Appraisal
Before a bank loans you money to buy a house, they want to know what it is worth… The same is true for building a house. They want to have an idea of what the final house is worth. They especially want to make sure that they don’t loan you more than 80% of that “appraised” value. If you were buying a house, the appraiser could go look at it. If you are building a house, you need to fill out a lot of paperwork to help the appraiser “imagine” your house. We did that and submitted the paperwork near the end of March. It was very detailed and covered everything from the finish on the floors to the make and dimensions of the appliances.
The appraisal due back on Easter Monday, but took an extra week. There was no guarantee that the bank would loan us what we needed for our rather unusual house, so we had decided we didn’t want to spend thousands on permits before getting the appraisal back, but we were getting the permit paperwork ready to go.
When the bank finally did get back to use, they had estimated the value of the home at about 20% less than it would cost us to build it… This dropped the amount they would give us by a fair chunk of change. We thought about it (and prayed about it) and eventually decided that we thought it was still worth building and we would just make up that difference ourselves.
I had hoped to keep our extra cash reserves in case something went wrong. Now we are planning to use that money, so we are now planning on building with much less of a safety net and I will need to keep an even closer eye on costs.
On the positive side, with a lower evaluation and a smaller loan, we will pay a smaller closing cost, pay less for insurance, less taxes on the property later, etc.
Then the actual appraisal paperwork came in the mail so we could see exactly how the reduced value had been calculated… I was pretty disappointed. We had spent so much time on our half of that paperwork, but the appraiser was not so careful and seems to have just made up his own facts. For instance, he said the home was on a public dirt road, when really it is a paved private road. He was 1 bathroom short for the house and 1.5 cars short for the garage. He wrote down double hung windows instead of casement. He said it was 1 floor with a full basement instead of 2.5 floors with a partial basement. He magically added a walk out basement and a fireplace. He reduced the basement floor space by 20%. We found major mistakes in 11 sections of the report.
I sent a full summary of the mistakes to my loan officer (who is on holiday). I guess we will find out what he says on Monday.
Permits
Once we decided to go ahead (even with the 20% reduced valuation), it was time to start rolling out the permits. Maybe I will eventually put up a page to explain how that all works, but basically some permits need to be done before others. In fact the final building permit requires the permit numbers from the earlier permits. The permits need to be submitted to 4 different buildings (state, county, township and city). Different offices are open on different days.
Everyone I met with in the various offices was very friendly and helpful. There were few or no lines (which is probably why each office keeps such short hours). The big problem was just having to drive around.
The first permit needed is a soil erosion permit. I needed to create a “soil erosion control plan” and apparently they send out someone to check the site from time to time (at 95$/hr). If the plan fails or I don’t follow the plan, I will be fined. The permit said I had to submit it to the county, but when I got there they told me that for my particular township within the county, I needed to fill out a completely different form and take it to the township office (20 miles away) which was only open on another day. The new form required most of the same info, but was laid out differently. I could reuse the same “plan”. The cost of the permit also dropped by more than half, which made up for the extra hassle.
I also needed to have a soil study done. It cost about $360. However, we had found that the previous owner had already had one done 15 years before. I talked to the septic permit people and they said they would honor the earlier study.
The driveway permit (also in its own building) would have cost over $100, but it turns out we don’t need it because we are building on a private road.
The guy reviewing our septic permit was nice enough to come out and talk to me before I left the building. He pointed out that my topo survey (which cost me $1200 a couple years ago) was not sufficient because it didn’t have the boundary stakes marked with the little “s” or “f” (for “staked” or “found stake”). I would need to have it done again… Well, it turned out that the previous owners had already done that also. I was able to find their old survey and the county accepted it.
There was some issue because our address was not properly in anyone’s system, so we had to go to the city zoning office to get an official paper stating that was our address.
Anyway… Most of the permits are in. I am told it will take a week to 10 days to get things processed. When they come back, I can assemble the final permit applications.
In the mean time, I dropped the plans off with the township inspector. I already shared a digital copy with him last year, but this feels more formal.
Tractor
I would love to have a decent compact tractor on site with a front end loader to move dirt and perhaps forks to help unload trucks and maybe even an excavator arm. I visited a few dealerships and have been searching craigslist for weeks. I didn’t find much available.
I could go with a used tractor for about $10,000. When the job is done, there is a good chance I could sell it for almost as much as I bought it for. On the down side, I would need the $10,000 up front and I might get a lemon.
Or I could go for a new compact tractor, it would be a bit smaller and would cost about $20,000. However, I can financing with interest free payments for 60 months. During the actual construction period, I would only need to pay about 340$ a month. Also, the new tractor would be covered by warranty and I wouldn’t have to worry about hidden problems…
I am going to try for a cheap used tractor… But I want a great deal, not just a good deal.
