us into a jumbo loan rate because they must have the cash on hand at the bank to finish the home in case we croak. So essentially we are getting a worse rate over 30 years reduce their risk for 9 months while we build. It's a raw deal. We will ultimately have to refi immediately once the build is complete to save on the interest rate.

Good luck! Even though it's a rocky road, it's still fun which is part of the goal, right?

Maybe I am misunderstanding you... But we paid cash as we went and just never dealt with loans at all.  Our GC would typically front us about $30k.  When the expenses got to about that level, he asked for a check.

If you have a bank involved, you will likely have to build to 100% completion before they'll let you move in.  We moved in at about 60% completion and did not complete that last 40% for a long time.  In fact, I suspect we're still at 95% completion with the last room only partly completed.

[Lmoot]

^ Did you purchase the land with cash?

[Spork]

^ Did you purchase the land with cash?

I am not sure if that is addressed to me, Landlady or the OP.

For myself: I had a loan for the land several years before I built the house.  That loan was paid off 5-6 years before I built the house.

[Lmoot]

^ Did you purchase the land with cash?

I am not sure if that is addressed to me, Landlady or the OP.

For myself: I had a loan for the land several years before I built the house.  That loan was paid off 5-6 years before I built the house.

Sorry, yes I was replying to you. I was just wondering if the fact that you didn't have a bank involved from the time you started building the house would be a reason why you were able to pay cash as you go. If she has a loan on the land and declared her intention to build a house, the bank probably wanted to oversee the process since a half-finished house could reduce the value of the land to a buyer, since the buyer would either need to tear down the house or complete it. Also, zoning. In some areas there might be rules in place that indicate the land can only be used for building, in which case the value would be on the building as primary, land secondary.

*I'm no RE expert, just brainstorming

[Rural]

^ Did you purchase the land with cash?

I am not sure if that is addressed to me, Landlady or the OP.

For myself: I had a loan for the land several years before I built the house.  That loan was paid off 5-6 years before I built the house.

Sorry, yes I was replying to you. I was just wondering if the fact that you didn't have a bank involved from the time you started building the house would be a reason why you were able to pay cash as you go. If she has a loan on the land and declared her intention to build a house, the bank probably wanted to oversee the process since a half-finished house could reduce the value of the land to a buyer, since the buyer would either need to tear down the house or complete it. Also, zoning. In some areas there might be rules in place that indicate the land can only be used for building, in which case the value would be on the building as primary, land secondary.

*I'm no RE expert, just brainstorming

Not an issue for us; we still had a loan on the land as we cash flowed the house. Wasn't a concern for the bank; we didn't destroy any land, and the road we put in (and utilities) would have only increased the value for them. But they loaned first, and the contracts were signed. As long as we kept up the payments, they couldn't dictate our use of our property outside the contract, even if we hadn't been doing things to increase the value of their collateral.


But a land loan is a different thing from a building loan, which is more like what you're describing. Land loans may be higher risk; the rates are definitely higher than mortgages. Ours was 7.5% when mortgages were sitting around 3%, and it was the best of a couple of options we got approved for.


In exchange for the control, of course we also paid cash on the barrelhead for every board and concrete delivery other than a couple thousand in day to day things my dad picked up at the hardware store if he ran out while we were at work. Those he saved receipts for,

[Spork]

But a land loan is a different thing from a building loan, which is more like what you're describing. Land loans may be higher risk; the rates are definitely higher than mortgages. Ours was 7.5% when mortgages were sitting around 3%, and it was the best of a couple of options we got approved for.

Our land loan was even higher.  I forget exactly, but it was around 10%.  This was before the housing crash, so rates were a little higher (BUT NOT THAT HIGH!).  It was also structured with a big balloon payment at the end -- but we had intended to pay it off early and the loan officer knew that.

Our loan was really odd... and a little weird to get.  As mentioned up thread... it had a 30x40 shop on it, which wasn't worth much.  In fact, it was worth less than the land.  Traditional financiers didn't want to touch it with the "home" value less than the land value.  Land financiers didn't want to touch it because... it wasn't exactly just land.  It had a building, utilities and a 300ft paved driveway.

