Building A Custom Home: The Financial Benefits
It’s rare to find instances where we get to ‘have our cake and eat it too,’ but building a custom home can be one of them.
Building a custom home comes with its own set of challenges. However, when done right, you get to live in a home that's designed to your specific taste, AND you can build equity in the process. Here's how that works.
How It Works:
A home’s value is ultimately determined by what someone else is willing to pay for it. To estimate this, we look at comparable properties—homes in the same area that are similar in size and condition and have recently sold.
From there, the math is straightforward. We total all costs associated with the home and compare them to the projected market value. In many cases, the total investment is less than the completed valuation, meaning equity is built simply by constructing the home. Instead of letting a developer take that profit, you have the opportunity to step into that role and turn those gains into your own equity.
Become the Developer:
This is what we do! We’ve built our business by purchasing properties, adding value through construction, and selling at the top of the market. Whether it's developing land or renovating an old home, we’ve successfully turned investments into profit.
When you build your dream home, you get to do the same—take on the developer’s role and reap the financial rewards for yourself. To illustrate, here’s a scenario:
Dream Home Build Scenario:
You have a vision of living in a beautiful 3,250 sqft home with all the fixins’, so tomorrow you purchase a plot of land for $100,000. We run an analysis on nearby homes, in the same school district, that are 3,250 sqft, on a similar lot size, and built to similar standards that you want. We find 4 homes that are similar that all sold for $400/sqft – giving us a pretty good indication that your property will be worth $400/sqft when it’s done, or $1,300,000.
Our next step is to pay our industry professionals (engineers, architects, etc.) to help us create a plan for the site to connect all of our utilities to the home, build in a driveway, create a plan to manage the stormwater and build your dream layout for this 3,250 sqft home. All of this costs us $60,000.
Now that you have a footprint that you love, we bring in a designer to help create a cohesive design for this dream home of yours. You pick every little detail from the layout of the kitchen, to the materials of the cabinets and counters, to the lighting fixtures and the paint, all the way down to the color and style of the windows. Each and every detail is organized and categorized so you know exactly what it’s going to look like and we have a plan for our construction. The designer’s fees are $40,000.
You’re now 9 months into the process and our next (most exciting step) is to build it! Step 1 is going to be to excavate the land according to the plans and we’ll manage the process all the way to Step 876 which will be the final inspection and cleaning of your brand new dream home 1 year later! The entire build, including hard construction costs and GC Fee is $850,000. At this point, you’re 21 months into the process and have spent $100,000 on land costs, $65,000 on entitlement costs and $850,000 on build costs. These, however, are not all of the costs you’ll incur during the process. You’ve also paid $30,000 in taxes, insurance and closing costs AND $75,000 in fees to service the loan that allowed us to build it. Let’s review in totality:
Purchase: $100,000
Entitlement: $65,000
Designer: $40,000
Tax/Insurance/CC: $30,000
Financing Costs: $75,000
Build Costs: $850,000
Total: $1,160,000
Value of the home: $1,300,000
Equity Created: $140,000
In this example, you’ve created $140,000 in equity through the process of building your dream home! Also, worth noting – in this example Axe Builders is handling the entire process. We are your “developer consultant” helping you run an analysis on the valuation and introducing you to the right design professionals. We are your “building consultant” during the planning process, present with you and your designer to make sure that your design is within budget. Once you have your design, we are your General Contractor to bring your design to life.
These are all realistic numbers and showcase how you can ‘have your cake and eat it too’ – or said plainly, design your own custom dream home AND build immediate equity. The equity that you’ve created is typically the developer’s profit when they sell a project, but since you’re the developer in this scenario you get the profit.
We’ve done this dozens of times and we’re involved every step of the way to ensure that we remain on plan, however there is still risk involved. If you’ve followed us for a while, you know this is my favorite topic. We do not shy away from risk, we look directly at it so we can better understand it and mitigate its effects.
Keep an eye out for our next blog entitled ‘Building a Custom Home – Outsmarting the Risks’ to see how we accomplish this!