Before deciding to build our dream home, we researched all the costs of building a custom home, especially the startup costs. We could get an idea of the base price, but it was hard to get a straight answer to what it cost to start building a custom home. Before interviewing builders. we wanted to get an idea of the “average” financial commitment and upfront costs we could expect to pay a builder. In this article I am going to share what we learned and show why it is so hard to get a straight answer to the question:
What Does It Cost to Start Building a Custom Home?
Watch our video if you want to hear what it cost us to start building our custom dream home!
Building a New Construction Home is Somewhat Like Buying a New Car
Building and buying a new construction home is a lot like buying a new car: different makes and models include certain standard features; the advertised price is the starting point before you add on any options; you choose options that correspond with your selected model; add the options to the base price to produce a final price; you sign a purchase agreement, make a down payment and secure financing.
While most people would not sign a purchase agreement to buy a new car without knowing the final price, we found that this is regularly done in the new home construction process. Many new home construction customers sign a purchase agreement and provide a down payment, knowing only the base price, including structural options. The customer estimates their interior design costs. The builder provides estimates for the construction costs.
What Happens During the Custom Home Building Process?
Generally, the custom home building process follows three phases and four to five steps: Pre-Construction Phase – you buy land, hire a builder, and take out a construction loan. Construction phase – you make interest-only payments on the construction loan. Final Phase – you close out the construction loan and take out a regular mortgage.
During the pre-construction phase, the customer and builder work together to design the home which includes making structural design decisions. The builder gives the lender these floor plans along with an estimate of interior upgrades and construction costs. Your lender will use this information to appraise your new home and guide the approval of your construction loan. However, depending on the type of contract the builder uses, the final price of your new house remains unknown until final reconciliation before closing.
Watch our Video if you would like to know how Builders determine the base price and final contract price for a new construction home!
How Much Money Do I Need to Give the Builder to Start and When?
Each builder requires an earnest money deposit at the time you sign the contract. However, each builder may use a different methodology to determine the earnest money deposit amount, and due date. However, I did make some general observations and findings on the amounts and timing of payments made to the builder if you are building a custom home.
Generally, if you are building a custom home, your financial commitment to your new home started before you met with your builder. Although there are situations where a customer purchases the lot and contracts with the custom home builder in one transaction (as is done in most semi-custom and production homes), most of the time, a custom home customer has already purchased their lot before starting to work with a builder. Therefore, the first point of contact (and payment) is for floor plan designs.
The Design Process Requires an Initial Down Payment
As I previously mentioned, the customer and builder work together to create floor plans during the pre-construction phase. This is typically the first financial commitment made to the builder. There is typically a design fee which could be a flat fee ($2500-$10,000 or more) or could be a set price per square foot of the home. Please note that each builder may have a different payment schedule or process.
Some builders may want a minimum amount of money paid upfront, with subsequent payments made as the plans progress. Other builders may want a flat fee paid upfront. There are also situations where the customer approaches the builder with a floor plan in hand, in which case the builder may eliminate or reduce the design fee.
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Contracting with the Builder – How Much Does It Cost to Start?
In many cases, the customer has not yet committed to a contract with the builder during the design phase. When the design process is finished, the customer can decide to proceed with the builder, or not. If you do not proceed with the builder, you may be able to keep the floor plans. However, it is also likely that the floor plans are proprietary and belong to the builder.
When you decide to continue to move forward and sign the purchase agreement contract, the builder will require you to pay an earnest money deposit. This earnest money deposit could be a flat fee or can be a percentage of the contract price, anywhere between 1% and 10%. Some builders will apply the design fee toward the earnest money deposit if the customer moves forward to the construction phase with the builder.
The Answer to How Much it Costs to Start Building a Custom Home is . . .
The amount of money you will pay the builder to start the construction of your custom home depends on the processes, practices, and contracts used by the builder. That is why it is hard to know an exact number upfront. However, you can use the information in this article and other research sources as guidance.
Best practices are: 1) consult an experienced realtor, 2) carefully interview builders, and 3) read all documents thoroughly to ensure you understand how much it will cost you to start your new construction custom home before you sign a purchase agreement contract!
