Today we'll talk about one of the main ways you can save money when building your dream home… by being your own general contractor or builder. But CAN you build your own home? Are you allowed? And SHOULD you?
We'll also cover the pros and cons of being your own builder. Plus discuss some things that owner builders can do to increase their chances of success.
But first, let's get to today’s Pro Terms.
PRO TERMS: Builders Risk Insurance and General Liability Insurance
Builders risk insurance, also called "course of construction" insurance. It covers loss or damage to the house under construction, as well as loss or damage of any of the materials and equipment used in the project. You will typically need to purchase coverage for 100 percent of the anticipated construction costs.
General Liability Insurance is to safeguard the builder against the risks of potential lawsuits over accidents, injuries, and illnesses that occur on the job site.
Most builders have to acquire, at minimum, those two types of insurance. So, if you're considering being an owner builder, ask your insurance agent and your bank about builders risk insurance and general liability insurance.
Now, moving on to today’s mini lesson…
In most of the United States, you need a general contractor’s license to build homes for other people, but most areas will allow you to build your own personal residence without a contractor’s license.
Double check with your county to make sure that is true for you. Start by calling your state’s builder’s licensing board.
If you are considering building your house yourself, you should know that many builders decided to get their general contractor’s licenses because they built a home for themselves and enjoyed the process. When they began building, many knew no more than you or I do about construction.
Many builders insist that a builder is absolutely necessary if you want to build a house… but, ask a barber if you need a haircut and guess what he’ll say?
When they get started, lots of builders have minimal knowledge about residential construction. And I don’t know of any builders who are experts at all the different trades. How could they be?! That’s why they hire tradespeople, just like we can.
We actually have a much bigger advantage today than those who built their first homes 20 or 30 years ago because there is lots of construction information that is readily available on the internet and in books. That’s the information that I want to bring to you in this podcast and blog, so you can listen and learn and prepare for the construction of your new home while you are commuting to work, or walking your dog, or working out or doing chores.
Although we don’t have the benefit of building experience, we can learn from the experiences of others. I believe you're smart if you learn from your own mistakes, but you are brilliant when you learn from the mistakes of others.
To build your house yourself, you don’t need construction skills, you just need to know how to choose and manage the people with those skills. A builder's job, and your job of a builder, is to get your house constructed, not to construct it yourself.
You don’t need to know how to install windows and insulation, you just need to know what windows and insulation are the good options for your new home.
You need to gain a general knowledge of residential construction to help you communicate with your subcontractors. This podcast will help you with that.
The fact is the general contractor is a coordinator, scheduler and communicator during the construction process. The definition of a general contractor is “a manager responsible for the coordination of a construction project and for hiring specialized subcontractors to perform the construction work.”
General contractors manage people, problems, money and time. If you think you can do those things, you can probably be your own builder…. if you have an interest in that role.
If you have no interest in being the boss, communicating directly with tradespeople, making decisions, ordering materials, scheduling and coordinating workers, you probably shouldn’t be the GC for your home.
That role is not for everyone and that’s ok, but I think EVERYONE who wants a house built, whether you hire a builder or not, should have some knowledge about residential construction. Since, for most of us, our home is the biggest investment we will ever make.
Even if you decide to hire a general contractor, or BUY a new home, listening to this podcast will help you become an educated consumer.
Did you know that you don’t necessarily need to hire a general contractor, even if you decide you need help in managing construction and supervising subcontractors?
There are other options available for those who want some, but not all of the responsibility of a general contractor. We’ll talk about those options in an upcoming episode called Build Your House Yourself, but not ALL BY YOURSELF.
GC’s generally charge a fee of 10-25% of the construction costs. In addition, they typically mark up materials and the subcontractors’ labor. No disrespect, but they are essentially experienced middle men who acquire materials and labor, mark them up and sell them back to us. No judgment, no shade— it’s just the way it usually is— not 100% of the time, but most of the time. Yes, their experience is worth something, but even experience doesn’t protect them from problems.
I’m not saying that your project won’t be easier with a builder, it most likely will be easier. But some of us are willing to exchange ease for having more say in HOW our house is built and in exchange for a significant amount of money saved.
Let's talk about the Pro and Cons of being an owner builder...
Pros of being your own general contractor/builder:
1. You could save 10-25% of construction costs. Builders typically charge 10-25% of the cost of your house. Twenty-five percent of a $200,000 house is $50,000. That’s could be a significant savings and it might be worth the time and effort of contracting your own house.
2. You can hire the subcontractors of your choice and communicate with them directly — you will have more control over the construction of your dream home.
3. You can decide when to start construction— in the spring when the weather is good or in the fall when subs are more readily available. Sometimes when you use a builder, you may have to wait until your project fits into their schedule.
4. If you decide to make changes during construction, you won’t incur change order fees charged by the builder (although the subcontractor may charge you for changes).
5. You will end up with the house that you really want, not the one that the GC is used to building. Like most of us, builders like to stay in their comfort zone, so they sometimes steer owners away from unique features, such an interesting ceilings or tile work, and encourage us to go with what is familiar, and therefore easiest, for them and their subs.
