You've decided that you want to make the move to your dream house. You've looked at existing properties for sale in your area but haven't found anything you liked. You've toured a spec home and a semi-custom home built by a well-known local homebuilder, but they didn’t catch your attention either. So you've decided to build a custom home designed uniquely for yourself and your spouse.
However, building a custom home involves a lot of planning, choosing fixtures, selecting materials and supervising the construction. Here are the steps to building a custom home and the costs involved.
Set a Budget & Arrange Financing
The first step is to decide how much you want to spend on your new dream house, and, unless you’re paying all cash for the house, how much mortgage payment you can afford.
A good rule of thumb is that your mortgage payment shouldn't exceed 28 percent of your gross monthly income. For example, if you have a gross monthly income of $6,000, your monthly mortgage payment including taxes and insurance shouldn’t be more than $1,680 ($6,000 times 28 percent).
For the purposes of this calculation, let’s estimate taxes and insurance for your new house at $600 per month. This leaves $1,080 to apply to the principal and interest payment on your mortgage. If the current interest rate for a 30-year mortgage is 4 percent, and you make a down payment of $60,000, the maximum you can spend on your custom home is $384,000 ($1,080/month times 12 months divided by 0.04 plus $60,000 down payment).
Since you're building a house from the ground up, your bank will not start you out with a 30-year mortgage. You'll need to set up a construction loan which can be converted to a long-term mortgage after home construction is finished. The bank will probably require you to make a down payment of 20 to 25 percent of the construction loan.
After you have found your maximum mortgage amount, you can determine the size of your house in square feet and set budget limits for the construction costs.
Read More: I Want to Build a House. Where do I Start?
Find the Right Lot
Decide where you want to build your house and purchase a lot. The cost of the lot will depend on what type of improvements it needs. Does your lot have trees that need to be cleared? Does the lot already have utilities like water, gas and electricity?
The cost of the lot depends on the area and can range anywhere from a few thousand dollars in rural areas and up to several hundred thousand dollars in urban settings. Any improvements that need to be made will add to the cost of your one-of-a-kind home.
If your lot does not have city water or sewage, you’ll have to drill a well that can cost from $1,500 to $12,000. A septic tank can cost from $3,000 to $10,000.
Hire a General Contractor
You'll want to hire a general contractor who has experience building custom homes. You can look for references, or you can ask your real estate agent for a list of custom home builders. You should bring your general contractor into your initial discussions with your architect. They will be your construction team they need to be able to communicate openly and work together.
Hire an Architect
The cost of an architect depends on how unique your custom home will be. If you're starting with basic floor plans that only need slight modifications, an architect's fees may be only a few hundred dollars. But if you're looking for a special design that will take more hours to create and draw up, an architect could cost you upwards of $20,000 to $30,000.
Construction Costs for a Home
Let's start with the basics. According to the most recent survey from the National Association of Home Builders, the average cost to build a 2,594 square foot house is $296,652. This is an average of $114 per square foot. The average cost to develop a finished lot is $89,540.
The construction cost breakdowns are as follows:
- Site work - $18,323
- Foundations - $34,850
- Framing - $51,589
- Exterior finishes - $41,690
- Plumbing, electrical and HVAC - $43,668
- Interior finishes - $75,259
- Landscaping, driveway and outdoor structures - $20, 116
- Other - $11,156
Read More: What Are the Costs When Building a House?
Construction Costs for a Custom Home
Generally, the cost to build a luxury custom home starts at twice the cost of an average home design and goes up to $400 per square foot. Using the example above of the average cost of a house with standard building materials from NAHB, a custom home will start at a little more than $200 per square foot. The quality of craftsmanship and degree of customization are key differences between a production home and a custom home.
This means that the pricing for a 2,500-square-foot custom home will range from $500,000 (2,500 times $200) up to $2 million (2,500 times $400). As you can imagine, when you're building a house from scratch, you can spend as little or as much as your budget can take.
For example, you could have floors covered with standard-grade carpet or floors made with marble, granite, terrazzo or inlaid hardwoods. Your bathrooms could be made of fiberglass and only one with a bathtub. Or your master bathroom could have large custom showers made with imported Italian tile, a stand-alone tub with brass feet and a separate spa. Your fixtures could all be of high quality - or higher.
A standard kitchen could have decent-grade wall and base cabinets with acrylic countertops. But you might want your custom house to have deluxe wall cabinets, stone or granite countertops and a center island work area with a breakfast bar.
What Do You Want in Your Custom Home?
It's your house, so you can have whatever you want, within your budget, of course. Do you prefer one story or two? How many bedrooms and bathrooms do you want?
The idea is to think big about your home plans and what you want in your dream house, and then start to cut back and work within your budget. For example, do you want a home office with built-in bookshelves? Would you like to have a home gym and a separate playroom for the kids?
These are the kind of questions you need to prepare to discuss with your architect and general contractor. They can advise you on the practicality of your plan and give you cost estimates that will hopefully get you most of what you want.
- U.S. News: The Guide for Buying Land, Building a House or Buying New Construction
- Washington Post: What You Need to Know Before Building a Custom Home
- Home Builder Digest: How to Build A Custom Home: A Step-by-Step Guide for Building
- Zillow: Steps to Building a House
- The Spruce: Building Your Own Home: a Step-by-Step Guide
- Rocket Homes: How Much Does It Cost To Build A House? An In-Depth Look
- Federal Trade Commission: Hiring a Contractor
- National Association of Home Builders: Cost of Constructing a Home
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.