DETERMINING YOUR BUILDING CRITERIA
Start by asking yourself these questions:
What is your time frame? Do you have 3 months or are you able/willing to wait a year or more?
How much do you have to spend/can you afford? Are you able to pay above appraisal, are you able to pay 10% or more upfront for the down payment, can you get pre-approved for a new construction loan?
What do you want in a home? Do you have specific needs, function, style, floor plan, etc.?
What/how many options do you want to have?
Numbers 1. and 2. listed above are the most significant factors in determining what type of home builder fits your needs. There are three primary types of home builders. I’ll explain each one in detail and how the answers to the questions above may lead you to choose one home builder type over another.
TYPES OF HOMES AND HOME BUILDERS
Tract
Spec
Custom
TRACT
They are called tract builders because, commonly for this build type, a large tract of land is acquired, a developer or builder subdivides it and designs the entire neighborhood, and they sell individual lots bundled with a new home build. It’s the same builder for the entire subdivision and, often, the options for finishes (interior and exterior) are very limited. For instance, all homes in the neighborhood may have the same roof color, gutter color, limited brick/stone/siding options, the same several floor plans, and the list goes on. You will likely be limited to using only their vendors or showrooms to make selections.
With that said, there are many advantages to choosing a tract home builder. Because there are limited options, these builders can buy in bulk and build quickly. So, if you’re needing to build quickly, this may be a good option. With limited options, your risk of exceeding the original build price is also reduced.
If your budget is more restrictive, this may also be a good fit. Many tract home builders do not require a new construction loan in order to start the building process. They absorb all financial responsibility during the building process, and you technically buy it from them at the end. You can use traditional, government-backed or non-government backed, financing on these. Refer to my blog post on mortgage types for what this means.
If you’re not able to put down a large down payment, this may be a viable option. Another upside: the lot price is often combined with the build price, so you don’t have to worry about purchasing the lot separately.
The downsides: in addition to having limited options, these tend to be small lots in populated neighborhoods. So, if you’re looking for spacious yards where you can’t see your neighbors, this may not be the best option for you.
There are a subset of tract home builders that offer "build on your lot" options. In this case, you have the option to build in other locations, they can still bundle the lot purchase with new build cost, and earn some of the financial savings that other tract homes do. So, this option may be easier on the budget than building full custom if you want to build in a specific location and you're okay with limited options.
SPEC
These are homes that are built prior to having a buyer. Spec is short for speculative. The builder starts building with speculation that the home will sell after or during construction. These homes have some similarities with tract homes, in that the builder likely doesn't offer a lot of options. The largest difference from tract homes is that the builder isn’t building all of the other homes in the neighborhood.
These homes are not always built by large corporations. In the area I live, spec homes are common and usually built by small, family companies or individuals.
Because these homes are bought while in or after the construction process, you can use traditional loan options. This is usually more affordable than building full custom and you know exactly what the final cost will be.
CUSTOM
Lastly, we have full custom builds. This is an option if your budget is flexible, you have 10% or more for the down payment prior to starting construction, you can get approved for a new construction loan, you’re able to absorb unexpected expenses, and you have unique building requirements/desires.
We went this direction, primarily, because we wanted a specific floor plan. But, also because we wanted unlimited and flexible options, including employing our own subcontractors.
Building custom takes significantly longer because there are a lot more details and options. Know that the process is probably going to take longer than what you anticipate. Talking to multiple builders, having plans drawn and reworked over several versions, having multiple quotes generated, working through house placement with an engineer… this all takes time and the list goes on.
We bought our lot in Mar 2021, worked on our plans for 4 months, and received our first quote from a builder in Aug 2021. After the shock of the cost wore off by Mar 2022, we met with the same builder and others to get new quotes and made a few plan updates. We closed on the new construction loan in Dec 2022 and broke ground in Feb 2023. We may have been able to shorten this timeline to under a year. But if you want to assess multiple options and make plan changes, then it will take time.
As you would think, custom builders are themselves custom. Each one is unique. We assessed several, looking at not just cost but building cost model, transparency, reputation, quality, attention to detail, working style, and previous builds.
Let me touch on building cost model for a minute: some builders are “cost plus”, while others are not. Cost plus means that the builder considers whatever it takes to build your home and adds a set percentage to that price for their commission. For cost plus, any shift in what it takes to build the home (due to buyer selections, natural fluctuations of materials/labor), is the responsibility of the buyer and the builder’s commission adjusts accordingly. We liked this option because it’s highly transparent what we are paying the builder.
Builders, cost plus or not, can either set the build cost or give estimates for each building category at the beginning of the building process. With a set price, you know what the final cost will be, but with the estimates, the cost is liable to flex, for cost savings or overage.
Know that when you're building custom, the appraisal assessment may not match the building cost. Usually when building custom, you're factoring in unique materials and details. For us, this includes a hidden pantry door, custom cabinetry to the ceiling, walnut floating shelves, engineered hardwood floors, and upgraded doors and windows. These items cost more but don't necessarily increase the appraised price. So, keep in mind that this option may require paying the difference between appraised price and build cost out of pocket prior to closing on the new construction loan.
I'll go into this in more detail in a future blog post on new construction loans.
SUMMARY
TYPE | PROS | CONS |
TRACT | Lower cost, set building price, traditional loan options, fast | Limited options, cheaper finishes, sometimes lower quality |
SPEC | Tract plus: already built or being built, not in tract subdivision | Tract plus: already in construction so changes or options are limited |
CUSTOM | Unlimited options, any location, can be higher quality | Longer process, new construction loan needed, higher cost, possible gap between appraisal and build cost |
When considering building, you can start with location, plans, build type, or builder. I recommend starting with build type because it then impacts builder, location, and plans.
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