Updated: Mar 10, 2020
My name is Paul Pablovich. In this series, we're going to be talking about residential construction, With a focus on the financing end of residential construction. In the world, I live in. We own a company that kind of sits in the middle of the transaction where we deal with capital deployments, the payments to construction projects: the draw process, the inspection process for residential construction. We've been doing this now for about 15 years. We started from nothing and just kinda came up with some new ideas and concepts on what may or may not be wrong with the process. Not that there's anything wrong with the process. If it's working for you, it's working for you, and I think that's great, but I think we can all agree that some improvement probably couldn't hurt.
I'll be bouncing around. I wish I could tell you; I'm going to stay on track. We're going to do the borrower, and we're going to do the builder and we're going to do the lender and we're going to do the mortgage broker. But I probably won't do that. So don't hold it against me, I can assure you whatever knowledge I have amassed in the past 15 years of sitting in the middle of these transactions, I'm going to try to share with you openly and honestly. I think that although the system may not be broken, I do believe that there is a tremendous amount of opportunity to improve it, improve the process of construction financing and all of the components that go into.
So I'm going to take a minute and talk directly to the borrower. To Mr. and Mrs. Smith, for lack of a better term, So if you're a consumer, Joe public out there and, you're thinking about renovating a property or building a property, there are some things that you probably don't know. If you have done this before, there are probably some things that you wish you'd known before you got involved in it. So I want to talk to you guys about the number one thing that you'll hear me repeat over and over again. As the consumer, as Mr. and Mrs. Smith as Joe six pack, you are paying everyone! Understand this from the moment you start this process.
As soon as you open your checkbook and you write a check to anyone, From that moment on, everyone works for you. You need you to understand every single individual works for you. Whether you're hiring a builder or you're going to renovate your bedroom yourself, you are in charge. You're the boss; you're paying everybody. I'm just going to keep saying that you are paying everyone. So with that being said, let's get into.
Why would you want to get into this? There are a number of reasons. Let's go with new construction. Why would you want to build something new? Well, for me, the reason I built my house is that I wanted what I wanted. I had certain things that I wanted in the house and decided that building it would be the most efficient way to accomplish those goals. There are a lot of amazing builders currently building. They're very attuned to what's going on in the marketplace. They do a very good job of delivering of providing to Joe six pack the type of houses that people are interested in buying. So you may not have to build anything. You may be able to go out there and, and look around and talk to a good professional real estate agent or talk to a few builders and they may have a house already built that meets your needs, makes you happy, and you can go on down the road.
I encourage you to do that. I encourage you to go look, go see what's out there. If you just can't scratch that itch and you've decided you want to go ahead and build a house, well good for you. I'm a huge fan of it. I think if you want to get what you want, building your own house is a way to go. Now, whether you legitimately build it yourself or you hire a builder to do it, there's one constant in the majority of these projects, and that's how are you going to pay for it? Now, if you're fortunate enough to have the money sitting around someplace, you've got the capital, you've saved your money, and you can write a check for your dream house, that's great. What I have to say is going to apply to you just as if it's going to apply to someone who doesn't have the money, who may have to go borrow the money.
Let's say you've looked at the market, you've analyzed what's out there, you have an idea in mind, you have some very specific things you want in your house and, you just decide you want to build. Well, what do I do now? A couple of things you want to do, and they may not be in the order you think.The first thing I would do is find out how much borrowing power I actually have. In other words, how much money can be made available? Money that I can afford? How much? How much money can you afford? You may have dreams and aspirations of a $750,000 house. You may have drawn up these plans for your entire life and you have this dream home in your head, but if you can't afford it, let's be realistic here, there's no reason to pursue that particular house.
