Hello there everyone,

I just would like to get some opinions on buying land then building your own home on the land. Has anyone done this before? I know a good friend that is thinking of buying a lot consisting of 10 acres, then wanting to build their own home by obtaining a home plan or personal architect, then pay for materials and also obtain the best price bid from local contractors for a 4/5 bedroom, 3/4 bathroom home and approximately 5,000+ sq. feet. Then they want to put cost of land and own home construction costs with plans all under one loan. He also has a duplexe which we're thinking could be used as collateral.


How could a loan such as this be obtained to pay for land and home? How could he let the mortgage or bank know he will later sell acres to any interested buyers of the rest of the land? He has a very good credit history, so how could this be made possible? Loan amount is atleast a million. All input is very appreciated.

Hello OBL,

Building your own home is not as easy as some think, especially a home of the size you are considering. As well, most contractors will charge homeowners (non-builders) more money as they often have to make several extra trips to the job due to the owner not following proper construction sequence.

As for obtaining a loan to purchase the land and do the construction, this is something that is commonly done in the building industry. If the numbers make sense then it shouldn't be a problem.

My suggestion would be to find a builder that can help manage the project. This will save you from costly mistakes, and believe it or not you will probably save money in the long run.

Take my opinion for what it's worth. I am also a builder though so I have seen the troubles people get themselves in when building their own home.

Good Luck.

Tom Crouch
www.crouchhomes.com
www.tjcinspections.com
www.tomcrouch.com

Thanks Tom, but as far as financing goes for land and cost of construction, what could make this possible? Will a good credit report allow for a lower monthly installment? Are there any creative financing ideas that could be incorporated to be able to purchase the land w/ construction of new home project. We actually went today and looked at the land and it is such a beautiful property that it has to be made possible in anyway. An oppurtunity that has opened my eyes for sure and would like to get input on what ways financing from banks or any other sources to be able to finance $838,000 dollars for cost of land then cost of construction.

After just completing my own house where I served as the general contractor I can tell you that your friend will have an extremely difficult time obtaining a loan for the home.

Lenders generally will not give loans to homeowners that want to serve as their own general contractor but are inexperienced in the home building field. If the duplex has lots of equity, then maybe a better bet would be to try getting a home equity line of credit on the home. That would circumvent the tedious inspection/timeline constraints common with new construction loans (assumming your friend could qualify for one). With the home equity line of credit you would be able to simply use it as a credit card/checking account to buy contractor labor and materials for the building of the home.

Lenders often do give new construction loans to homeowners that have a written agreement with a builder to build their home. Lenders want to see experienced people working with their money knowing that if a homeowner makes one simple mis-step in the building process and then is unable to complete the home due to code violations, sub-contractor theft of capital, a liability stemming from insufficent insurance, unstable worksmanship, and about 10 other possibilites, then the lender would have to forclose, and be faced with having a mangled piece of property on their hands that they now have to somehow sell to recoup some of their investment. The rest of their investment, if the property sale comes up short of the balance owned to the lender, is pinned on the borrower to cough up...no matter what. The homeowner ends up with a credit history that is deep sixed with a forclosure and sprinkled with judgements/liens.

I concur with the previous post, hire a builder to oversee the construction.

Hello OBL,

You need to talk to a reputable mortgage broker in your area as I am not a mortgage broker and I don't know what is availabe in your state. I do know that there are many programs for owner/builders providing it is for your personal residence that will finance your land and construction then roll it into a permenant loan. Perhaps even a local lumber yard has a lending department for this. Why banks are willing to do this is beyond me, as Xeno pointed out there is alot that can go wrong.

I am pretty sure indymacbank.com still provides these types of loans. But like I said you are better off working with a mortgage broker on this as they know how to structure these deals. As well, bismarkmortgage.com I believe deals with these loans but you have to be creative and you have to work with a mortgage broker.

As well there are some alternative companies that will finance your project and work as "consultants" for you. However, I do not suggest these companies as I have spoken with several of them in the past and the people that are supposed to be "consultants" know less about construction than the average home owner.

The bottom line here, find a reputable builder that will serve as a project manager for you and your buddy. Chances are he/she will know of a good lender to make this deal happen. Or work it in reverse and find a reputable mortgage broker as they usually know of a good builder. If you do choose to do the project yourself all I can say is educate yourself on the process and don't jump in until you fully understand what you need to do and when you need to do it.

Good Luck.

You received some excellent advice here. I would recommend BuilderMax if you're doing it yourself. You're looking for a "construction to perm" loan.

You've actually made this harder than it has to be. I understand you want to get as much profit out of the deal as possible. (doesn't everyone?)

However, you would be opening yourself up to a lot of risks, costs of insurance, etc... It's false savings if you have to redo or a contractor walks off the job, or the contractor doesn't do a good job, or you can't sell the property quickly.

The easier way to do this is:
1) Find out what your budget is? How much do you qualify for?
2) Find out the appraised value (not fair market) on the property you want to build.
3) Determine the cost of the land. (You'll have to have it properly subdivided and zoned and improved.)
4) Never, ever call a builder and ask them how much to build. That's just asking to be taken advantage of. When someone calls them and asks them that they think, "Sucker!" and their eyes light up with dollar signs.
5) Instead, you tell the builder the appraised value, cost of land, and how much you have budgeted. Ask them if they can build it within your budget and will sign a contract with this as a stipulation.

Just for grins, ask him if he'll provide a money back guarantee on his work. 8)

BTW: One way to know to know if you want to work with a builder is to ask him, "How much would it cost to build my home?" If he asks you, "What's the square footage?" Then run DO NOT walk away!

Good luck!

Storm