Financial Matters
Understanding Construction Loans
You may be financing your build with a construction loan from a bank. Generally, the bank will provide for a number of draws throughout the building of your home. The typical construction loan includes three or four draws.
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Homes with simple designs or non-custom homes can be built quickly (within a few months). This is because homebuyers are not typically involved in the design process or making many choices about the construction of the home. Construction loans with only a few draws are generally great options since the draws can coincide with monthly invoices.
Custom homes can take much longer to build because the houses are generally far more complex and homeowners can decide on virtually every aspect of the home’s construction.
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In order to access a draw, you typicaly have to pay someone from the bank to come to the site to decide whether or not to issue the draw. The bank’s appointed evaluator will inspect the site and determine how much the bank will release for the draw.
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You may be financing your build with a construction loan from a bank. Generally, the bank will provide for a number of draws throughout the building of your home. The typical construction loan includes three or four draws.
Homeowners sometimes change their mind during the build and want to add or change features in their home while it is being constructed.
Since there are so many options, it can seem overwhelming to decide on features such as cabinets, flooring, paint colours or other fittings and features. Delays in decision making may prolong the construction of your new home, especially if products need to be imported, specially ordered, or custom made.
Construction loans with only a few draws may not be enough to keep up with monthly invoices. Before construction begins, be sure to become familiar with how your particular construction loan works, how the draw process works, and the schedule of your build.
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If you have a construction loan with three draws for a complex build that may take five (or more) months to complete, you may have trouble paying monthly invoices without some form of bridge financing.
It is important to speak with your lender about the projected completion date, number of draws and what happens if the project is delayed. Because builders are not typically finance companies, their interest rates can be higher than other lenders. It may be cheaper to find alternative financing at a much lower rate to pay monthly invoices.
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Once you have requested a draw, you will need to allow some time for the banks appraiser to visit your site to authorize the draw. After that, the bank may delay in releasing a draw for any number of reasons. If your draw is delayed, you may miss an invoice due date.
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A bank’s appraiser will typically use some sort of calculation sheet to determine the amount of draw to release. This may or may not cover what is actually built, installed and invoiced.
You may find it helpful to discuss typical problems with construction loans and how your lender typically deals with these issues.
Controlling Costs
Building a new home is an exciting process, and you may be tempted to go beyond your budget. In our experience, homeowners generally add between 5-10% in additional upgrades and changes throughout the build. Below are some reasons for and tips to control building costs.
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The budget for a custom home will include a number of allowances. An allowance is a budgeted amount of money included in the contract price to cover things that you can decide after the project has started, including choices for flooring, cabinets, fixtures and finishes.
The allowance will typically include an amount for a standard or popular option. In some cases, you will choose something that costs more than the allowance has budgeted for. In this case, you will have to cover the additional cost for the upgraded option. This will increase the overall cost of your build.
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During the design phase of your build, you might bring in photos of things you see in other homes that you would like to incorporate in your new home. Builders typically work with you throughout this phase to work in as many of your wants as your budget will permit. After this process, finalized plans will be created, permits will be obtained and work can begin.
It is common for clients to keep looking for design inspirations and want to change or add something in the middle of the build. Most custom builders will handle this through a change order—a formal request to change the build.
Depending on the change order, you may significantly increase the cost and duration of the build. Before confirming a change order, be sure to understand how it will impact the build, your cashflow and your current living situation.
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Local regulations can both prolong a build and add costs. For example, some roads have seasonal restrictions on the size or weight of vehicles. In some cases, local conservation authorities have additional regulations or lengthy processes to get certain aspects of your build approved. All of these things can increase the cost or duration of a build.
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Your build may include special-order products or imported building materials which may take several weeks or months to arrive. If there is a problem with a delivery, your project may be delayed.
Furthermore, local tradespeople are busy, and your project will be competing with others in the area for their time and expertise. You may have to wait for one or more tradespersons to become available, particularly during the busy summer building season. Delays and high demand for tradespeople can increase the cost of a build, particularly when you want to change some aspect it.
