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Old 09-17-2007, 11:12 PM
 
Location: High Bridge, NJ
2,762 posts, read 4,510,114 times
Reputation: 1982
Default Construction loan for a Katrina Cottage? Lots of questions....

I'm a 25 year old guy trying to figure out how I'm going to buy a home in New Jersey! At first I had contemplated a "fixer upper" because I thought I would save quite a bit of money if I went that route. I'm very good with my hands (worked construction summers in high school and all through college) and my future father-in-law has been in the custom design/build business for over 25 years. The problem I'm facing right now is that I'm just out of school (I was on the 7 year plan ), I've just finished paying off my debt, and trying to save for even a 10% down payment on a home is quite daunting for my fiancee and I. After agonizing over mortgage calculators for the past few months, I've come up with this plan, and I'm asking that folks please read and comment:

As some of you may or may not know, Lowes is offering what they call "Katrina Cottages," which are small, low cost, easy to build dwellings intended as an alternative to FEMA trailers for victims of Hurricane Katrina. These homes are sold as "kits" which do not come pre-assembled or pre-cut, but rather as a complete materials package. In other words, Lowes delivers to your site the exact amount of materials you need to construct the home. The package includes EVERYTHING from lumber and nails to roofing and siding to the appliances/fixtures and kitchen cabinets. The largest of the homes is a two bedroom, one bathroom 936 square foot, two story home somewhat reminiscent of a "Salt Box." I've spoken with the commercial sales desk, and the ballpark figure for this particular model is $36,000 depending on options chosen. Obviously commodity items like lumber change prices frequently also. However, whether the final price is $36,000 or $40,000 it doesn't matter much to me.

In some preliminary talks with a masonry contractor recommended by my fiancee's father, I've determined that a poured concrete foundation (full height basement) for the footprint of the home will cost between $8,000 and $10,000 complete (excavation, materials, labor, foundation drains, etc...), which brings the total cost of the home to $50,000. Once the foundation has been completed, my fiancee's father and I would take over. It is my understanding that most reputable loan companies will only write construction loans for homes being built by licensed contractors, which is why my fiancee's father will be involved, besides his expertise. I will be doing a majority of the work save for a 2 week stint he intends to devote to the construction on his vacation.

Once the home is on its way to being completed, I will "farm out" the electrical, plumbing, and HVAC work (the HVAC equipment is NOT included in the package, so that adds another $2000) to contractors who are associates of my fiancee's father. He assures me that for a home this size, plus the fact that all materials will be on-site waiting for them, their labor will only cost about $5000 total. The total cost is now up to $57,000 for the high end estimate. I would figure in another $3000 for the labor and materials to hook up to sewer, water, gas, cable, electric, and telephone to round the cost to $60,000. Again, for the sake of round numbers, I'll bump the cost to $65,000 to account for permits, fees, and incidentals. The $700 cost of the plans is refunded once you buy the materials so not to worry about design costs.

Of course, in order to spend $65,000 you need somewhere to PUT the home of course, which isn't all that easy in New Jersey, but I should be able to find a small buildable lot with available utilities for $80-100K. Even if the lot costs me a full $100,000 the home will be totally move in ready (minus landscaping, which I would just pay for in cash and do myself) for $165,000. A brand new home with brand new appliances for the price of a half decent mobile home! So, since I have a plan, how can I finance it?

My number one concern is down payment. I'm hoping that since this is a relatively small loan compared to other construction loans that I can find a relatively low down payment. Are there reputable lenders who will finance a land purchase AND construction with say, 10% down? Also, if I get a good deal on the construction loan, does that mean I'm going to get robbed when I convert to a mortgage? Do I have to stick with the construction loan company when I get the mortgage, or can I go somewhere else? Also, how does the equity of the home, once its finished, work with the mortgage? I know that I can construct this home for $165,000, and if I put 10% down, I'll eventually be taking out a mortgage (when I convert the construction loan) for $148,500. A brand new home, albeit a small one, in the area I'm building with the options I plan on will surely appraise for $200,000 if not more, so does that mean I will have $68,000 ($16,500 down payment + $51,500 difference) in equity in the home? I'd like to be ahead of the game so that 5 years down the road I could add on using a home equity loan.

