The Ultimate DIY Project: Owner Builder Construction

If you enjoy working around the home and doing various DIY projects, then maybe you're ready for the Holy Grail of DIY - building your own home as an owner-builder. By eliminating the costs of a general contractor's overhead, you will save tens of thousands of dollars on your next home. And it's not as labor intensive as you might think.

Being an owner builder simply means you are overseeing the construction of your home without hiring a licensed builder. By eliminating the builder, you eliminate the builder's profit, which translates to tens of thousands of dollars you get to keep for yourself.

For many DIY lovers, being an owner builder is a chance to put their skills to good use. When you act as your own general contractor, you can do as much of the work as you wish. There are many examples of owner builders who do the majority of the labor themselves, from framing all the way through to landscaping.

However, many owner builders contract out the bulk of the labor and focus on doing only the projects that they are comfortable with, such as hanging drywall or painting. Every bit of labor that you do yourself becomes extra sweat equity that you build into your home.

Once the house is built, it's worth whatever a potential buyer is willing to pay for it. Therefore, cutting the costs of construction by being an owner-builder means your new home will be worth much more than you spend to build it.

But, don't worry if you feel you're not ready (or willing) to take on an entire construction project on your own. Being an owner builder is more about project management than it is about actual physical labor. In fact, plenty of owner builders never lift a hammer.

Even without doing any of the labor yourself, there is plenty of sweat equity to be made, because you will cut out the costs of the builder. Indeed, a lot of people don't realize that their builder never actually does any labor himself. Instead, he typically manages the sub-contractors who do all the actual physical construction.

So, if you feel you have the management skills to oversee the project, then being an owner builder can still be very profitable.

Beyond having to understand the planning and project management involved in construction, a successful owner builder also understands the financing that is needed.

It's fair to claim that most people who build a home do not have the cash on hand to complete the project without financing some (or all) of the construction. The trick is understanding how being an owner builder affects your chances for getting approved for a construction loan.

With the current belt-tightening by the mortgage industry, construction loans are getting harder to find, even if you are willing to hire and pay a fully licensed general contractor. As you might imagine, securing financing for a construction loan that will allow you to be an owner builder is even tougher. The good news, though, is that there are programs still available - you just need to understand some of the key points about the financing that may affect your ability to build your dream home.

First, it's important to realize that the costs of the financing will typically be slightly higher than the costs of a regular construction loan. Step back and look at the big picture. If you feel you would be a successful owner builder, is it worth it to pay slightly more for the financing for the opportunity to save tens of thousands of dollars on your construction costs?

Owner builder construction loans are a specialty product that represent more work and more risk to the lender. On the other hand, they also represent a greater opportunity for you, the borrower, to save a ton of money. It should be a fair trade all around.

The second important thing to realize is that owner builder loans will typically have stricter requirements than a simple purchase or refinance loan. These requirements may mean you have to qualify based on stricter credit score guidelines or tougher debt-to-income ratios.

For example, if a borrower's credit score is below 700, it is pretty common to require that borrower have a larger spread between the total construction line of credit and the appraised value of the future home. Sometimes, for the borrower with the lower credit score, this might require a down payment on the construction loan. But, that doesn't mean the deal can't be done. It's just important to understand the financing will be different than the simple purchase loans that you may be accustomed to.

The third important point to recognize is that owner builder construction loans will always be designed to protect you and ensure there is enough money available in your construction loan (i.e., line of credit) to complete the project. Nobody, meaning neither the bank nor you, wants an unfinished home. So, it is pretty common for owner builder loans to require that you qualify for extra amounts of money in your construction line of credit on top of your land and budget numbers.

For instance, you may have a small pot of money wrapped into your loan as a contingency fund in case you slightly under budgeted. It's a protective feature to make sure you don't run out of money during construction and end up with a home without a roof. However, your permanent loan should only include the money that you actually use during construction. So, any extra funds or any extra budget money that you don't spend during construction won't count against you.

So, if you are a fan of DIY projects, and you think you have the management skills to oversee the project, then perhaps being an owner builder will be a good option for you. The large amounts of savings can make it a very profitable experience. Just make sure you understand the planning and the financing involved.