Maybe you have to wait a few years. Maybe you have to wait ten years, five years, six years. I don't know. I don't know what that number is and since I don't know what that number is, I can't help you. My advice to you would be to find out what that number is. What can I afford now? Any bank will be able to help you with this. A mortgage professional will be able to help you with this. Get online, talk to friends, talk to the family. If you bank locally, go talk to your local bank. If you bank with one of the big boys, go talk to them. Start the conversation. Remember, keep in mind, keep in mind, they all work for you. Don't ever forget through this process while you're talking. You may not be planning on building for a year and a half, two years, three years, five years, doesn't matter. You just want to find out how much house you can afford.
There are people who are paid to tell you that. All we have to do is go ask them and it's not a very complicated list. You have friends who have built houses, and you have friends who have bought houses, you have friends who are mortgage brokers. You may play golf or go fishing or go shooting or whatever it is you do for fun with a guy who is a commercial lender or a commercial realtor. Anyone in banking, a mortgage professional, a commercial banker will be able to assist you in finding what your credit worthiness is. What your value is to the marketplace. How much money you can borrow to invest in a house. I would also suggest that you speak to your bookkeeper or your accountant. That is another great place to start. If you have an accountant, which some people do, some people don't. You may want to start there, ask your accountant, how much house can I afford? I'm thinking about building a house or buying a house or buying a double and renovating it. You want to find out how much money you can put in the bucket. And you'll hear me reference the bucket a lot. When you hear me mention the bucket, it's how much money is in the bucket. How much capital is available to accomplish the task at hand.
As you take money out of the bucket, the level of money in the bucket goes down. You want to find out how much you can afford and comfortably afford because renovation and construction change the parameters when it comes to acquiring real estate. There are a number of things that have to happen. So go find out how much money you can get your hands on that you can afford to pay back. There are people out there that will help you do it. I'm not going to get into the minutia of trying to figure that out for you because I'll mess it up. So go, ask some people. You're smart, you know, who to ask.
So once you figure that out, you know how much you can afford realistically, comfortably, you know you're not gonna break the bank here. Then you have to figure out where you want to live.
Where do you want to live? You may want to live in an area where you can't build anything because there's just no vacant land to build on. It's been picked clean by all the investors in the TV gurus and there's just nothing left. It's $800,000 for a tear down or you have to buy something new off the shelf. You know where you want to live is important. I invested in a piece of real estate 15 years ago, in a neighborhood that was ridiculously undervalued because of a catastrophic storm. Hurricane Katrina. I just built my dream home on that land 15 years later. I lived in a little house that was there, which was very nice. It was a definite upgrade for me , until my wife and I had put the math together, to build our house.
This probably isn't going to happen overnight. Find out how much money, find out where because that's going to affect the money. If you can get $250,000 and you want to live here, and dirt here, the lot, the land is going to cost you $350,000, then you can't live here with $250,000 at least not yet. So be patient. Market's change, things go up, things go down, stuff happens. I've seen it.
You know how much money you can afford. You have a general idea of where you want to live, and you probably have a pretty good idea of what you want to build — been thinking about it for a while.
So traditionally, what will happen at this point is you'll start looking for an architect or a builder or a combination of both in order for you to get permits. To pull a municipal permit, pretty much anywhere in the United States of America, unless it's, on somebody's 3000 acre track of land, you're going to need to get permits. To get permits, you're going to need a set of architectural drawings.
Now what a set of architectural drawings is, it's a description of the home and the engineering behind the home, including the HVAC. HVAC means the air conditioning system, air, and heating system. Plumbing? How are you going to get waste out of the house? How are you going to get water into the house? How is the water going to be heated? Where the lines are going to run and where the bathroom's going to be located. That's the plumbing aspect of it. Electrical? Where is the power going to come into the house from the grid? What's going to keep it from blowing the house up? The breaker panel and then all the wiring throughout the house. Where the switches and lights are going to be? Where the stove is going to be. All of that is handled by the architect in conjunction with an engineer.
