…Your Own Home? Think Again.
It is the American Dream to own your own home … and many people think they will save an enormous amount of money by building their own. This could be a costly mistake financially, emotionally, and physically. Many aspects need to be considered and the purpose of this brochure is to help you think about avoiding some of the pitfalls and what you can do to make this a suc-cessful undertaking. There are several questions you will need to answer. Our hope is that you will be helped by this publication. Ask yourself….Do I really have the time to undertake a project so time con-suming? Is it worth the time? How stressful will it be on my family? Do I really have the skills to build a home properly? Do I have the correct tools for those jobs I plan to do? If not, how much money will I spend on those tools? Will I use them again once the home is completed?
Your home is the single largest investment you will make in your lifetime. Do you have the expertise to make sure this home will last you a lifetime?
Arranging and applying for a home loan can be quite involved and should be one of the first orders of business. Even if you feel that you have enough cash to do the job, apply-ing for a home loan to allow for inevitable overruns due to increased material and labor costs or upgrades is always advised. Most mortgage companies will not lend money to cover the unanticipated costs on a home on which construction has already begun. As a self-contractor, some lenders will not lend you more than 80% of the projected cost of your home. House plans, specifications and an itemized list of docu-mented costs and bids must be provided to the lender. In calculating costs, do not allow for “sweat equity” as most lenders do not recognize this as a legitimate cost.
IRS: The IRS requires that you send any sub who earns $600.00 or more a 1099 form at the end of the year. In the event you are au-dited, be prepared to prove that the sub is an independent contractor – that is, you did not have to supervise his work and you did not dictate what time he reported to the job. Tracking Materials Purchases: It is very im-portant to be on the site or have someone you can trust to document delivery slips. Returns must be accounted for since inaccurate billing can run up costs. You will need to check all invoices and account for all materi-als. Waste can add hundreds if not thou-sands to the cost of your home.
Do not take this area for granted. There is much more to building a home than meets the eye. Be realistic about your level of skill and the amount of time you can spend on the jobsite. Base your decision to put “sweat equity” into your home, consider your experience, skills, available time and the amount of stress you and your spouse are able to manage. Your ability to handle long-term disrup-tion of schedules is just as important as your ability to swing a hammer. And there’s more!
Deposits will be required by all utilities before construction can begin. Make deposits early as some may take weeks to get their services connected.
Do you know why builders carry Builder’s Risk, General Liability and Workman’s Com-pensation insurance on all of their building projects? Because they know what their liabilities are and YOU, as a self-contractor, may have to assume the same liabilities.
The mortgage lender will require this type of insurance which covers the home materials only (no bodily injury, etc.). Upon completion of the home and closing the loan, you will want to convert this policy to a homeowner’s policy. Your lender or insurance agent can explain this to you.
Your lender may or may not require this type of insurance, but as a self-contractor, the permit purchaser and the property owner, YOU are responsible for any third party injuries that may occur on your property. Without the proper general liability protection, YOU will be held liable if anyone gets injured on the project, including children injured while playing on the job site.
If you are not in the business of building homes, you may not be required to carry workman’s compensation insurance; however, it would be prudent to require any sub-contractors you hire to provide certification of their workman’s compensation coverage. Also, it is important to know that any sub-contractor who employs any number of workers is required by law to carry workman’s compensation insurance.
Do not accept a release of injury in lieu of a sub having workman’s compensation insurance as the release may not be binding in a court of law.
Requiring the Minnesota Building Code statewide means that every citizen in Minnesota, whether hiring a licensed contractor, an unlicensed contractor, or doing the work themselves, will still be required to build the structure according to the Minnesota State Building Code.
There is an issue which has been of increasing concern to property owners … there is a fine line between being an employer and a do-it-yourself minded builder. A recent case in Oregon ruled that, since the property owner was serving as their own general contractor and had the right to control the worker, they were employers and therefore liable for workman’s compensation insur-ance. This presents a legal issue about which property owners should be knowledgeable. Your attorney or insurance agent can explain this exposure to you.
Be prepared to spend at least 35 hours per week for probably 5-6 months. This is calcu-lated for an average 1,500 sq. ft. home. If the home is larger, figure accordingly. Does your present employment allow enough flexi-bility to spend this amount of time away from your job?
Selection & Scheduling of Subcontractors
Remember subcontractors have other jobs in progress besides yours. Their loyalty may be to those builders that give them the most work during the year. Will they be available to you at the proper time? For example, do you have the toi-let installed before or after the flooring? One sub cannot do their work until another has completed theirs. Delays are costly, frequent, and frustrating.
Do you really know how to properly analyze a cost break-down? Are you able to distinguish high bids, low bids and work quality? Are you allowing for all of the materials you’ll need? For example, everyone knows to buy tile … what about grout, thin-set and spacers? Is everything that will be needed to complete the task included in the bid? Do you know enough about the work to realize if it’s not? Remember, the lender will require that your cost break-down be documented and if you have not projected costs efficiently and run short of funds, the loan amount cannot be adjusted after it is approved.
As the general contractor of the home, it will be your responsibility to hire qualified, licensed, insured and/or certified subcontractors. Do you have the technical expertise to oversee if the work is done properly? If, after inspection, the work is rejected by the Codes Department, who will absorb the cost to redo the work? While this work is being redone, time will be lost, and other subs may have to be resched-uled.
Occupational & Safety Health Administration (OSHA)
As the general contractor of your own home, you can be held responsible for all sub-contractors who do not adhere to the construction site OSHA safety require-ments. Specifics such as regulations involv-ing stairways and ladders have been a ma-jor source of injuries among construction workers. OSHA has set out about 17 detailed rules that govern stairway and ladder use. Other OSHA standards for a ‘job site include postings of emergency numbers and instructions in the event of an injury. If your job site became the target of an OSHA inspection, penalties for any infractions could be very costly. For example, in Texas one inspection of a single home under con-struction resulted in $20,000 worth of cita-tions. (Source: NAHB Business Management)
The 2010 Minnesota Statute 327A.01 Hous-ing; Statutory Warranties, effective Aug. 1, 2009, requires builders of new homes to provide certain warranties that extend over periods of ten years, depending on the nature of the defect. If you build your own home and sell it to another party, you will be responsible for any of the legitimate defects within the given 10-year time frame. In the case of your death, your estate would be responsible for claims. As far as the law is concerned, you will be the builder and responsible for claims brought by subsequent owners of the home. For a copy of the New Home Warranty Act, contact our office at (218) 722-5707.
In the event any of your subcontractors fail to pay their suppliers or laborers, a lien can be filed against your property. A lien is a claim against a piece of property and can cloud the title or deed to the property. These suppliers and laborers, if not paid, can file a lien against your property, even if you have paid the sub-contractors.
Building permits and periodic inspections are required even if you are self-contracting. It can be a tedious and frustrating experience if you are not familiar with the system and all of the “red tape” requirements, which must be complied with before commencing work. Mistakes here can be costly and time-consuming.
Minnesota State Building Code and Building Inspections
As of August 1, 2008 the State Building Code is required statewide. Anyone building a house in any part of the state must build it according to the code. The only exceptions to this new law are agricultural buildings. These codes are rather detailed and complex. Failure to comply with these codes can result in your project being shut down, fines & penalties. Before you under-take to build your own home, you should have a thorough understanding of these new building requirements or hire a li-censed professional familiar with these codes.
This article is provided by the Arrowhead Builders Association in an effort to promote public safety and awareness.