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Building a custom home is an exciting process and it is easy to get carried away. Here are just a few of the strategies our clients have used to control costs during their custom build.
Make Timely Decisions
A lack of decision making is the number one reason for project delays. It is important to make timely decisions on fittings, fixtures and finishes. Tradespeople book up quickly and materials sometimes take time to arrive. Delays in decisions translate into delays in building.
Set Realistic Budgets
Allowances typically cover costs for the most popular option choices or options that you have previously indicated you want. When you visit product showrooms, you get to see options that suit every budget. It is easy to choose an upgrade here and there. And these upgrades can add up quickly. Make sure your budget reflects not only what you want but also what you can afford.
Choose Options Early
Choosing options early (before your build starts) is a great way to control costs. This is because your builder can reduce the number of allowances and get fixed prices for the things that you want. While the build is underway, you may be tempted to change your mind when you actually see the space. Make sure you understand the impact of change orders on the overall cost and schedule of the build. Some clients limit the number of times they visit the site to reduce the temptation to add this or upgrade that.
Avoid Watching Home Building and Renovating Shows
Some clients love watching home building and renovation shows. These shows can be great sources of inspiration for your project. However, once your build has started and you have made your selections, you might find it useful to watch something else. These show can easily tempt you into requesting more changes to incorporate something you’ve seen on TV.
Be Honest with Your Own Skills
Some homeowners will leave things to do themselves, such as drywalling an unfinished basement. Before you leave things unfinished, be sure that you know your own strengths and weaknesses. You may end up spending more time and money having someone fixing your own handiwork. Some things are best left to the pros.
Avoid Buying Fittings and Fixtures
Builders source products from professional suppliers who work closely with the tradespeople who install them. This way builders are able to ensure that the items are complete, in good condition, are appropriate for the application, and have trusted warranties.
It may be tempting to buy a light fixture or some flooring on sale from a big box store to save a few dollars. It is not uncommon for these purchases to lead to delays while professionals deal with warranty issues, track down missing parts or replace broken pieces. For these reasons, many builders do not permit homeowner supplied building materials.
Prompt Payment Rules
In October 2019, new prompt payment rules were introduced in Ontario. The new rules:
Require that contractors and suppliers get paid on time
Set up a new adjudication process to deal with payment disputes
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Many builders invoice monthly. Invoices typically include what is built, installed or completed. Be sure to carefully review each invoice and ask if you are unsure about the charges.
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If you disagree with a charge on your invoice, you will have 14 days to properly inform your builder about your concern. In most cases, your builder can quickly resolve the issue. If a resolution can’t be found, there is a formal process through which disputes are resolved.
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If you know you are going to miss a payment due to lack of financing, it is probably best to let your builder know. Some builders can help you arrange bridge financing to avoid the formal processes required under prompt payment rules.
In some cases, nonpayment can lead to administrative or legal proceedings such as liens. Most builders will probably want to avoid this since it may cause delays to the completion of the project, complications with lenders, and additional legal fees and stress.
Choosing a Builder
This article suggests fourteen questions you could ask a potential builder so that you choose the right one for your new home.
Financing Your Build
This article provides important considerations, useful information and tips on navigating construction loans and other financial issues.
Evaluating Estimates
This article suggests ways to get useful prices from builders so that you can compare them and make the best decision for your project.
Working with Our Team
Although we have a unique relationship with each one of our clients, this article outlines the way in which we typically work with our clients.
Notice to Readers
The content on this page is provided for general information purposes only and does not constitute legal, financial or other professional advice or an opinion of any kind. Readers should seek specific legal, financial or professional advice by contacting an appropriate expert for their specific project. While we try to ensure the accuracy of the information, we cannot guarantee that all of the information is accurate at all times. Bosiak Construction Ltd. does not warrant or guarantee the quality, accuracy or completeness of any information on this page.