Introduction to the Owner-Builder scenario
You would think that being your own builder will save you a pile of money building your own new home, because you will save the “builder’s fee and or mark-up” right!, Well, maybe!
There are a number of reasons why you may not save as much as you think, compared to hiring a qualified builder, but on the other hand there may be several reasons why you could save a bunch! Sounds like a bit of an oxymoron right!
But, there is a reason for each scenario, one, if you do have a bit of construction background, and you are handy with power tools, and you personally know a bunch of tradesmen and subcontractors, then you will probably save money.
However, on the other hand if you don’t have much in the way of construction background, then it will probably cost you more money to build than if you hired a Real Builder in the first place.
The pro’s and con’s of being an owner builder
We will dive into the pros and cons of being an Owner-Builder in this article, each of which can have several tentacles to follow through on, and each can have its own set of consequences.
We at Landen Design Build do a lot of architectural design work for “Owner-Builders” on a regular basis. These are people that want to build and supervise their own home in the hope to save money on their project.
However, this is one project cost factor that you really need to think about before you undertake this mammoth task. Hiring a builder will obviously cost you some money as they need to make a profit, however consider this, a good builder that has been around for a while tends to get substantial contractor discounts from their regular suppliers and trades.
In some cases these contractor discounts can be as much as 30% to 40% and, on average tend to run between 10% to 15% of the overall project. Whereas you as a “private person” will most likely get the “average Schmoe price”!
Unless you have lots of friends that are sub-contractor or tradesman and you also know how to talk “tradesman-lingo” otherwise you will be hard pressed to negotiate a contractor’s discount of any substance.
Most tradesman and sub-contractors can smell a “newbie-owner-builder” a mile away, and know they can take advantage of a situation and “overcharge” their normal rates compared to what they quoted to an experienced builder.
You may ask, why do “Experienced contractor/builders” get discounted rates? The simple answer is repeat business/work.
Most good tradesmen and suppliers are already very busy with their “regular builders” so when you come a long they most likely don’t need your work, so they handout what in the industry is known as the “go-away price” meaning the price quoted is so high that you most likely will go away, and if you don’t go away only then will they “make room/bump a builder job” for your job as your job is now paying way more than normal builder rates.
Owner Builders get charged more by trades, and suppliers!
Another reason for higher priced quotes to “average retail people” trying to be an owner builder is the time it takes a tradesmen to do an actual detailed quote for someone that may never become a client.
So a lot of tradesmen will simply guess high and not spend a lot of time on a quote. This way, if they do get the job they know they are more than covered, and if they lose the job, oh well, they did not spend that much time on it anyway.
This compared to working for their regular builders where they know for sure they are getting most of their work on a regular basis doing work for the builder’s “normal fixed rates”.
You may find there may more benefits to having an experienced builder involved, and in a lot of cases may even cost you less than if you did the whole project yourself. Never mind the possible savings in avoiding the overall headaches of being a “beginner builder” or mistakes that would be made by a new-be, compared to using an experienced quality builder.
This is probably why the most common way to build a home is with an experienced builder. However, for homeowners with some past building experience and a lot of extra time on their hands the savings could add up and be worth the effort. Or for smaller projects like a deck, fence, or basement development, the savings could add up if doing it yourself.
A quick test to see how much you might NOT save!
One way to test how much an experienced builder could save you in their contractor discount rates is by picking a single trade to quote separately on a final set of building plans.
For example, you as the “home-owner-builder” go out on your own and separately chase down pricing from say three drywall contractors, and then compare these owner/builder chased down prices to that of a real builder’s regular drywall guys.
When you sit down and compare the difference between homeowner vs. builder pricing, I think you will be amazed at the difference.
If you have ever gone to a wholesaler there is reason they have a big sign on the door that states “Wholesale Only”. First off, they simply don’t have time to deal with newbie owner-builders, and second, if their regular builders found out that they were giving out contractor pricing to an “off-the-street” sale, they could lose their regular builder customer’s account.
So, even IF a wholesaler is willing to sell to you, you will NOT be getting wholesale rates! In a lot cases they will simply tell you “Sorry I can’t sell to you”! Part of the problem is “paper work” as most builders have accounts with the wholesaler, making the paperwork process fairly seamless, when you come along and don’t have an account, the paperwork becomes a nightmare for the wholesaler, and that is why many wholesaler’s simply state, sorry we can’t sell to you!
If you are thinking “no problem I will just set up an account” well. NOT so simple, in order to get a wholesale account opened up, you first need a register corporation, then you will need MANY trade and supplier references to prove you are a real builder, and to verify that you pay your bills on time, plus you need to have a registered corporation that has been in business for few years with a proven track record.