If anybody has any comments on this scenario I'd sure appreciate it. Any glaring issues, problems, concerns? Does this seem like it could work?
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Old 09-18-2007, 09:24 AM
 
Location: California
510 posts, read 2,278,835 times
Reputation: 366
Bank of America has the best retail construction loans bar none. However, they will be concerned with an owner/builder loan. Odds are slim you will get the loan without having a general contractor oversee the project. This means plans, permits, construction contract, cost breakdowns etc... Call them and discuss options.

In addition, Indymac has some amazing construction loans as well. I'm not sure if they are available on the retail side, but you can call local mortgage brokerages and ask them first if they do construction loans, then second if they use Indymac.

Both of these lenders will offer a construction to permanent loan, which can include the purchase of the land. It's generally expected that the overall finished product will be worth more than you put into it, so often they want to see you invest 5% of your own money. Sometimes up to 10%. The const to perm loan will allow you to take out chunks of money for each portion of the build. You will have all of your interest and everything rolled up into the loan, so you won't have any payments at all during the process. Once you get your final completion cert your new permanent loan will start. They will have called you to discuss which loan you want as you near completion. You will not have to re-qualify, you will just choose the loan you want. 30yr fixed, 5yr fixed, 30yr fixed 10 year interest only...etc... There may or may not be a prepay on this loan, so if there's not you could always refinance it. However, odds are you'll get a very good loan and won't want to refinance it if you get approved with BofA or Indymac.

The only problem you may run into is the type of home you're building, although to me it sounds like it's a real house, just that you have the blueprints and materials prepared ahead of time. Do as much research on the home first, and find out if it's really not a pre-fab home, and it's actually a home to build just like any other. If this is the case, you'll be much more likely to get a loan.

Good luck!
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Old 09-18-2007, 10:12 AM
 
Location: High Bridge, NJ
2,762 posts, read 4,510,114 times
Reputation: 1982
Jeff-thanks for all the info! I think I understand more about construction loans after reading your post than I did after doing days of research online! To be clear, the Katrina Cottage is not a kit, pre-fab, manufactured, modular, etc... Basically what they have done is commissioned architects to design the homes and come up with a complete materials list. Initially you purchase the complete set of drawings and plans for $700. Once you purchase the materials, the cost of the plans is refunded. The materials list simply takes the guesswork and time out of estimating material costs because it's already been done. You just have to receive it at the jobsite and build. Nothing is pre-done (ie: lumber needs to be cut, nailed, etc...), you simply have all the "raw" materials you will need in order to construct the home.

My biggest concern is money down-if Bank of America will lend me 95% in order to purchase land, buy materials, and pay labor I'm set to go. Obviously the owner/builder aspect is an issue, but I fully intend to use my fiancee's father as the supervisor of the project anyway. I will be doing a majority of the actual work, but not without his advice and consent prior to and approval afterwards. The plans will be taken care of by Lowes as we won't be deviating from them, the permits are easy enough to pull, and the materials list is already done. That simply leaves cost breakdowns for the foundation and the labor for subs (electrical/plumbing/HVAC), so I think if we go there prepared we'll be ok.

Jeff, if I may, I'd like to ask one more question. I see that Countrywide offers 5% down construction loans as well. Now I know from watching the news that Countrywide is in trouble because of mortgages they lent in the past. What does that mean to me? Does the fact that they are in financial trouble mean anything to me as long as I only take out a loan with them that I know I can handle?
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Old 09-18-2007, 12:42 PM
 
Location: California
510 posts, read 2,278,835 times
Reputation: 366
Countrywide won't be going anywhere. They are one of the biggest lenders out there, and worst case someone will just acquire them.

The most important thing is that you tell them you have a contractor to oversee the project. Assuming your fiance's father is a licensed contractor. Other than that everything you've stated will allow you to fit into a loan. I fully recommend a construction to perm loan. Call BofA, Cwide, and possibly a broker. I'd go to Bank of America first. My best friend who is essentially self employed within a brokerage did his own personal construction loan through Bank of America. They gave him a better deal than he could give himself doing essentially a free loan.