Now you may say to yourself, well, if I have an architect, why do I need an engineer? Well, architects draw and help in the design process of the house, so they'll draw out the bedrooms and the doors. They'll count the windows and make it look all pretty. You'll say, I want this here, and I want that there, and they'll draw it all up. Then they will have to hand that to an engineer. Who's going to do all the math. They will tell you things. What do I need to build this roof out of to make it structuraly sound? When that whole process is done, they'll stamp it, and they'll give you a pretty big roll of prints. The plans are usually digital now, but at some point, they'll hand you this big roll of architectural drawings and you'll have fun trying to unroll them and show them to your friends. It's actually pretty exciting. You can walk around with them under your arm. It's kind of neat. I'm a digital plan guy, but believe me, you'll have a big set of paper plans that you can flip through and make notes on and do everything else. Well, now you have a decision to make.
Traditionally, what will happen is the architect or a friend of yours or an associate of yours or someone has recommended a builder to you. You will give Bob the builder your set of plans and say, here you go, Bob the Builder, how much are you going to charge me to build what's drawn here on this paper? He's going to do what's called a takeoff. He's going to go through everything in the house and he's going to put a dollar amount to it. He's going to count the number of windows. He's going to calculate how many, two by fours he needs. He's going to calculate how much wire he needs. How much plumbing he needs. Well, he's actually not going to do that. He's going to take your set of plans and he's going to send it out to his subcontractors. So you have the builder who's the general contractor, you're going to hand him a set of plans.
Some builders have plumbers, electricians, and they have the whole thing. Just give him a set of plans. It's their electrician, it's their plumber, so on and so forth. A lot of builders, the majority of builders will use a subcontractor. So I'm a general contractor. You give me the plans, and I'm going to take the plans and hand them to a plumber that I like doing business with and to an electrician that I like doing business with and an air condition guy and HVAC guy that I liked doing business with. I'm a send it to a couple of supply houses. and they're going to send me back a material take off. I need X number of two by fours and X number of two by sixes. I need seven windows and six interior doors. All this stuff and they're going to put math on everything. How many of these do I need? What's the cost on those, so on and so forth. So they're going to give me a price based on their takeoff. An estimated cost to build based on the architectural plans, that's where I'm going to get my number.
So you can see that if you're in this process. You're talking to a guy about building your house. He's giving you numbers, and you don't have a stamped architectural set of plans. Which means the architect has designed the house, the engineer has examined the materials and code that needs to go into the house. They've signed their name to it. You don't have a project. You can't give a price. The builder may give you a price, but it's not going to be the price you need.
So that's kind of where you get started. Know what you can afford. Probably a good idea to know? Where do you want to live? Where do you want to build? Just figure those two things out. I can afford this. I want to live here. Then what do you want to live in? What do you want to build? Choose an architect who's going to take your dream and turn it into some calculable lines and dimensions. They're going to take those lines and dimensions and hand them to an engineer who's gonna do all the math to make sure that the roof won't fall in on you. Lay out the electrical schematic and lay out the plumbing schematic. Then you're going to take that, and you're going to hand it to a professional builder and then they're going to hand that to their subcontractors who are in turn going to give them prices back. Your builder is going to calculate all that stuff together and then he's going to hand you a bid for the opportunity to build your house.
So that's the kind of down and dirty process of building a house. This will hopefully get your juices flowing.
If you have any comments or suggestions or I'm missing something in that process, please don't hesitate to let me know. Comment down below, leave a note on the blog. We are going to get further and further into this process. I want to help builders. I want to help lenders, but I most definitely want to help you,the home owner!
Your probably pretty smart, but not everybody goes through this process every day. I just can't find a suitable set of information or instructions out there that protects you, keeps you in the driver's seat, keeps you where you need to be. There are some fantastic builders and some fantastic lenders out there, so you shouldn't be okay.
Don't forget once you start this process, everyone you bump into is working for you. If you decide to go with this builder, he works for you. You decided to borrow money from this bank. They work for you. You decided to do business with this architect. They work for you.
Keep repeating this-They work for me. They work for me. Because at some point in this process, you will forget.
Don't worry. I'll remind you!
See you soon.