This weekend, I plan to head out to a tractor auction and see what I can find.
Website
I have been having trouble with this website. For instance, it has not been sending out emails to subscribers… I spent about 2 hours tonight working it out. Some of my plugins and failed and I needed to learn how to delete them and replace them. Hopefully I didn’t ruin anything.
As I went through my budget, it soon became apparent that I would need to put in a considerable amount of sweat equity to get the job done for what I could afford to pay. We already talked about how I would take care of the concrete ribs and steel studs.
But I always planned on hiring out for most of the more conventional trades (such as the excavation, concrete work, plumbing, HVAC, etc.), but the sum total was just too high for my budget to accept and something had to go. I chose electrical for a number of reasons. First, Cost. The electrical quotes were particularly ridiculous, electricians were doubling or tripling the quote due to FUD. Second, experience. I have done a little bit of wiring in the past, like adding a circuit and some lights and outlets to my current home. I was a bit concerned about doing the main panel or grounding system, but a friend assured me it was possible. Third, tool costs. Of all the options, the electricians tools box is the cheapest. It is certainly cheaper to buy my own electrical tools than to purchase a backhoe and bulldozer to do my own excavation. Bottom line. I think I can handle electrical better than I could handle HVAC or Plumbing or concrete work.
I am also getting some minor help from some friends with some better experience, and I plan to take it slow and learn as I go. But in the mean time, I hit my local library and got out a bunch of books on the subject, and that is also the subject of this post…
I skimmed through most of the books over about 3 evenings. I was really just looking for the books that seemed most applicable and had the best approach to teaching. I chose to renew the top few, and read those completely over the past couple weeks (including the Easter Holiday). These were the best ones…
note: with wiring, the code changes from year to year, so you really want to find the books that are up to date enough with the National Electric Code so you can pass inspection.
Wiring Simplified (44th Edition); This book had the fewest pictures, but gave the most specific references to the 2014 National Electrical Code. The authors of this book (Richter, Schwan and Hartwell) are extremely well respected. The writing style was a little bit dry, but I liked how, in addition to explaining what the NEC rules were and were to find them in the code, this book also explained the “why” behind each rule. “Wiring Simplified” really covered everything from the planning stage to how to actually setup the service entrance and wire everything up. In also included tricks for making the job easier.
Wiring a House (5th Edition); This is one of those books with pictures on every page. It stood out for me because it was really about wiring a whole house, which is what I needed to do. Many other books seemed focused only on renovations. The Author, Rex Cauldwell, also has a great reputation and brings both his experience as a master electrician (and plumber) and his degree in Electronic Engineering to this book. He tells you how to meet the code, and then common sense ways you should exceed it. The explanations and images are excellent. The book is actually a fun read with humor sprinkled throughout and as a result, I was able to read it much more quickly than some of the other books.
You’re about to learn all the top secret information about… wiring that contractors rarely discuss. You’re putting your ear to the keyhole and listening as we discuss what to buy and what to avoid, what looks good and what really is good, what works and what doesn’t. ~ Rex Cauldwell, Wiring a House, p 207.
I have one more book to go through, I may come back and put that here later…
I took some of what I learned from the books, YouTube, friends, etc. and put it here under Technotes => Conventional Systems => Electrical.
Embarrassed about the numbers
I am actually still waiting on the appraisal (should know early next week). This is a quiet time to crunch numbers and prep for the closing on the loan.
I wanted to blog about bank loan numbers and how I made my decisions (in case it is helpful to others), but I am a little embarrassed about how much I plan to spend and about how the new house will be double the size of my current one.
We live well within our means. We buy used cars and my current one is 14 years old, we don’t own any fancy electronics (we don’t have an i-anything), my wife has a 3 year old laptop and a free flip phone with a minimal plan. My computer and cell phone actually belong to my work, etc. We do not try to “keep up with the Joneses.” On the other hand, I do have a good job with a good salary and regular bonuses. And the house needs to be large enough to have an office (because I work from home), school room (since we plan to home school) and room for visitors (since our guests come from far away and usually need to spend the night)…
Anyway, my solution is to pretend that I am going for a $100,000 loan so you can see the relative amounts without thinking too badly of me.
Here is the mortgage situation…
In the aftermath of the housing bubble, a lot of banks were severely burned. The first thing they stopped doing was making construction loans to crazy people who wanted to build earth sheltered homes, especially if they wanted to be their own GC. There may be a few more doing it now, but back when I was shopping in 2009, there was only one company willing to do it, GreenStone Farm Credit Services. They had not played the games and were in very good shape after the crash. We used them to buy our land and now we are just a few days from hearing back on the house appraisal to see if we will get our construction loan.
