With the cost of building a custom home constantly increasing, I frequently have prospective clients ask me about what the cost savings would be if they chose to build their own home, as opposed to having a professional homebuilder do it.
Some folks will look at the builder’s profit and overhead line item, which typically runs between 10% and 15% of the total hard costs of the project, and see that as an opportunity to save a significant amount of money.
While I don’t disagree that a builder’s fee for building a home is a significant amount of money, if you look at the alternative scenario, I think you’ll see that there is tremendous value in the services that a builder provides as part of the build process and that the potential for spending MORE money to do it yourself is a very plausible, and even likely scenario. Let’s jump into it!
Loss Opportunity #1: Homeowners Don’t Have the Network Builders Do
As a professional builder, I have an extensive network of relationships within my service area, and most of my subcontractors and vendors are doing multiple projects for me each year. Typically, we have many years of working together successfully, and these subcontractors continue to work for me at a competitive price because I’ve proven to be able to get them in and out of a project quickly and efficiently, and they’ve demonstrated to me the ability to provide quality work at a competitive price in a reasonable time frame.
A homeowner who decides to build their own home does not have the relationships that a builder does, and subcontractors are almost certain to add in a “homeowner/builder” factor to their bid. Why? They know that working with a homeowner as the builder means their customer (the homeowner) will be less efficient and will take up MUCH more of their time, since the subcontractor will have to explain what it is they need, how the process works, and so forth.
While this is admittedly complete conjecture, I’m confident that it’s safe to say that on average, a subcontractor will add at least 10% to their bid to cover the additional time spent on teaching and coaching the homeowner what they need to know and what they need to do for their specific trade.
Bottom line: as a builder, I buy at a much better price than a homeowner does, and for good reason. All by itself, this loss opportunity more or less offsets whatever margin the builder is charging. And if a homeowner is paying 10% more across the board for subcontractors and materials, that almost completely offsets the builder margin all by itself.
Loss Opportunity #2: Professional Builders Are Much Faster at Building
Most of our projects are financed with a construction loan, which is either a “one-time close” loan that will convert to permanent financing at the end of the project or will be replaced by permanent financing (a “regular” mortgage) at the end of the project.
There is, of course, a monthly cost to this construction loan, which grows larger and larger as the project progresses and the amount of the funds disbursed increases. A professional builder is going to build much more quickly than someone who is NOT a professional builder.
Let’s say, for the sake of argument, that a builder finishes a project 90 days sooner than the homeowner does; depending on the size of the project/loan, that will translate into $10K – $20K quite easily, and possibly a good bit more. If we use a $1MM construction loan as a hypothetical model, we can split the difference at $15K for our additional carry costs, for a total of an additional 1.5% in costs. That’s huge.
Loss Opportunity #3: Change Orders Add Up Very Quickly
As a builder, I’ve learned a lot over the three decades I’ve been building, and most of those lessons have come at a cost, usually in the form of a FINANCIAL cost.
For a homeowner who has likely never built a home before, and almost certainly hasn’t built a hundred homes before, there’s almost invariably going to be mistakes made that are going to incur change orders on the part of the subcontractors.
This learning curve comes at a price, regardless of the industry. As a professional builder, I factor in a 5% contingency for the fact that “life happens”; I’ll miss something, we’ll get thrown a curve ball, and so forth. No bank would underwrite a loan on a project that didn’t have a contingency built into it, and when I build, I’ll typically tap into roughly half of the contingency on a project.
I think it’s fair to say that a homeowner would tap into at least twice what a builder would have, so let’s chalk up 2.5% of the total project in change orders, re-working, and remediating scopes of work.
Also, keep in mind that many builders (myself included) are fixed-price builders, so working with a company like mine means you have almost ZERO exposure to change orders (with a few exceptions that I could explain later). If you’re building your own home, every single one of these change orders is going to cost you.
Loss Opportunity #4: Builders Have More Time To Build During the Work Day
Building a one-of-a-kind, never-before-built custom home takes a lot of time. Unless the owner is retired or works a relatively low-demand job, there are simply not enough hours in the day to effectively manage a custom home build in the margins.
If the owner has a job that is commission-based, it’s almost certain that there will be a decrease in their income due to the enormous time demands. Even more so with someone who does not work on a commission structure: they’ll see an impact to their ability to perform their workload effectively, which very well may have consequences either short term or perhaps a bit further down the line.
Bottom line: most folks don’t have the bandwidth to manage their own build, resulting in an impact to their work and quite possibly their personal lives as well. This of course is impossible to quantify, so I won’t, but it’s safe to say that it’s fairly self-evident that there will be tremendous opportunity costs in a homeowner managing their own project.
Adding It All Up: The Additional Cost of Building Your Own Home
So let’s tally this all up:
- Purchasing power of the builder: 10%
- Additional carry costs of the construction loan: 1.5%
- Exposure to change orders: 2.5%
Without factoring the opportunity costs within both the business and personal life, my very conservative estimate is that it will cost an additional 14% for a homeowner to build their own home. A more realistic estimate could easily be at 25% or more.
Using my earlier example of a $1MM custom home, 14% would cost $140k more, and 25% would cost $250k more. So when you take into account that a builder is typically charging around a 15% margin, it’s not difficult to see how you could lose a LOT of money by building your own home.
Thank you for reading, please feel free to reach out if I can be of any assistance to you in your home-building adventure.
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Mike Rice is a custom home builder in Colorado Springs, Colorado. As the president of Paramount Homes, he has over 30 years of experience in construction. Originally from California, he moved to Colorado with his wife and three sons to seek out the natural beauty and high quality of life we enjoy here. Mike is licensed as a builder in El Paso, Teller, and Douglas Counties and would love to build your dream home. Contact him today at (719) 331-4116 to learn more.