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I'm not sure if this goes in the RE forum or here.
Please shoot down my idea.
We're looking to purchase a house near the downtown of a medium-sized coastal town. There are only a half-dozen houses for sale in the area we want to live, and most are 100K to 800K above our budget. Occasionally one pops up within the realm of affordability, but it is usually in need of rehab and snapped up at well above asking by investors.
A parcel of land in the perfect location is for sale for about half of our total budget. Using a--probably totally unreliable--homebuilder website, I came up with a cost estimate for a 1200 sqft house under the other half of our budget.
So, instead of buying an existing house, why don't we simply purchase this parcel and build our little dream bungalow?
Obvious drawbacks:
The land is near the crest of a steep dirt hillside (70-degree slope) which will require considerable engineering to even build a home there. There are dwellings on both sides, so it's clearly possible, but I have no idea what the cost will be to either remove probably around 15,000 cubic feet of dirt and rock and install retaining structures, or sink pilings and somehow build this thing atop the steeply-sloping land.
The neighborhood is very fancy with many historic homes. There may be significant building restrictions or requirements.
So, why else shouldn't we even consider doing this?
You know nothing about the land. Can it even be built on?
Acquiring the land may be easy. Building a house on it? That's another story. With deep pockets, anything is possible but then again, you are looking to save money by building versus buying an existing home.
If it were worth doing, someone else who could afford much more would already have done it.
Engineering alone would eat up the rest of your budget.
That's probably true. Not only would they have built, but they'd have built condos, townhouses or a 1.5M house.
Anyone know an estimate if the cost of earth removal per cubic foot, and hillside stabilization? The hill (more like a cliff) descends to the street and is only about 30 feet high, so it doesn't seem like a slide risk (to a layman). A hobbit would be right at home tunneling a dwelling into it.
There are formula / generally accepted ranges of land value to total built-out cost that are important to lenders and even, for a variety of reason, future value considerations.
In this case the OP is clearly unaware that spending HALF one's budget on land and then LESS THAN THE other half on some "building project" will not pass muster with lenders NOR will it result in a home that is likely to be equal to "budget". If the OP were NOT a "first time home owner" longing after homes "$100k to $800k over our budget" I might suggest that it is more reasonable to allocate about 1/3 of ones budget to land and about 2/3 to the building...
The caveat that prevents from doing even this for a first time home buyer is the natural tendency for building projects to end up consuming 1/3 for land and 3/3 for the building -- being about 4/3 of one's budget or leaving you with your about 33% negative equity and/or a partially unfinished house...
The thing too is that even if this was NOT a first time buyer but someone with all the "stuff" to end up with a fully finished house (or at least the experience to understand what really and truly was on the 'even if we can't afford it we have to pay for it' list...) there is a big problem with trying to get anything built for "generic" over the interweb price estimates. These estimates often assume things that even the best case have too much local variability and/or result in a house so barely meeting code / habitability that no municpality would sign off on them.
Even worse in this case is the FACT that considerable "site work" is likely required to allow for any structure to be constructed on what sounds like a dangerously sloped site. Site work is one of those things that often KILLS even experienced "geo technical" engineers' preconstruction estimates because the sequence of removing surface soils to reveal if a sloped site has any hope of supporting a structure economically will often reveal hidden problems like sand / loose gravel that may necessitate expensive operations to reach a stable material. Once end up siting pilings and such you are really closer to a COMMERCIAL construction project and the rest of the estimates then have to scale up to that and you toss out the residential estimate all together...
Finally the unique situation described by the OP, of having existing house that are "very fancy" AND "part of historic" district very well may preclude the construction of a "little bungalow". It is rather common for these areas to have, beyond "zoning" and "building code" requirements, some sort of "architectural review committee" to ensure that size / appearance / buidling techniques are in keeping with the unified look of the special area. Even if there is no such committe it would NOT be wise to build something will A) be upsetting to your new neighbors B) be out of character with existing homes and diminish the appeal of this historic area C) have signficant deviation from area pricing norms and be dificult for future buyers to accurately judge a fair price...
Without addressing the technical details (there are others here that are far more capable in that area), I'll try to touch on a few reasons.
First of all, this is your first house. I don't know what age range you are in, but let's assume that you are still closer to the beginning of your professional career than to the end. When you build a home - or have one built for you - you are investing a lot of emotion into that piece of property. Four or five years from now, when you get that career chance you've been waiting for, how is that emotional investment going to affect your decision of whether or not to take that dream job?
Point the second, where have you been living up until now? Apartment living is much different from living in a house, and living with family is much different from having your own place. You may have an idea in your head of what you want the new house to be, but is it realistic and will it be functional? These are things that you learn by experience, and what looks good on paper may be absolutely horrendous in reality. Living in a pre-built house helps you to pick up on those things that could turn out to be either minor annoyances or serious issues that make you want to grab a gas can and a match.
These may not be good enough reasons to not build your first home, but they are issues that need to be thought about before signing away a substantial portion of your income for the next decade and a half or more.
Just seem like too many variables going your route, vs. finding a house and agreeing on a price.
And keep in mind, a lot of project costs, estimates, and time, usually go above and beyond what is allocated, unless you really find a very reputable and proven team, from the engineers to contractors.
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