[Landlady]

Maybe I am misunderstanding you... But we paid cash as we went and just never dealt with loans at all.  Our GC would typically front us about $30k.  When the expenses got to about that level, he asked for a check.

If you have a bank involved, you will likely have to build to 100% completion before they'll let you move in.  We moved in at about 60% completion and did not complete that last 40% for a long time.  In fact, I suspect we're still at 95% completion with the last room only partly completed.

That's great that you could do it without a loan! I would love to build that way. We decided to do a loan because we live in a mountain area where the building season is short and it would take us too many seasons to finance it ourselves. Maybe with the next house on a sunny beach location. :)
 
It is true that the bank wants it finished to 100% completion which is fine because we are building a rental wing on the house which we want to start renting out immediately to cover our mortgage costs.

[Blindsquirrel]

  Buy a foreclosure and fix it up. New construction costs a mint compared to rehab. Just my 2 cents but have bought and sold over 50 houses. If you look at what they get for a new house in a new development vs an existing foreclosure I think you will go not building your own. A total dump is cheaper to fix than to stick build a house in 99% of cases I have seen.

[Landlady]

^ Did you purchase the land with cash?

I am not sure if that is addressed to me, Landlady or the OP.

For myself: I had a loan for the land several years before I built the house.  That loan was paid off 5-6 years before I built the house.

Sorry, yes I was replying to you. I was just wondering if the fact that you didn't have a bank involved from the time you started building the house would be a reason why you were able to pay cash as you go. If she has a loan on the land and declared her intention to build a house, the bank probably wanted to oversee the process since a half-finished house could reduce the value of the land to a buyer, since the buyer would either need to tear down the house or complete it. Also, zoning. In some areas there might be rules in place that indicate the land can only be used for building, in which case the value would be on the building as primary, land secondary.

*I'm no RE expert, just brainstorming

Lamoot you are correct that banks want to make sure that they have the full value of the home on hand in case an owner build scenario goes south. We paid cash for the land and this value is considered a % of the Loan to Value that the bank calculates. The ideal scenario is if the land alone is valued at or above 20% of the loan you are needing so that the land functions as the downpayment. Paying cash as you go would be the best! We briefly considered living in a yurt for this reason!

[abhe8]

Spend a few months combing remax and similar sites to see what the market is like, for a house and property you would want. We did this and realized it's not a cost issue, but rather we just can't buy what we want, with the combination of land, location and house. So we are patiently looking for just the right land, which we plan to buy outright, then build our house.

[paddedhat]

The Denver/Boulder area might be a red flag. I spent some time house shopping in the Boulder county area, and had some interesting conversations with locals and builders. Apparently, Boulder county has some pretty over the top regulatory burdens, that far exceed what is expected in most parts of the country, and costs have skyrocketed. Don't know exactly how bad it is, or if it extends to other counties, but I heard some pretty wild prices for even basic "builder grade" construction, based on what the ever exploding market will bear, and the silly amount of over-regulation. So, look before you leap. Good luck.

As a personal note, I built custom homes for a living. My latest personal dwelling is for sale, and we are relocating. I'll find a place to flip when we find our next location, and wouldn't even give a though to building one from scratch. Finding a new set of subs, and dealing with another bureaucratic maze is not something I'm willing to put my self, or my wife, through again.  There are many happy owner builders out there. There are also just as many uncompleted (and often occupied) houses out there, an broken marriages caused by the stress of "saving a whole lot of money by building our own home".  If you do it, sub out whatever the budget will allow, and if you are not a tough skinned, cynical prick, you better be able to fake it, since it isn't a task for the weak.

[Simpli-Fi]

I just went through this...bought land, custom home, self contracted, and it was in no way cheap.  It will take decade or more to get money out of this house.  However, I built it to stay there.  One bit of financial advice people don't talk about is "moving is expensive". No matter how you cut it, you spend money moving, whether it's boxes, trucks, new things, etc.  Find a place to stay and build/buy the best house for your needs and stay there.