Tuesday, February 28, 2012

Can I build a custom home and sell it and make money?


Can I build a custom home and sell it and make money?

This is a question that I am asked more and more in this current market and economy.

The fact is that it can be very tricky to try and make money from building a custom home and then trying to sell it right away.

A lot of people think that the way to do this is try to build the custom home without the use of a general contractor. The reason that they think this is because contractors charge you a percentage on the whole project, this is their profit. It is true in principle that you would save money without using a general contractor expect that it isn’t true if you actually sit down and way the pluses and minuses of trying to build without a general contractor.

Here are some of the problems that you will run into if you try to build your home without a general contractor;

Building a custom home is a full time job. You will have to take the 8 to 12 months off to build the house just to organize and supervise the trades.

Builder discounts. You will not qualify for these at the local lumber yards, tile suppliers and construction material warehouses.

Sub trade priority. Trades such as electricians and plumbers are loyal to contractors because contractors will give them work year over year. You are a one time job and since you are the general contractor they will look at you as a hassle, because you will not know as much as a general contractor. If your not there every day to talk to them they will leave every time there is a decision to be made and there is no one around to make it.

Sub trades charge more to homeowners then they do to contractors. There a couple of reasons for this; one is because contractors will give them more work, the other big reason is the risk that you will not pay them. This is a real worry for sub trades; collecting money is not a fun thing for sub trades.

Knowledge. You will not have as much knowledge as a contractor. You will end up doing things that will cost you more money than if a contractor had organized them. The contractor with experience knows the pit falls and will save you money steering you around them.

Safety, safety, safety. If take on building your own house you have to give every trade a safety tour of the house. You as the owner of the property have to ensure all safety standards are met and if anyone is hurt on the site you will have to answer to the labour board. Any lawsuits (because of injured workers) will be directed at you because you are in charge of the site.

Clean up. One of the major concerns about work sites is how clean they are kept. Sub trades don’t always clean up after themselves. You will have to do it, or you will have to pay someone to do for you. If sub trades find a site to messy they will charge you more for hassle or walk away because of safety concerns.

Code. You better memorize the code book. A lot of sub trades will give you exactly what you want, even if it’s against the code. You will find this out when the building inspectors fail it. Since you asked for it, the sub trade gave you exactly what you wanted and now you have to pay to have it done again.

Building officials. You better learn when you need all your building inspections and you will have to take the whole day off to meet with the inspector. They will not give you a time they will be showing up, they will just confirm the day that they are going to show up.

I have seen home owners that have tried to build their own home to save 50 thousand that the general contractor would make and blow that 50 thousand in mistakes that they make before the house is half built. I have seen homeowners hire sub trades to frame the house under their direction and then have the building inspector come in and fail it. Forcing the homeowner to bring more sub trades in to fix the problems and then get it engineered because the inspector doesn’t trust what the home owner did. This is well within the building inspector’s right to force you to pay 5 to 10 thousand in engineering costs to prove to him that the house is structurally sound.

Things such as the order of how the trades are called in to install things in the house can cost the homeowner money. I have seen homeowners call the electricians in before the heating contractor to wire the whole house. The electrician is happy because there is nothing in the way of their wiring, but when the heating contractor shows up to run all the duct work and finds that the electrical wiring is in the way, they will simply cut it out. This will force you to get the electricians back to rewire the house. This will cost you money, because it’s your fault. To sub trades time is money, if you cost them time because you didn’t know what order things should be installed in your home then they will charge you money for all the time they lost during installation and for every hour that they are forced to redo something because of your poor scheduling. It is not a sub trade’s job to give you advice on how to build a house; it is your job to hire a general contractor to do that for you.

The way you finish the house will be only as good as the people you hire to do it. The best finish carpenters are already employed and are kept employed by contractors. It will be hard for you to hire the best which means that you won’t get the best job. The other thing is when you finish a custom home it is finished in your tastes, it is customized to you. This will be a major problem when you go to sell it. People who are looking to buy a custom home are looking to buy a home that meets their tastes. So right away you have removed a lot of the market that will be looking to buy a house in the price range you will be asking.
Also when you are selling your custom home you will be asking more then it cost you too build it because you will want to make a profit. Here lies the problem with custom home building. Why would someone buy your custom home for more money than it would cost them to have one built themselves? They could have one built and have it customized to them not you.

One of the biggest reasons that it is almost impossible to make money by building a custom home and then selling it right away is the warranty. If you do not have a contractor build your house then you don’t qualify for the warranty. In a custom home, warranty is a big issue because there is a lot that can go wrong. In Ontario we have Tarion (the new home warranty program) that is a 7 year warranty on all new homes, as long as they are built by a registered Tarion builder. It is actually illegal for a builder in Ontario to build a new home without being registered as a Tarion builder. This all costs money and is built into the percentage that a contractor charges the homeowner to build the house. Imagine walking into a car dealer and the salesmen says, I have this car that you could buy for $20,000 with a full 7 year warranty or this car for $19,000 with no warranty. I think for the small percentage more, most people will be asking for the more expensive car that has a warranty.

So when you add up all the costs associated with a custom home you can clearly see that building a custom home and then selling it will not net you any great profit. Now if you waited 5 or 6 years as house prices and building costs continue to rise then maybe you would have the chance to make a profit on your custom home.

If you are thinking about building a custom home please feel free to check us out at www.villagebuilders.ca

Rob Abbott
Operations Manager
Village Builders Inc.

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