Okaza Real Estate

How To Find A Custom Home Builder Without Losing Your Mind

Building a custom home is the largest purchase most people will make in their lifetime, and choosing the best custom home builder is essential to the project’s success. The role of a custom home builder is as much to advocate for the homeowner as it is to collaborate with the design team. Since homebuilding is a process that takes several months, it’s important that you the buyer feel there is trust and clear communication on the part of the builder. If you have a location and have set your budget for the project, you are ready to shop builders; read the following tips on how to find a custom home builder without losing your mind.

Consider your resources

If you have already hired a designer, they are the best asset at your disposal for beginning your search. Your design professional likely has first hand experience working with builders and will know their construction qualities, communication styles, and business reputations. You could also check with your lender or realtor, if they are familiar with the custom home market in your locale. You can contact the National Association of Home Builders for a list of qualified local builders. Internet searches can identify builders in your area, and some sites may be equipped with ratings & feedback from prior customers. And, certainly, you could ask friends and acquaintances who have completed custom home projects for referrals.

Shop the candidates

Shopping for a well-qualified home builder is easy when you know what to look for to accommodate your project. The right builder for you will need to have the available time, an interest in your project, and experience in working with homeowners. You want a custom home builder whose primarily focused on building custom homes rather than speculative homes, so that their services are tailored to your needs. When considering builders, ask about their current projects and their track record with projects of similar scale and detail to yours. They should also be able to provide you client references. You want to get the sense that the builder you are considering has done this sort of thing before.

Work the schedule

When you talk to prospective builders, ask what kind of schedule you would be looking at for your project. Know that building a custom home usually takes a minimum of 6 months and that the schedule will be weather-dependent. Additionally, steps must be taken before the home can even be framed, such as installing the plumbing and electric up to city code. A builder promising a time frame for completion that is only a few weeks or months should be considered a red flag, no matter how tempting it may seem. In the case of custom home building, it’s better the project be completed properly then quickly.

Communication is key

Again, you need to be comfortable with how a builder communicates with you. You should not feel pressured or talked down to at any junction. You are trusting an expert to build your home, and that expert ought to be able to take the time to explain their process in layman’s terms. You should have access to the construction site. You should feel your questions are welcome, and that they being answered in a timely and respectful manner. If you get the sense that the builder is more or less communicative than you would like, take note, and consider moving on. You do not want to enter into a building contract with a builder whose communication is irksome.

How Real Asset Managers Approach Land Investments

Real assets of all kinds, including land, have performed well, years after the financial crisis. But managers of these assets need to know their category.

Real asset managers are different from financial brokers in many regards. Chief among them are how they understand the assets themselves, beyond performance metrics. Rare antiques and art require people who are versed in art history, for example. For people who trade in gold, an understanding of the market and global geopolitics is a requirement. A real asset manager who works in land investments is perhaps the best example of this distinction.

For investors, this might be reassuring because of the heightened degree of interest in land and property. Particularly now – more than a half-decade since the global financial crisis – land investments retain an attraction to investors for several reasons:

• Land assets outperformed securities – In the first 13 years of the 21st century, the world equity index (performance adjusted for inflation) generated an annualised return of only 0.1 per cent. Bonds did better, with an annualised return of 6.1 per cent, benefiting from a low-interest rate environment that could change soon. Real assets including land can and often do perform much higher.

• Land assets are hedges against inflation – Real assets, including land, tend to rise in value with inflation. Fund managers value such things as farmland and forestry holdings because their products rise with inflation and increased yields (food and wood) over time as well. Considering strategic land investments, which prepares and converts raw land adding into housing-ready developments, the demand for housing and price increases that outpace inflation drive home this point.

• Land assets are non-correlative to financial markets – Land itself lost little value in the financial crisis while the financial markets were in a tailspin.

But to be clear, working in land investments comes with requirements:

• Illiquid, for better or worse – Almost all real assets cannot be disposed of easily. Investment in a joint venture land opportunity, for example, will come with contractual time parameters. It may be that the investor can exit after 18 months or after several years. Real estate investment trusts (REITs) are the exception, traded as market securities (and as such are subject to price volatility).