The Construction loan starts with a 4.25% variable interest rate. That is normally not something I would risk, but it is only for a year and it has been 4.25% for a very long time. I would get a line of credit and monthly payments would be interest only (no principle) on the money I already spent. In June of 2015, the loan would automatically convert over to a 30 year mortgage at a fixed rate without any additional closing fees (they are built into the upfront fees).
There are two problems.
1) Green Stone charges higher interest than anyone else I can find. At the time of writing, the average mortgage rate for a 30 year fixed, 0 point mortgage is 4.44%. Greenstone’s rate for the same mortgage would be 5.15% That makes a big difference in terms of your monthly payment and total interested paid. When I called them up and asked them why I should pay such a high rate for their loan, they said they offer better service (which is true), and that they wouldn’t be selling my loan to anyone else (which doesn’t bother me). They also mentioned the patronage program, which has paid about 0.5% back over the past few years, which made their rate half a percent better than it appeared. They didn’t say it, but I guess they know I am not going anywhere right now anyway.
2) The second problem is uncertainty because we don’t yet know what the interest rate will be 1 year from now when it kicks in. My insurance guy is pretty sure it will go up, but that is because he wants to sell me something called a “Rate Commitment Fee”. This fee is 0.75% of the total loan amount and would allow me to fix the rate where it currently is. We are talking thousands of dollars betting that the interest rate will go up… I had to crunch the numbers.
Using my fictitious $100,000 loan amount, the “Rate Commitment Fee” would be $750. So I looked at what the 30 year mortgage would be at the current 5.15%. I put in a column for monthly payment and one for total interest paid (if I paid for the 30 years).
Of course, I also ran tables for how much quicker it could be paid off if I tossed in an extra few bucks a month (I did a full table with a row for each additional amount). I totally plan to do that, so I hopefully wouldn’t get hit with the total interest numbers shown here… I also compared with the lower rate for the 15 year loan which would save even more money, but we decided that while that was doable now, it could make things more difficult if I lost my job (its not flexible enough)…
Then I considered what could go wrong… I created rows where I increased the interest rate to 5.5%, 6% and 6.6%. I looked at how that affected the monthly payment and the total interest paid. Then I calculated how long (in months) it would take me to pay off the “Rate Commitment Fee” as well as the total savings for each scenario… The chart looked like this (rough no formatting ;^)
So, what this is saying is that if I pay the 0.75% “Rate Commitment Fee” and the rate only goes up by less than half a percent, I would still end up better off in less than 3 years and I save a considerable amount of interest (nearly 10 times the fee) in the long run. If it goes up by almost a percent (which is the most that I really think is possible without a major world shift), the fee would be paid off in 14 months and I would save more than 20 times my investment in interest… In other words, if I think there is any chance that the interest rate will go up, the good bet is to pay the Rate Commitment fee…
So, is there a chance that the interest rate will go up? I don’t think so. Obama is working to raise the minimum wage. The natural effect of that would be inflation which would automatically lead to higher interest rates… But there is nothing natural about an election year. Obama and the Democratic party will be working hard this year to make sure that the Republicans don’t get to say, “I told you so.” about an inflation until after the election. Eventually, I expect the interest rate will go up based on market forces driven by a decent economy and increased minimum wage.
So, I do NOT plan to pay the Rate Commitment fee. But I will want to lock in to a fixed rate before the economic forces to kick in in 2016.
Hedge my bet?
After my construction loan is complete, I will have a normal mortgage on an existing house. There will be lots more banks that would be happy to talk to me. The “Rate Commitment Fee” is close to the amount I would spend on refinancing my mortgage if I decided to go with another bank… Other banks are more than 1/2 a percent lower than Green Stone. So…
If rates go up in a year, I can use the money I didn’t spend on the “Rate Commitment Fee” to pay closing costs to another bank to get a mortgage at a lower rate… Even if they don’t go up, I may still want to do that… I’ll do that math when the time comes.
Before a bank loans you money to buy a house, they want to know what it is worth… The same is true for building a house. They want to have an idea of what the final house is worth. They especially want to make sure that they don’t loan you more than 80% of that “appraised” value. If you were buying a house, the appraiser could go look at it. If you are building a house, you need to fill out a lot of paperwork to help the appraiser “imagine” your house. We did that and submitted the paperwork near the end of March. It was very detailed and covered everything from the finish on the floors to the make and dimensions of the appliances.
Once we decided to go ahead (even with the 20% reduced valuation), it was time to start rolling out the permits. Maybe I will eventually put up a page to explain how that all works, but basically some permits need to be done before others. In fact the final building permit requires the permit numbers from the earlier permits. The permits need to be submitted to 4 different buildings (state, county, township and city). Different offices are open on different days.
I have been having trouble with this website. For instance, it has not been sending out emails to subscribers… I spent about 2 hours tonight working it out. Some of my plugins and failed and I needed to learn how to delete them and replace them. Hopefully I didn’t ruin anything.