Build a home without going to the poorhouse

Ask anyone who's done it. Spending can quickly spiral out of control. Here are key expenses you need to calculate carefully and pitfalls to avoid.

By Liz Pulliam Weston

There’s one sure way to know the cost of building your dream home. And that’s to add up the bills once it’s built.

Otherwise, trying to estimate how much a home will cost to build is tricky at best. There are so many variables, and so many temptations to overspend once you start, that coming up with a realistic budget can be tough.

Warren Christensen knows this well. The Los Angeles man and his wife racked up more than $100,000 in credit-card debt paying for upgrades on a house they built in the mid-1990s. The heavy debt and sinking real estate prices eventually led them into foreclosure and bankruptcy. 

“You just want all the things you’ve seen in Architectural Digest,” said Christensen, who has recovered financially from the debacle and is currently building another house. “But you have to scale back in the early stages or you’re going to get in serious financial trouble.”

So many variables that add up
Where you live makes a big difference in how much you’re likely to spend. Consider that the same 2,000-square-foot, two-story house (3 bedrooms, 2 baths) would have cost $155,196 to build in Atlanta last year but $182,119 in Seattle and $219,605 in Boston. That’s according to Bob Crine, president of Marshall & Swift/Boeckh, which provides building cost data to insurers.

Among the variables you face:

As impossible as it may seem, you still need to have a solid cost estimate before you break ground. If you’re financing your home with a construction loan, your lender will insist that you have a budget. (For more on obtaining construction loans, read " How to pay for your dream home ." ) Even if you were to pay cash, having a spending plan in place can keep you from bankrupting yourself.

Cruise new home developments
The most common advice is to give your plans to three builders and get bids. But if you don’t already have a pretty good idea of how much your home will cost to build, this could set you up for several rounds of revisions and bidding. Most of us don’t have the patience, the money or the time to go through this more than once or twice.

You can start by asking a builder to give you a ballpark estimate based on a sketch of what you think you want, as long as you understand that this is the roughest of guesses.

“A builder can’t give you an accurate price,” said Ken Katuin, president of the HomePlanFinder.com Web site, “until they have a good set of plans and specifications.”

That’s why Katuin, who wrote an e-book on homebuilding, also recommends cruising new home developments and visiting the owners of newly-built houses. What you want to look for, he said, are homes that are similar in size, quality and features to the one you want to build. You can either ask how much the homes cost to build, or figure out a rough estimate yourself by subtracting the cost of the land from the asking price. (You can find the land cost by asking a real estate agent or by looking at publicly available tax records.) Divide the cost by the home’s size and you’ll have a basic idea of the cost per square foot.

Shelling out more ... for this and that
There are some caveats. A larger home may cost less per square foot than a smaller home, since the price of most of the expensive parts -- the kitchen, the plumbing, the heating and cooling systems -- is spread out over a larger area. Similarly, a two-story home may cost less than a one-story house with the same square footage, since the foundation and roof will be smaller.

J.P. Singh, owner of a Sacramento manufacturing company, started his budget-making process by talking to a friend who had built a 4,000-square-foot home with the kind of upscale finishes Singh wanted for his own home. Singh adjusted his budget upward to reflect the larger size he wanted (5,000 square feet) and to accommodate extra costs such as a longer driveway and a septic system.

Still, with the house almost finished, Singh finds himself shelling out even more than he had planned on upgrades He’s spent, for example, an unexpected $6,000 just on extra wiring for televisions, computers, the alarm system and stereo speakers -- all in $100 to $300 increments.

“Once you put up the sheetrock, you’re not going to want to go back in there,” Singh said. “When you’re spending so much money, $100 extra … doesn’t seem like a lot, but it adds up.”

Work backward from mortgage payment
Stockbroker Ted Baden took another approach. The Chula Vista, Calif., man and his wife, Maria, figured out how large a monthly mortgage payment they could afford, then calculated how big a mortgage that would get them.

Once they knew how much money they had to spend -- about $200,000 -- they went to work on the design, using their home computer and the services of a contractor who also designs homes.

They wanted four bedrooms and three baths, which would have exceeded their budget had they built an average, 2,000-square-foot home, or a smaller home with fancy touches. So they opted for a smaller, 1,600-square-foot house with standard finishes, such as textured drywall inside and stucco outside.

The Badens want to build and rent out more homes so that they can eventually work for themselves. Having this goal in mind helps them rein in their spending on the new house, since taking on more debt would delay the day when they can strike out on their own.

Whatever budget you come up with, though, all the experts recommend building in at least another 10% for cost overruns.

No matter how carefully you build, Baden said, “you’re always at least $20,000 short.”