6. You are the boss, but you don’t have to the do the job alone. You will have the expertise of the subcontractors, inspectors and a site manager, if you decide to hire one.
7. In addition to saving 10-25% by not paying a general contractor, you can save on materials by shopping around for the best prices on supplies such as lumber, roofing, appliances, lighting and flooring.
Most builders don’t have the time or interest to do this for every client. Builders usually buy everything where they have a charge account and bargain shopping is usually not in their scope of work.
You can often beat whatever discount the builder would pass on to you (and by the way, many builders will NOT pass that discount on to the owners) by seeking out close outs, discontinued and refurbished items, floor samples and last year’s models.
8. Finally, you will have a tremendous sense of accomplishment when the
project is finished.
There are also some disadvantages to being your own builder, so here are the cons:
Cons of being your own general contractor/builder:
1. You may not save as much as you think because of unexpected expenses and problems that arise. Even the most experienced builders incur unexpected expenses, so owner builder might have some too.
2. You may have trouble getting financing. Some banks insist that someone with a contractor’s license be involved with your project. But be tenacious and apply to several lending institutions.
Other options include:
Hiring a general contractor as consultant or site manager. Many banking institutions will go for that option.
Saving up and paying cash for your home (it may take years, even a couple of decades, but some people have been able to do this).
3. Subcontractors may not show up as scheduled for your job— they usually prioritize the work of professional builders who can award them several jobs per year.
On the flip side, even if you hire a builder, you may have delays due to subcontractors because builders often have more than one project going on at once. And the builder’s subs may have to finish another project before working on yours.
4. You may make scheduling mistakes that delay construction, but this podcast and many other resources can give you scheduling advice.
5. You will spend significant time and effort researching and overseeing the project.
6. Most builders will give at least a one year warranty for new construction— some will even extend the warranty beyond a year. If you act as builder, YOU have to assume all the risks of loss or damage associated with the job, during and after construction. If, for example, something breaks or malfunctions 6 months after you've completed construction, you can’t call the builder. You have to get it repaired or replaced yourself.
The good news is that most licensed subcontractors will give a warranty on their work, so just as a general contractor would call a plumber back for plumbing problems, so can you, as an owner builder. Make sure your contract with each subcontractor includes a warranty. Consult your lawyer if you have any questions.
7. You have to acquire builders risk and liability insurance. When hiring a builder, those policies are covered by him or her. But you will incur that extra expense if acting as an owner builder.
There are no guarantees, but as an owner builder, you can increase your chances of success with the following preparation:
1. Study residential construction at least several months before starting construction. Resources like this podcast and home building forums, websites and books, even HGTV can help.
2. If you can, develop your contracting skills by first taking on a smaller project, such as a renovation or a small add-on.
3. After you have your plan selected or drawn up, meet with tradespeople, inspectors and suppliers before construction and get their opinions about what potential problems they see in your plan, and have them suggest changes or solutions before you start building.
4. Volunteer for Habitat for Humanity. In my area, you can volunteer as much, or as little as you want, according to what works best for your schedule. Check with your local Habitat for Humanity. The great thing is you will be serving others AND learning first hand about construction.
5. Go to safe construction sites and talk with the subcontractors. Ask them to recommend other tradespeople and ask what common mistakes they see in new construction. In my experience, they are usually very willing to talk.
6. While you are on the job sites, jot down the names and numbers of the subcontractors who have signs displayed, especially if they are working on a house that is similar in size and complexity to your future home. And pay close attention to the company names that you see repeatedly. Although it’s not always the case, most subs who get lots of work, typically do really GOOD work.
Contracting your own home is very demanding, and it will probably be one of the most challenging projects you will take on in your life. But my hope is that this podcast will make our journeys less complicated and more enjoyable.
Ok, let's do a couple of quiz questions as a review and test of what we just went over.
1. What’s the name of the type of insurance that is needed for residential construction that covers loss or damage to the house under construction, as well as loss or damage of any of the materials and equipment used in the project.
--Builders risk insurance is the answer. Do you remember the other name for it?
The other name is Course of construction insurance
2. How much can you save by not hiring a general contractor and being your own builder?
—The answer is 10-25% of the cost of the house is what most builders will charge to build your home. So if you do your homework and are well-organized and don’t have too many unexpected challenges, you could save 10-25%. AND you could save even more if you consider the savings of not having materials and labor marked up by the builder. In addition, if you shop around for your materials and fixtures and purchase overstock materials, close-outs, floor samples and discontinued models, you might save even more.
Do you need a structural engineer for your house plans? We’ll talk about that in the episode 003 where you will hear the first part of an interview with a structural engineer.
Well, that’s it for today. I hope you learned as much as I did. If this post has been helpful, I'd love it if you would share it on social media. Just click one or more of the social media icons.
Remember, the purpose of this podcast is to educate and inform. It is not a substitute for professional advice. The information that you hear on this podcast is based the only on opinions, research and experiences of my guests and myself. That information might be incomplete and it is subject to change, so may not apply to your specific project. In addition, building codes and requirements vary from region to region so always consult a professional about specific recommendations for your home.
Thank you for stopping by. Come back for the next edition of Build Your House Yourself University--BYHYU.