Hey, everybody. Have you been confused about how much money you’ll need in order to start your custom build project one of your very own? Well, don’t worry, you’re not alone if you’ve ever wondered and that’s what this video is all about. By the end, you’re going to know exactly how much money you need to have upfront to start building your new custom home, and it starts right now. I’m Jonathan, and this is my lovely wife, Rachel, partner extraordinaire. We’re local real estate brokers here in Hampton Roads, and you’re insiders into the world of custom building and new construction.
Introduction
So if this is your first time on our channel, please don’t feel the pressure to subscribe. We actually want to earn every subscription that we get and we want you to come back a second time. If you’re going to subscribe that way, we know that the content we’re putting out is valuable to you and you’re enjoying what we do. So if this is your first time, don’t even worry about it. Just sit back, relax, enjoy the video. And maybe if you come back, then you can hit that subscription button in the bell notification as well. But for now, let’s get into the good stuff. Building a custom home is really a special thing, right? We’ve done it twice. It’s an amazing process because you get to create something that by definition has never existed before, and you get to use the coolest parts of your imagination to dream it all up.
So you get to choose all the things that you want about the home, all the things that you want inside of it. You get to design around the way that you and your family live. So when we’re working with new construction clients, we like to operate around the idea that the home is made for you. You and your family don’t shift your lifestyle around the house or accommodate the house plan itself. It’s for you. You’re not for it. But even before you begin the planning process, there’s often a step that people overlook, and that’s understanding just how much money you’re going to need to get the project started.
So this can be confusing, but you shouldn’t confuse it with how much you can afford to finance or how much the bank will lend you as a mortgage. That’s a separate topic. Also notable to think about the fact that when you’re talking about custom homes, this is very different than building with a standard production builder in a standard production neighborhood. And when I talk about that, we won’t name names, but think about your proverbial cookie cutter houses on postage stamp sized lots. That’s that’s the production side of things generally in a production neighborhood. The builders have some different financing options, and they have a different capacity.
A lot of times they can build a house for you and then just sell it to you at the end. Similar to a resale, but in a custom project where you’re buying a singular lot or you’re buying a tear down in an existing neighborhood, the upfront money is going to look a little bit different.
LVT or Loan to Value
So let’s talk about the land and let’s talk about the financing. Most large lenders and big institutions will not finance raw land. We have a few contacts, and they’re all local lenders that will in fact finance land at 75% LTV or loan to value. And essentially what this means is you get an appraisal for the property. They’ll fund 75% of that loan and then you bring the other 25% to close on the land. Now in this instance, you’re buying the land up front.
This works really well when you found a piece of dirt that you really love, but you maybe don’t have your house plans ready or you’re not ready to get the build project started immediately. There’s also something called construction to perm financing, and that’s a little bit different. How does that all work? A CP loan is essentially like a line of credit. The funds are available from the loan that you procured from the bank for the purchase of the lot and the cost to build your home. So when you do this, obviously you have to have a builder and a contract to build with him. You are going to purchase the lot with your first draw from the loan. And when your builder gets going on the project, he’s going to request draws throughout the process in accordance to the progress of your build, basically.
But don’t worry, it’s not carte blanche from the builder. The builder actually has to request funds from your lender. The lender sends somebody from the bank to go, look at the property, take pictures, basically make sure he did what he said he was going to do with the money he’s already been given. And then a title search is also run to make sure that basically there’s no leads or loans against the property. Ensuring that the builder paid all of his contractors. A CP loan is also interest only. So your monthly payments are the interest from the funds that have been drawn from the loan.
So you’re not making interest only payments on the entire amount. It’s basically it goes up over time now, isn’t it? Also, they can structure it such that they could pay those payments, or the builder can pay those payments and just roll it into the loan? Yeah, totally. So it’s just up to them. OK, thought it is worth noting? Yes, that’s exactly right. A CP loan is actually a really great thing for you as the land owner, and you have a lot of control over the process and you get to know exactly what’s being spent on your home.
Right? We just went through this process. I think we had to put like eleven or 12% down upfront, right? So generally. So our total project was north of $600,000, and I think we put down somewhere in the arena of $85,000.
CP Loan Deposits Upfront
So this is stuff that you work out with your lender and isn’t there now. Sometimes there’s a situation where the buyer will give the builder a deposit upfront to do things like a survey or soil test. How does that all work? Yeah. So obviously when you go under contract with a builder, they’re going to require some type of deposit, and this is only when it’s a CP loan, typically that deposits can be pretty on the low side. Most of the builders that we work with, it’s about $5,000.
And what this does is it gives the builder basically some starter money. Before he asks for his first draw to do the feasibility period, which would be getting a survey of the property, doing soil samples, getting the site plan of where your home is going to be on the land to get that approved with you, get it approved with the city and then also get your building plans underway. So that’s basically what that $5,000 or whatever your builder is requiring of you. But it’s typically very low because he knows you are essentially the bank. You are the person funding the build.
And that’s totally separate with your lender, of course. Yeah. And this upfront initial deposit is sort of like when you buy a resale, you have a home inspection period and you invest in figuring out what that home is all about, what’s going on with it, making sure it’s a sound home and a sound investment. Same thing with a new construction build that four to $5,000 is going to make sure that the dirt is sound, that your foundation is good, that the survey in the house and the site plan will work out in a way that’s pleasing to you, and the yard size is what you’re going to want it to be.
Overview
So and that number can vary. You know, if you’re doing some plan revisions, that deposit might go up a little bit. We definitely recommend that if you can, you pick a plan that the builder already has rather than starting from ground zero because building plans from scratch can be north of $15,000, whereas a few revisions might only be a few thousand bucks. So the money you’re going to need is a minimum of 10% if you’re getting construction to perm financing, if you’re buying the lot outright initially. 25% down on the lot purchase and then another 10% of the overall budget, when you go to close on that construction loan and then somewhere in the five to $15,000 arena for your site, plan your survey work and maybe some plan revisions. Now, of course, we’re not lenders, so please get with your lender. And actually, as of the time of this video, there are some who will do even a 5% down construction loan.
So please get with your lender if you don’t have a good contact. Let us know. Hit us up. We’ll give you some of ours and rock and roll. Let’s go. Build some houses. We hope that’s helpful. We’re Jonathan and Rachel Beasley That Fit Team professionals in real estate and passionate about people.
See you next week.