Plus you need to pass a corporate credit check. Plus you need to give the wholesaler your bank contact, and bank account information for then to follow up with to see that you are a “Real contractor” that runs a real business. In other words, it is not a simple as sliding a business card over the counter, and hope they will set you up with a contractor discount!
Understanding a Builders’ mark-up
I have a question for you, “how much do you think a builder makes as profit or a fee, building an average new home of say a $500,000 sales value”?
Most people that I ask this question of answer back $150,000 or more in profit! Or state that they think a builder makes 50% profit! I am not sure where this number comes from, but most people think we builders are just making a killing building a new home.
I have a thought for you to consider, if builders were making so much money, why then do they need to build several homes a year just to keep the doors open?
If the average custom home builder was making $150,000 per home, why not simply build one or two home a year and take the next year off? Or just retire after 4-5 home builds! Because they don’t make as much as most people think!
The simple answer is that most builders’ work off very tight margins, why, because there is lots of competition out there. The average margin/mark-up is between 12-15%, with a few very high-end builders able to achieve up to 20%. So, that means that most builders are on average making about $75,000 mark-up over hard cost, this, based on the above example of a $500,000 build.
However, to be clear that is NOT Profit. The builder still has to take out of that number their cost of running the job, such as supervision, insurance cost, WCB cost, and other overhead and administration cost.
Now consider the normal builders construction discount, which on average will be between 10-15%, meaning a builder that is working off of a gross margin of say 12-15% is really only making 2-3% over what you as a private consumer could source out trades and supplies at retail prices for!
I know, you think you will get contractor rates because you are building a whole house, right! WRONG, most trades and subcontractors will only work for a new-be owner-builder if they are getting “above normal builder rates”.
You may ask, “Why is this”? The big reason is that most real subcontractors are already busy with their regular builders, and simply don’t need “your work”, so even if they are willing to price out your “private job” they will most likely hand out a much higher price than they would with their regular builder!
Newbie Mistakes!
If you have never built a custom home before, then you are bound to make new-be-builder mistakes along the way of building your new home.
These are mistakes that a well-seasoned build would most likely NOT make, meaning, the cost of these owner-builder misstates need to be accounted for when comparing what a real builder can build for, vs. what you THINK you can build for!
There are MANY ways to make a mistake when building a custom home! The following is only a small list of the most common new-be-builder mistakes.
- Not verifying WCB coverage for each and every trade and subcontractor
- Not verifying Liability coverage of each and every trade
- Not ordering enough materials for onsite tradesmen, causing back charges
- Ordering too much material and then being charged for restocking or possibly totally wasting the overage order.
- Improper job scheduling, where a job is not ready for the contractor or tradesmen, and you are then back charged for the contractors delay
- Not catching construction mistakes or problems before they are cover-up, which then translate into huge repair cost later on.
- Hiring a sub-trade, that does not finish a job, or will not come back to fix their mistakes
- Paying a trade or subcontractor, then finding out they have not paid their own bills, which then translates into lien problems for the owner builder.
- Not having a proper lien hold back trust account set up BEFORE there are any liens
- Not properly vetting trades and subcontractors
- Not knowing the proper building code requirements
- Not getting the proper inspections done by the right approving authorities
- Not knowing the proper order in which to schedule trades, for example, why do most experienced builders schedule the electrical rough in after pluming and HVAC rough-ins? There is a reason, and most new-be-builders don’t know why!
- Not dealing with things upfront that will become a servicing issue, or a warranty issue years down the road!
- Hiring unqualified trades or sub-contractors, most times if a trade or subcontractor is willing to do your new-be-builder job, it is because they can’t get work with a real builder, because their quality or service sucks, or other builder’s may have tried them and fired them, and then let all other builders know that this guy is a smuck, and should be avoided! Believe me, word gets around fast in this construction industry, as to who is a good tradesman vs. a crappy one! And many times the only ones available to do your new-be-builder’s work are the crappy ones, because the good one are all working for the real builders.
Getting good quality trades and subcontractors
There is one problem that most Owner-Builders fail to realize upfront before they start a build! And that “one thing” is getting access to GOOD quality trades and subcontractors!
As stated previously, most GOOD trades and subcontractors are already fully book-up and very busy servicing their regular builders, so when you come along, they not only may give you a higher bid price but may also need to slot your job “in-between” their regular builders job.
Meaning their regular builders job will take preference over your job, meaning you will have to WAIT, until they have TIME to do your job. Which will then translate into project delays on your Owner-Builder job, compared to a real builder’s scheduling. Furthermore, any trades that are available might have a good reason WHY they are available! Possibly because real builders don’t want to use them at any cost saving!
Furthermore, you may only be able to get access to trades and sub-contractors that REAL builders don’t want to use! Meaning, if any of these guys do have time to do your job there might be a good reason why they are NOT busy! Translation, the subs and tradesmen that you hire, maybe not be that qualified or experienced, meaning they do “crap-work”, and that’s why other builders don’t use them!