Feel free to PM me throughout the process if you want unbiased answers, as I'll have nothing to gain by your loan.

The 5-10% down loans are out there, now it will mainly be up to your qualifications. Be sure and have your last two years W2's with you, as well as a full months of paystubs from your job. You'll want to also have a contract from your father in law as the main contractor. He should be familiar with this, assuming he's done builds in the past.

I think you're good to go...(don't forget my rep point! - weeee rep point beggars unite!)
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Old 09-18-2007, 12:49 PM
 
2,758 posts, read 5,654,585 times
Reputation: 2860
Have you already scoped out an affordable and buildable9sewer and water) lot where the zoning will allow what you are proposing? Biggest problem here with all the building regulations and zoning requirements.
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Old 09-18-2007, 01:06 PM
 
Location: High Bridge, NJ
2,762 posts, read 4,510,114 times
Reputation: 1982
Quote:
Originally Posted by UseJeff View Post
You'll want to also have a contract from your father in law as the main contractor. He should be familiar with this, assuming he's done builds in the past.
I'll be seeing him this weekend to talk about the project some more. He was in business for himself during the 1980s/90s and GC'ed more than a few homes, and then he eventually signed on with a large design/build firm in the Morris County area and is now a project manager for them. Most of the homes they build are in the $$$ areas of North Jersey and tend to go for a million plus. I'm hoping that when the lender sees those qualifications they'll have no problem approving my measley $150K construction loan!

Quote:
Originally Posted by sweetana3 View Post
Have you already scoped out an affordable and buildable9sewer and water) lot where the zoning will allow what you are proposing? Biggest problem here with all the building regulations and zoning requirements.
We've looked at a few lots and basically you can get a buildable lot with public water, sewer, gas, electric, phone, and cable, for around $80K give or take. Not a large lot, but this isn't going to be a large house either. One I have my eye on is 50' x 143' - perfect for the 26' x 26' footprint of the home. The other nice thing is that since the cottages have a very classic look they fit well in a variety of neighborhoods.
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Old 11-13-2007, 10:42 AM
 
1 posts, read 11,502 times
Reputation: 10
Default katrina home

Badfish,

How is the project going? I bought land in TX (10 concurrent lots) and the plans (KC888) from Lowes. My goal is to build a mixed-use block using the various plans from Lowe's (omitting the "Katrina" aspect!)

I am experiencing difficulting getting the promised "complte materials list" from the local (Marshall, TX) commercial desk.

The desk manager is resonsive, but sends me indeciferable (sp?) multiple -paged lists of materials in Lowe's computer-speak, followed by a call asking "is that everything"?

I don't know if "that is everything", and I'm mostly familiar with what it takes to build a house. (I'm not a CG, but these plans are pretty simplistic)

Anyway, how did your materials list check out? I am interested in your project progress. I,too,am currently in the NYC/North Jersey area too. The TX properties are to be used as investment/rentals!

Chris
973 769 6721
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Old 12-01-2007, 12:48 PM
 
1 posts, read 11,399 times
Reputation: 10
Chris,

Chili Pepper! Email me!
joehotchie@hotmail.com

Joseph M. Hotchkiss
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Old 05-09-2008, 08:43 PM
 
1 posts, read 10,784 times
Reputation: 10
Badfish740 & UseJeff I have to tell you thanks. I to have been researching the Katrina Cottages and fallen in love with them, but do not know how I am going to arrange financing. You both have really enlightened me. I wish you the best of luck. Please keep us posted as I will be looking for you if I can find this site again. I have also recently fallen in love with my PC, nevering having touched one till a couple of months ago. LOL
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Old 06-17-2008, 10:29 PM
 
4 posts, read 16,480 times
Reputation: 10
Default katrina cottage experience?

Has anyone actually gone through the process of building a Katrina Cottage in California? I am interested in building a rental on a double lot in Stockton. I like the speed and style and, what I think is, the affordability of these cottages...but I am sure there is more trouble involved than the breezy articles indicate.
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