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Our goal is to help contractors build stronger businesses, but we’re aware that homeowners are also reading our website. The letter below is from a first-time homeowner who wants to build a new home and is frustrated with their builder.New Home Construction Budgeting #MarkupAndProfit #ConstructionBusiness

I’ll note a few observations at the end, and I’d also like to hear your opinion on the situation.

“Excellent blog and very informative web site. As a first time homeowner embarking on new construction, it’s enlightening to view the perspective of builders and contractors – and what they need to do to keep their businesses successful.

If you’d be so kind, I’d like to run a scenario by you and get your perspective:

My wife and I found an MLS listing advertising a plot of land. The land has already been purchased by a builder and he wants to build a custom home on the property. We’ve met the builder a few times, and it’s clear that he’s learning a bit about this process at the same time we are. He has built 5 custom homes in the past. We’ve seen them, and it’s excellent work. He’s trying to build his business. He’s financed by a wealthy business owner, who technically owns the property.

The well-worn path for new construction is for the buyer to source and purchase the land, work with an architect to come up with a design, and then put this design out to bid to 3-4 general contractors. In this scenario, you have a frame of reference on price to ascertain ballpark. The other path is the builder creates a subdivision and you tour the new construction with no input and decide if you want to buy it.

My wife and I have a very clear budget. If we had bought the land, pulled the permits, and paid an architect ourselves, we’d have a very clear idea of what’s “leftover” to actually build a house.

The situation we find ourselves in now appears to be working backwards. We have a defined budget that aligns well with the price the builder marketed. There’s an incredible amount of site work to be done – demolition of an existing home, removal of a foundation in the back of the property, acres of clearing brush. There’s wetlands and conservation land involved, so the builder used hay bales to replicate wetlands and will need to construct a rail & post fence. None of these hard costs are lost on me.

He has to pay subs, do the labor, buy the materials, and include his mark-ups to cover business expenses and earn profit. It’s not a volunteer organization and I get that.

This may be poor salesmanship on behalf of the builder, coupled with lack of experience, but he simply can’t articulate how the process will work.

My wife and I know we can afford X. As we embark on the journey with the architect, taking into account all the costs the builder has incurred and will incur, how do we make decisions? If you take out the cost of the land purchase, all the site work, is it fair to ask what the cost of the actual structure will be?

I’m not looking for a complete itemization or a full look behind the curtain. But we might tone down the complexity of the gables or dormers if it means more budget available for high end finishes. We may do away with a curved stair case if it means nicer appliances. We might opt for less square footage if it meant a higher end interior.

But operating in a complete vacuum of available spend (Our Budget – Land Cost – Site Work = Left Over), how do you even make decisions?

Is this industry standard and have you seen this scenario before? The builder also wants to cover the cost of the architect and roll the cost into the project, which we find a bit odd.

If you’ve made it this far, I certainly appreciate your taking the time to read it. Keep doing good work on your site. You’re shining light on an industry that us laymen know little about!”

I spoke with the writer about his situation. He’s employed, has a good income, and is money-savvy. He knows what he wants and is willing to compromise, but he also wants to get the most home for his dollar, without exceeding his budget. He’s just like you and I would be in this situation.

He expected to purchase land, hire an architect to design his home, then find a contractor to build it. He’d know how much of his budget would be available to build his home, and he could design the home accordingly. Instead he found land owned by a builder (or the builder’s partner), and the builder can’t or won’t separate the cost of the land and necessary sitework from the cost of building the home.

It’s fair to ask the builder to put a dollar amount on getting the site ready to build. When it comes to sitework, there aren’t a lot of selections to make that will change the cost. The builder should be able to estimate the cost of the developed land so the writer knows what’s available to build the home.

I’m opposed to transparency, ie, disclosing line-item costs to your clients. But separating the cost of land and sitework from the cost of building the home isn’t transparency. It’s a reasonable request. The builder is missing the mark here, and might lose a ready buyer with cash in hand.

Let me know your opinion. If I’m the one missing the mark, I’d like to know.

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