That’s why most quality builders use the same trades and suppliers over and over again, on every job they do. This, for two reasons, first they get better pricing due to volume of work, second they get better quality, because the trades and subcontractor know they HAVE to do a good job or lose all the future builders business!
In an Owner-Builder’s case these same trades and subcontractors know you are a ONE-TIME job, so they are not that worried about losing “your future business”. This is also why some trades and subcontractors will “cut corners” on owner-builder jobs, because they don’t have to worry about repeat business from your ONE job! Nor do they plan to come back and service any repairs or maintenance issues after you pay them! Whereas trying to cut a corner on their regular builder’s job is like biting the hand that feeds you!
Then there is the Bank?
IF you plan to be an Owner-Builder, you need to consider financing issues! What do I mean by this? Well, many banks are not that thrilled about lending construction funding to a party that has no experience in building a new home.
From their point of view history has shown them that this ends in disaster many times, where the bank ends up needing to foreclose on the property!
The very last thing the bank wants is to do is foreclose on property, also known as Bank Owned Property (BOP). That is not to say that you can’t get construction funding as an Owner-Builder, it just means that you will have to put together very well done Construction Funding Application. Meaning, an application that shows the lender that you know what you are doing as an “Owner Builder”!
This lending package will take allot of hard work to put together. You may need professional help with this package; we at Landen Design have put together many hundreds of Lending Packages for Owner-Builders, as we know exactly what most lenders want to see! However, you can also do all of this legwork yourself, and possibly save the fee that we would charge you for putting a lender package together for you!
Note: Many lenders, will issue a “higher construction Lending Rate” to Owner-Builders, compared to a possible lower construction rate if using a quality proven builder, such as Landen Development Inc. You may ask why do lenders tend to charge more for Owner-Builders? Simply put, to cover their “ass policy” as they know the chance of a problem coming up with an Owner -Builder is much higher than if using an experienced builder.
Furthermore, lenders know that they will need to do a bit of “hand-holding” with an owner builder client! Meaning they know they will have to spend much more time on your lending file, both in up front compliance due diligence issues, and also after the fact, as the lender knows that owner builder’s tend to have way MORE issues to deal with during the construction process. And lenders know that inexperienced owner builders tend to take much longer to get a home built than say an experienced contractor such as Landen Design Build! So they build this “what if factor” into their rates for owner builders!
Note: you will probably never know if you are getting the “overcharge owner builder rate” as you can’t simply ask your lender “what is the rate if we are an owner builder, compared to the rate if we have a REAL builder”?
On a side note, when shopping around for a construction loan, make sure you pull your own credit report, rather than having each lender pull a credit report, as each time a lender pulls a report, your credit score goes down, if you shop around too much, with each lender pulling a credit report, you might find that NO lender will want to lend to you. This is where it is helpful to have a Mortgage Broker help you with this.
So, what will be needed for the Bank
Your construction lender will want to see a very well done “lending package” which will need several detailed items clearly set-out.
The following bullet points are just some of the items that will need to be presented in detail within the lending package. However, as each lender will have its own criteria; you may need even more that what is listed below for “your lender”!
- Your personal background information
- Three years of Tax returns to show solid income, plus an employment letter.
- Any experience that you have in construction, or project management
- Your personal financials, and if you own a business, it’s financials
- Demonstrate cash on hand, your portion of the project
- Possible pending sale on your existing home/property
- Detailed building plans
- Detailed building specifications
- Detailed materials specifications, and room to room spec’s
- A proposed milestone draw schedule
- Engineering reports, for soil conditions, floor joist, roof trusses, beams, other
- If building an acreage home, well reports, septic sewer design and soil reports
- Very detailed building estimate/budget
- A detailed project management schedule, also known as a Critical Path Management (CPM)
- Back-up quotes from all major trades and suppliers to demonstrate you have a realistic construction budget
- List of qualified trades and suppliers that you plan to use
- Blue print appraisal (Note the lender will want their own appraiser as well)
- Land assessment appraised value
- Permits for building, plumbing, electrical, other
- Home Warranty registration
(We also have more information on this subject that you can download that is not addressed here).
Saving Money by doing a lot of the construction work yourself!
In all the years that we have done architectural and structural design work for Owner-Builders the one big takeaway is that most Owner Builders plan to do a lot of the actual construction work themselves! If you are handy with power tools and so forth, this could be a big cost saver.
But! Consider this, most future home buyers, at resale time, can see the difference in a pro done job compared to a “handy man” done job, which in the end, if you are not doing the same quality level of Pro type workmanship, may actually cost you in the long run in resale value. However, if you are confident in your construction abilities then this could be a big cost saver!