• Requires specialised skills – the predispositions of local planning authorities, home site design and infrastructure. It’s far from a market security buy-sell scenario – and just as importantly, it rewards strategic and creative thinking.

Land Purchase Considerations

Land Purchase ConsiderationsIf you are looking to purchase land, there are several important items to consider.

What is the cost of the land? If I pay $1,000,000 for 10 acres to build a shopping center does that cost fit within my budget? Or is $500,000 the most I can pay and still have a profitable project?

Does the location work for the intended use? For example if someone is trying to build a convenience store is the site in a high traffic area? Or if someone wants to build expensive homes is the location suitable for million dollar homes or is it too close to commercial uses?

  • What jurisdiction is the land located in? The City Limits? Is it in the Extra Territorial Jurisdiction (ETJ) of the City? Is it in the County? The jurisdiction that the property is located in will dictate which rules and regulations need to be followed. It might be advantageous to be in a particular jurisdiction (City A vs City B) rather than another. There may also be state and federal laws that will impact the property as well.
  • If the property is in the City, what is the zoning category assigned to the property? The zoning category dictates the land use allowed on the property. If a property doesn’t have zoning or if a zoning change is to be requested then that will add to the time and cost. Something to keep in mind is that zoning change requests are not always approved.
  • Deed restrictions are private agreements and restrictions specific to the land in question. They are noted in the deed, and restrict the use of the real estate in some way. Deed restrictions can be attached to property whether it is zoned commercial or residential and are in addition to local, state and federal rules. Deed restrictions can be more restrictive than other governing rules.
  • Have utilities been extended to the site? Utilities would include water, wastewater, electricity, natural gas, telephone, and cable television. Water is the most important. Water and wastewater are typically the most expensive utilities to extend to a property. There are other ways to get water service such as drilling a well or for wastewater constructing a septic system. However these solutions also involve ongoing maintenance and a limited lifespan.
  • Is any portion of the property in a floodplain? If so then the build-able or develop-able area of the property will be reduced. This in turn typically will reduce the value of the property.
  • What are the topographic conditions of the land? Is it flat or is there slope to the land? The more steep the slope the more it will cost to develop the land because of the necessary cutting and filling of the soil. In general flat land is preferred although a hillside location for a home or office can provide a very nice view.
  • Is there roadway access to the property? If so is there an existing driveway and curb cut in place or will this have to be permitted and constructed? How likely is it that a permit can be obtained at this location or is there already a driveway nearby which might diminish the chances? Is the roadway in a state of disrepair? If so then what are the chances that the roadway will be repaired and how might this affect my planned use?
  • An easement is a legal right to use another’s land for a specific purpose. Are there any easements on the property that might restrict or otherwise unduly affect my ability to improve the property? Examples of easements include public utility easements which allow utility providers to install and maintain utilities. Easements can also be the means of providing access to properties that do not otherwise have roadway frontage.
  • A lien is an encumbrance on one person’s property to secure a debt the property owner owes to another person. Before purchasing property it is important to determine through the Title Search and Commitment process if there is an outstanding lien on the property. It is best to have the property owner take care of liens before the buyer closes on the property because it is easier to leverage a lien being released.

Mortgage Strategies For Different Life Stages

Becoming a homeowner represents a major life milestone. But from a financial point of view, purchasing a home is not a one-time event; it is the foundation for a variety of strategies over the course of a lifetime.

Before settling on any mortgage strategy, it is important to think through what you want financing to accomplish. As with any major financial decision, your particular circumstances and goals should shape your choices. Are you most concerned with saving money overall? Minimizing your interest expense? Securing the lowest possible monthly payment? Some buyers may want to maximize their equity – the market value of the property less the remaining mortgage – while others may have the goal of becoming debt-free by a certain age or milestone. How you weight each of these objectives will shape how you approach a mortgage. Beyond your goals, think about your circumstances. Your stage in life, your family situation and the other assets available to you may all affect your decision.

