Financing the Dream

©2008 by Charles Morrison

It has become apparent over the last few years that the financial industry has killed the golden goose. The proliferation of predatory lending which followed rampant deregulation of the financial markets led to a huge spike in foreclosures, beginning with sub-prime mortgage holders (primarily lower middle class and poor people) and is now moving into the solid middle and upper middle classes. The huge surplus of relatively cheap housing made available by foreclosure added to the already large surplus of newly built but unsold spec houses, has depressed housing prices for the foreseeable future.

It’s a great time to be looking for a home if you have cash in your pocket. A lot of people realize this and you won’t find yourself alone if you decide to cash in on another’s misfortune. One thing that isn’t widely known is that the banks aren’t necessarily loosing money on these deals. Large numbers of people are being saddled with obligations to make up the difference between what the bank sells their old home for and what they owed on it before the foreclosure. I have personally spoken to people who owe tens of thousands of dollars on homes they no longer own or occupy. Some of these people actually work at banks. I’m not crying for the banks, I’m sure they will do just fine. The whole derivatives scam is a different issue, but certainly has contributed mightily to the situation we find ourselves in now.

The building boom of the mid 2000s is over. This is a fact some speculators, especially those new to the market, have yet to figure out. I have seen homes come out of foreclosure, be sold within a few days and go right back on the market at 3 times the sale price within another few days. These houses are often trashed, the new owners having done nothing to earn their 200% profit. Radio infomercials promote this kind of activity as get rich quick schemes predominate the airwaves. As always, it’s the last ones in who will be going broke holding onto worthless properties at high cost. We’ve been through this already so don’t get suckered.

Another aspect of this whole debacle is that Banks are now going to be a bit pickier about who they lend money to. Gone are the days of no money down mortgages. It’s back to the days of 20% down, good credit rating and a lien on the first-born child’s future. If you’ve saved your pennies, then you can buy with cash and forego the whole mess. If not, you may have some issues financing the dream. Owner builders have often had issues financing construction projects anyway and I doubt that the current situation is going to make it any easier.

OK, I’m done with the rant. what we’re really after is how to finance the dream of building your own home.

So here’s the easiest way to get things rolling on building your home. Do it with cash. That doesn’t mean you have to have everything up front. What it means is that you pay as you go with cash you have on hand at the time. Unless you do have it all up front, you will be taking some time to do this, working on the house part time and working for money either part time or full time. Yes, this means it will take much longer to build than if you did it full time. On the other hand, you weren’t so naive as to think that it would just take a year or so to build a lifelong dream, were you ? Of course not. I offer the following simple recipe for financing the dream:

1. Get out of debt. Seriously. You can’t be saving the amounts you are going to need to while paying off a car, house, credit cards etc. You may need to start slowly because some of this will probably mean a lifestyle change. You probably don’t need every new gadget that comes out. You may need to move to a lower cost home, trade in that hot Jag for an old Chevy, stop eating out every night. There are lots of things that may need to change to get on the path towards a credit free environment. There are lots of folks out there who are anxious to sell you a path to good credit. Ignore them and do it yourself.

2. Start saving money in safe places. Think FDIC. It’s going to take some cash to purchase a lot or acreage to put your home on. Unless you have some special connection with a relative with spare land you can acquire cheaply, it will cost at least $10,000 to get a buildable lot. If you want water, sewer, electric or other services, you will be paying a fair amount to get those as well unless the lot comes with those included. If at all possible pay this off before starting construction. Preferably you will pay cash for it, which decreases your cost and risk considerably. Remember, interest adds up. That’s why mortgages and loans have become tradeable assetts. You really don’t want some stranger to come along and demand you pay your loan in total or they’ll take your land. It happens. Don’t let it happen to you.

3. Start construction with a bit of a bumper. The amount of this bumper is going to depend on how much income you have while building. If you have a two earner household, at least one should be earning as much as they can to pay for construction and living costs. If it’s possible to take some time off and still have income, it will help speed up construction. However, make sure you can cover construction and living costs without borrowing.

4. Know what this is going to cost you. It may be impossible to anticipate every cost, I never could. However, you need to have a realistic idea of what this is going to set you back. You may have a time limit imposed by the building department and you want to make sure that you have access to that amount of cash in the time frame allowed. You may want to negotiate time frames with the building department as well if at all possible. As an owner builder, unless you’re hiring a full crew, it’s going to take you a while to get this done and department schedules are figured on professional contractors’ abilities. In the same vein, if you have a $30,000 building budget, make sure you are building a structure that can reasonably be built with those funds. A 4000sq. ft. superinsulated home with 3kw of solar panels is probably not possible for that amount of money. The cost of the outside shell is not even close to the cost of the finished home. If you are going to hire out some of the work, make sure you have that in the budget.

This is the “old” way of doing things. Doing them with cash. Pay as you go. My grandfather was paranoid of borrowing money to run his farm. He eventually did so, but not before he’d built a business based on being fiscally responsible. If ever there was a time to return to those “old time” values, it’s now.

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