Owner Building: How to Source Your Funding

Hi! Thank you being here! Now that we’ve talked a little bit about owner building, you may be wondering how to secure the funds to build. And that is a GREAT question!

Every community, every state, and even family circumstances can vary, so there is no “one” answer for this. Personally, I have raised private funds to use for construction on both of my owner builds. But I know that not everyone will choose to use this method.

Bank Construction Loan

This is definitely the most conventional route to take, although it will take some work to secure a construction loan if you don’t have a contractor. So you have a few options here. If you have a good rapport with a builder, you could potentially ask them (or pay them a consulting fee) to sign off on your owner build. Their license would be ‘on the line’ for the construction therefore some builders may not agree, or they may agree with conditions. The other option is to shop around until you find a bank or credit union that will give you a loan to owner build. It isn’t easy but it isn’t impossible! Banks will likely have a stringent list of requirements and there may be some additional hoops you have to jump through… but just remember how much equity you will have earned and money you will have saved by putting in this hard work. One side note to keep in mind is that banks sometimes will require you to start the build with your own cash before they cut the first check. And even after the build gets going, some banks will require you to front the cash during parts of the build before they will cut the next check and that may require you to have cash available for use. Contractors typically will cover these costs when you hire them, but if you are owner building, you are expected to have the funds to keep construction moving forward. Most banks limit the construction loan timeline to one year and then require the loan to be rolled into a mortgage.

Personal Private Funds

We actually used a HELOC (Home Equity Line of Credit) for one build and a piecemeal plan with savings accounts, cash from a recent property sale, and we put a few items on credit for the other. My mom is a CPA+financial planner, so we had a professional on board to bounce financial decisions off of (which I definitely recommend). If you use private money, make sure that you have a bank or credit union refinance-into-mortgage plan already in place before you start the build. I have worked very well with a local credit union here in Panama City and I was very shocked when I called around how many banks and credit unions gave me incorrect information or flat out refused to refinance into a mortgage from construction using private funds. The key is to have a plan in place before you begin the process and stay in contact with the bank throughout the construction of your home.

Private Money Lenders

This is an option that I really am not well versed on, but it’s something that is utilized in real estate dealings (usually investment purposes). The premise is that you are borrowing from people who are loaning the money because the interest rate that they charge you is more than they could make with their money just sitting in a savings account. In essence, you will be paying them to use their money for a certain amount of time. This money is not backed by a bank and there’s more risk involved for you and for the lender in this scenario. You could request a loan from these private money lenders but the downside is that the interest rate is usually substantially higher than a bank loan (but still probably a lot less than paying a contractor for your build).

As far as financing goes, just always cover your bases when you are owner building! You are taking on the risk of the build, so best practice is to have 20% of your total cost in cash. Most homes go over budget by about 15% because so many things change once the process actually starts and you will also need that money in cash (because a good lender is going to cap your spending at your original agreement). So, to give an example in round numbers, if you have a $100k budget total for construction, you should start off with $20k of that in cash plus you should be prepared to spend another $15k cash in overages throughout the build.

During our recent coastal farmhouse build, category 5 Hurricane Michael came to town and TOTALLY changed our building costs and plans! We were scrambling at the end to do everything possible to get to Final Inspection. We wiped out so much of our savings account paying for cash items/upgrades at the beginning of the build and at the end we had to prioritize tasks and move in with some projects incomplete.

Matt always gives a different and interesting perspective on building, so here is his take: If you can build in phases, that is the way to go. Anything that can wait until after the initial build will help you get to the certificate of occupancy faster and closer to your end budget goal. whether it be the garage, a wing on the house, a patio; try to build the house in phases if at all possible. It is a good idea to think ahead and plan for the final product regardless, that way your plumbing and electrical will still be where you need it, but you don’t have to have a fully completed dream home immediately. Building a house in phases is definitely not for everyone, but owner building can easily “build in” 20-30% of inherent equity simply by not having to pay the general contracting price.

As always, please email me (or DM me on Instagram @summer_onthecoast) if you have any feedback! I always love hearing about your build plans!

Happy Tuesday!