Once you have answered these questions, you can consider a variety of mortgage strategies appropriate for your goals. While there is certainly no particular age limit, upper or lower, for any of the strategies I will discuss, some make more sense at certain life stages than others.

For first-time homebuyers, often in their late 20s to mid-30s, the main goal of a mortgage will generally be to secure the particular home they have in mind. Before deciding on a mortgage type, these buyers should seriously consider how much of a down payment they can afford and the size of the mortgage they plan to take.

A few years ago, securing a mortgage often required a down payment of 20 percent or more. These days, lenders have relaxed that standard. Even when it is not required, a substantial down payment certainly offers advantages, such as the potential for a lower monthly payment. But the current low-interest-rate environment and reasonable housing prices in many markets may make buyers hesitant to wait.

In this situation, there are some options. The Federal Housing Administration offers insured loans to buyers who can only afford very small down payments, potentially as little as 3.5 percent. Borrowers must also meet other FHA criteria to qualify, and should expect more paperwork and a higher interest rate than those of a traditional mortgage.

Borrowers who cannot make substantial down payments might also consider “piggyback” mortgages to avoid private mortgage insurance, often abbreviated PMI. All borrowers will want to avoid PMI if possible, since it will increase the monthly payment amount, though this is offset slightly by the fact that premiums can be deducted as interest if you itemize deductions on your federal tax return. If a homeowner’s down payment is under 20 percent, a lender typically requires PMI. Piggyback loans allow borrowers to take out second mortgages to cover some portion of the down payment. These arrangements avoid PMI, but typically involve higher interest rates than single mortgages do.

Lenders may offer a buyer the option of paying points on the mortgage at closing. The buyer pays set fees outright in exchange for a lower interest rate. While this may seem appealing because of a lower monthly payment, most homebuyers should avoid paying points. If you pay interest upfront, it becomes a sunk cost that you cannot recover if you sell your home before the end of the mortgage term.

Once a borrower decides on a down payment, the next decision is what type of financing to secure. Adjustable-rate mortgages offer relatively low interest rates for a fixed term, often five or 10 years, after which the rate becomes variable. These mortgages are especially attractive to buyers who know they plan to sell their homes before the variable rate takes effect.

While many borrowers can and do refinance when the fixed term is up, the rates are likely to be higher, possibly much higher, five to 10 years from now. In White Plains, New York, 30-year fixed mortgage rates for buyers with good credit hovered between 3.5 and 4 percent as of this writing; by historical standards, these rates are incredibly low. Buyers will not want to be hit with the inevitably higher rates down the line. However, if a buyer firmly plans to sell the property during the fixed term, the lower rates can be attractive. Buyers should always avoid adjustable-rate mortgages with very short terms.

For many people, if not most, a traditional 30-year fixed-rate mortgage remains the best choice. If you are buying your “forever home,” where you plan to raise children or build your life for the long term, a 30-year fixed rate will almost always be the right way to go, since it locks in a reasonable rate virtually for life.

Even if you do not intend to stay in your home very long, life happens and many people’s plans change. Time moves quickly and only seems to go faster as we age. Not only might inertia keep you in place past your initial plan, but a financial setback could also mean an original moving timeline is no longer practical. Even if you grow into a larger home, you may wish to keep your starter property, especially if it is a condo or apartment. You could then rent it out, even once you have made your home elsewhere.

The major downside of a 30-year fixed-rate mortgage is that you will pay the most interest over the life of the loan because of the long term and the rates that outpace the fixed portion of an adjustable-rate mortgage. For those interested in obtaining home equity more rapidly, a 15-year fixed-rate mortgage may be an attractive alternative. The downside is that a shorter term means significantly higher monthly mortgage payments. In addition, your overall financial picture will include less liquidity, since more of your assets will be tied up in home equity.

There are a few mortgage types that all borrowers should avoid outright. An interest-only mortgage is one in which the borrower pays only interest for a set period, often five or 10 years, while the principal remains unchanged. While some borrowers find them appealing because the early payments are substantially lower than later ones, these loans almost always involve taking on too much risk; the homeowner builds no equity at the beginning of the loan, so a decline in the property’s value can quickly become a disaster.