There is another way though! You can get the best of both worlds by working with a builder that is willing to “work with you” in allowing you to put in your own sweat equity along with the builders other trades! At Landen Design Build, we have worked with many clients that want to do a lot of the construction work themselves, where we work hand in hand with the owner.
There are however a few challenges, such as working out any WCB (Workman Compensation Board) issues, and insurance liability issues. But, it is possible, and we have done this type a sweat equity arrangement many times. Other builders may not be as amenable, as it can be a bit of a project management challenge for other builders.
Another way is, engaging someone like Landen Design Build to simply help you as an Owner-Builder with a bit of project management and project inspection services.
What do we mean by this, well, the biggest problem for most Owner-builders is getting access to good quality trades and suppliers, and with this Landen service we take a small mark-up over and above our builder quoted rates, and then tell our trades and suppliers to simply deal directly with you!
There are pros and cons to this arrangement, and we won’t get into them here in this acritical, as that is a whole other article just in itself! However we would be happy to meet up and go over in deal how this would work.
The duration of a home build
Owner-Builder’s tend to take MUCH longer to build a home than say an experienced builder! Why? Because a real builder tends to be able to schedule a job much tighter due to a number of factors, such as:
- An experienced builder knows how long each trade really needs on a job, and also has better access to their trades, when they need them, and can somewhat dictate to their trades when to show up, whereas you as an Owner-Builder, can jump up& down until you are blue in the face, begging for a tradesman to show up! Creating large gaps in between each trade.
- Owner- Builders tend to make way more mistakes, that in turn then need to be re-done, which then simply suck-up more time and materials.
- Owner-Builder’s tend to improperly schedule jobs, meaning they tell a tradesmen to show up when a job is NOT ready, which in turn means the same trade needs to be re-scheduled, and worse most likely results in a back charge, as well as a timing delay.
- Owner-Builders tend to try and have too many trades on a job all at the same time, which can result in some trades walking off a job, which then takes more time to reschedule. An experienced builder knows which trades can work together at the same time, and knows which trades need to have the job mostly to themselves while on site.
- Most owner Builders do not use proper CPM schedule (Critical Path Management) software or even use a manual system. Which may not only results in a single trade being possibly delayed, but could then directly affect all trades all the way down the line, meaning everything then needs to be bumped ahead. Most inexperienced builders make the mistake of NOT knowing the “Critical Path” items that NEED to be done before a project can move forward to the next stage.
- Owner-Builders, that try to speed up a lagging job, but end up coving up mistakes or unfinished items, only to find out they now need to “back-paddle” to “un-do” a bunch of work that has progress over top of the mistake, once again cost time, money and project delay’s
Getting Contractor Rates
The one major disadvantage to being an Owner-Builder is not getting access to full contractor discount rates! I had one client that told me he went out and had a bunch of Fake contractor business cards printed up, so that he could go to wholesale sellers and try to open up a builder/trade account.
What he didn’t realize is that these wholesalers are not that stupid. Most check out the corporate registry to verify that you are a REAL builder or contractor. Furthermore most wholesalers will want other supplier references, meaning other suppliers that you have accounts with and have had a history with, that they also know, and are able to contact and verify that you are not only a real builder or contractor, but they also want to verify that you pay your bills on time!
Even IF you manage to hoodwink the wholesaler into thinking you are a real builder, and they give you a CASH account, you will most likely be getting very close to retail pricing anyway, as you simply have not demonstrated a history of “Volume”! In other words, the builders that have had long term accounts with a wholesaler and have a proven track record of how much volume in sales they bring to the wholesaler, and their discount rate is based on that volume and good history of on time payments!
The more they buy the better the discount rate! In your case you have NO history, and are a one-time buyer that won’t be able to build up a history of any volume!
I recently had a client that we did a major kitchen renovation for, and about a year after we did the job he wanted to buy some matching euro-cabinet-hinges through my wholesale hardware supplier (for some small project that he was doing). I found this out when he went to my supplier and asked them to sell to him directly, and he mentioned he was a Landen Client.
The wholesaler phoned me and asked if it was okay to sell directly to my client, I said “go-ahead and give him my price, as he was a great client to work for” and it was only for a few hinges and not worth my time to run it though the company just in paper work. The client phoned me afterward and told me he could not believe the price he got compared to Home Depot! Keep in mind I have had an account with this particular hardware supplier for some 25 years!
My point is this, these wholesalers know that we “real builders/contractors” will find out if they sell directly to a regular retail consumer, and they know this will “piss-off” their regular builder/contractors to the point they may take their business elsewhere.
So I ask you this question “why would a wholesaler sell to you as a ONE time sale and risk the loss of a long time builder/contractor client”? The simple answer is they won’t take that risk! As stated before that’s why every wholesaler has a bid sign on the door that clearly states WHOLSALE ONLY! They simply don’t have the time to waste on retail guys!
