Your budget may be your undoing

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This is going to sound counter-intuitive, but there isn’t necessarily a relationship between what you want in your new home and your budget. Or think about it a different way: We all learn at a young age that just because you want something doesn’t mean you can afford it.

The desire to get the home you want, with everything you want in it, can drive people to make bad decisions. You can ALWAYS find a builder who is happy to tell you he can build exactly the home you want, with everything you want in it, for your budget. Always. Why is that?

Here’s the industry secret I’m not supposed to tell you. Many builders love cost-plus contracts. It works out great for them—not so great for you.

Here’s how it works:

You say, “I’m in love with this home design, and I want this list of amenities. Can you build this home for my budget of $250,000?” The builder, either desperate for business or just not that concerned about your well-being, says, “Absolutely I can.”

The builder creates a budget, or “estimate,” of your building costs and adds on his fee, probably something reasonable like 15% of cost. The sum of the estimate plus the fee adds up to some number just below, or right at, your budget.

You might be tempted to try to negotiate a lower fee. The builder might even come down. Of course, that’s where the negotiation room is, because your home is going to cost what it costs, right? The estimate is what it is.

Except it isn’t.

So what’s the catch? The builder says he can do it, right?

The estimate is exactly that: an estimate.

Let’s say he estimated $4,520 for wall-framing lumber, $1,765 for ceiling joists, $2,672 for rafters, $1,894 for decking, and $2,113 for cornices.

Now, that might sound fine, but think about your job. If you hired someone with no experience in your industry and told them how much it would cost to buy bulk paper, computers, or any of the items you need to carry out your daily responsibilities, they would have to take your word for it.

A cost-plus builder is banking on you making that same assumption—taking their word for how much materials and labor will cost for your house. After all, you’ve invested time in becoming an expert at your own profession, not home building!

The problem with that is, unfortunately, your budget. Not that there’s anything wrong with having a budget! But if your builder automatically gives you the green light to put a long list of amenities in your home without a conversation about what will or won’t fit in your budget, that should make you a little suspicious.

The truth is, you can’t fit every feature into a home on any given budget. But a good builder will work with you to prioritize what you can fit into your home on your budget, and where you can find compromises or substitutions to get as close as possible for the features that would put you over budget.

If your builder gives you an estimated budget that miraculously fits all your desires into your budget, beware. An estimate is just that—an estimate. And in a cost-plus home build, any extra cost falls on your shoulders, not the builder’s.

But since we don’t write cost-plus contracts, I’ll admit I’m a little biased. So you don’t have to take my word for it! Just ask a banker who has a lot of experience doing construction loans how often cost-plus jobs go over budget.

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