Borrowers should also avoid loans structured so that the borrower owes a large lump sum at the end of the mortgage, often called a “balloon payment.” Unlike a typical mortgage, the full value of the loan is not amortized over its term, which makes monthly payments lower. However, many homeowners concerned about securing a lower monthly payment will lack the cash to make a balloon payment, meaning that they will either need to sell their home – trusting that property values have not dropped so far that the sale will not cover the payment – or refinance at rates that are almost sure to be higher five to 10 years from now.

Different strategies become available to borrowers who have held their mortgages for some time. For instance, by the time homeowners reach their late 30s or 40s, it is likely that their earning power has increased. Many may find themselves in a position where they could pay their mortgages down faster than the standard amortized schedule because they have paid down other debts or reduced expenses. But just because borrowers can pay their mortgages faster does not necessarily make it a good idea.

First, borrowers should double-check to make sure their mortgages have no prepayment penalties. While you should never accept a mortgage that has such fees in the first place, if you failed to look for this provision, you certainly should not incur any penalties to pay faster.

Even if no penalties stand in the way, the current low-rate environment means that many people would be better off investing their extra cash in diversified portfolios. If the expected rate of return is higher than the mortgage interest, allowing for the benefit of deducting that interest, an investor essentially creates leverage.

That said, a very conservative investor who is especially averse to debt may find paying off his or her mortgage is the right choice. If the borrower is considering sticking the money in a low-yield money market or savings account, the mortgage’s interest rate will still beat the rate of return on such vehicles, even allowing for its tax treatment.

For some homeowners, making extra mortgage payments offers the added bonus of imposing forced budgetary discipline. Some borrowers know that they will spend any cash that is available to them; by paying down the principal, these people will build their home equity by tying up their money in an illiquid form.

Homeowners in this life stage may also start to consider a second mortgage. While once relatively rare, home equity loans – another name for second mortgages – became nearly standard in the 1990s and early 2000s. In part, this is because mortgage interest is generally deductible on income taxes (up to certain limits), regardless of the loan’s purpose. While such loans can occasionally be useful, the housing crash demonstrated the real hazards of excessive borrowing using one’s home as collateral, including losing the home itself and marring one’s credit history through default. This strategy should be pursued very cautiously, if at all.

A home equity loan is different from a home equity line of credit, or HELOC, though both carry many of the same risks. Rather than taking out a loan for a fixed amount, a HELOC is set up as a line of credit using the home as collateral. The borrower can draw on the credit line much like a credit card, with the loaned amount subject to variable interest rates.

By the time you consider a second mortgage or a HELOC, you may be nearing the end of your original mortgage. Smart homeowners have refinanced their mortgages within the past seven years to take advantage of the current low rates; those who have not should do so as soon as possible before rates start to rise again.

Homeowners who have been in their houses for a few decades are likely to be in their prime earning years, with an eye toward retirement. Some of them may be financing their children’s college educations or considering big-ticket purchases, and may want to use their home equity. Beyond the options discussed above, borrowers may have the option to refinance a principal amount that is higher than their current principal balance. The lender will present the difference as cash. Some lenders, however, may be reluctant to allow such a strategy in today’s strict lending environment.

Furthermore, this technique can be dangerous. Effectively using a home as an ATM means that the homeowner will be paying a mortgage for longer than originally intended, face higher monthly payments or both. It can be tempting to view a home as a source of ready cash, but if the home’s value suddenly falls, the owner could end up in an uncomfortable situation. In fact, widespread use of this strategy was a major component of the 2008 financial crisis.

Retiree homeowners may have a problem opposite that of younger adults buying first homes. They may well own their homes outright, but could find their finances constrained by too-small retirement nest eggs or unexpected expenses. They may wish to consider reverse mortgages in order to turn some of their equity into cash. In a reverse mortgage, the lender does not require repayment until the borrower dies or sells the home. In theory, the loan is structured in a way that the loan amount will not exceed the home’s value over the loan’s term.

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