8 Costly Mistakes I Learned While Building a House. BEFORE and AFTER photos.

Have you ever thought to yourself, “It would be fun to build my own house!”

I encourage you. If you have the resources and time. In the end, it is very rewarding!

I love real estate development and investment. I have been doing this for 12 years, working at a boutique real estate development firm here in San Francisco.

Being involved in all phases of the development life cycle gave me the confidence to do my own projects. My focus was on mixed-use multifamily and hospitality projects.

I love it because it is such a dynamic industry, allowing me to wear many hats in one day, engage in creative problem-solving, troubleshooting, and always learning.

Recently, I sat down and was going over my fat folder of notes trying to figure out what valuable lessons I have learned.

I sincerely hope this will help other people to save time and money.

I and a friend of mine decided to build a house. This particular house took 3.5 years, from acquisition, entitlements, permitting, to construction and sale. This included an 8-month delay with 4 public hearings due to neighbors’ opposition and the City’s additional requirements.

How much does it cost to build a house in San Francisco Bay Area?

The bank usually finances 75% to 80% of the total cost. The land is purchased with your money, and the bank can credit you the land money back. Hence, it is helpful to negotiate a long-term closing to minimize the risk and upfront cost.

Check out the 8 real estate strategies I summarized in another post.

Okay, here we go: 8 costly lessons when building a house or any project.

1. ZONING — Ask a lot of questions, and confirm the fundamentals. Make sure the Planning and Building department feels comfortable with your proposal upfront, before you purchase the land. Confirm the new utilities approval process and the fees.

We were short about $25,000 in additional engineering reports that the City required, and on the City Fees (this was impossible to know upfront). The City does not know the exact fees either as it is project-specific.

Fortunately, we had contingencies that the bank approved. If there are any CEQA studies (California Environmental Quality Act) or anenvironmental impact, the fees go substantially up.

2. CITY — Think delays. Summon your patience and polite communication skills. Neighbors’ opposition can and will prolong your approval process for months. The city is not incentivized to move your project forward.

We added some $15,000 for additional studies such as drainpipe inspections, geotechnical reports, story poles, detailed civil engineer storm drain plans, encroachment and grading permits. We also had to involve a land use attorney on certain issues. Don’t be afraid to have your attorney take action. Sometimes the City thinks they can do whatever they want until the attorney gets involved. Be cautious though to walk this line.

3. NEIGHBORS — Network with neighbors, find out who is a nimby (“not in my backyard”), and why would they oppose. Be a good listener, be super nice. Small arguments can easily escalate into an energy sucking war. No one likes changes and everyone has an agenda. Try to find what is it that you can help them with, or make them comfortable with your proposal. Shadow, privacy, parking, aesthetics, facade color, you name it.

We added $20,000 in legal fees (mainly strategy and communication advice) due to neighbors’ opposition.

4. BUDGET AND FINANCING — Added 10% contingencies. Understand Owner’s allowances (for items you will buy or do yourself). Think about what can go wrong. There are City impact fees on top of standard review fees (eg. School, infrastructure fees, local utility company fees). Some General Contractors only build up to the property line, so any utility trenching, fence, or landscape, might be outside their scope.

We added $30,000 in Owner’s allowances and we did most of the work ourselves. Have some cushions in your budget. Landscaping is expensive, get some bids early in the process.

Financing — clearly, get pre-approved first and understand the additional fees the bank will charge. Any prepayment penalties, interest reserves covered, cost of an appraisal, timing to close the financing, draw schedule, and inspection fees. I contacted 22 banks, from which only 3 were willing to finance our project (this was an investment “spec” home). You will find the right lender if you look.

5. CONSULTANTS — Think scope. A&E (architects and engineers) do make mistakes. Define specific deliverables — what is the final product? Are there additional studies we should be aware of? Vague, lump-sum proposals are absolutely unacceptable.

Always ask the consultant to break it down into phases, and break down the scope. Insist on a “not to exceed” fee. Anything “T&M” (time and material basis) is completely outside your control. Of course, sometimes you have no choice, but try to put cap on this. Anything above the approved budget has to be approved by Owner in writing.

We only had $10,000 in additional A&E fees for additional site visits and reports.

6. GENERAL CONTRACTOR (“GC”)— Think change orders (amendment to contract reflecting changes in the scope of work). Be clear on the scope of work, exclusions, and Owner’s allowances. As mentioned above, be very specific on the scope and in the Contract with the GC. Define the construction schedule. If there are delays, use them as leverage to negotiate on change orders.

But remember, this is a two-way street, be reasonable and don’t pick unnecessary arguments. It’s also about trust. You want to keep your relationship with GC as friendly as possible. However, don’t get pushed around, and demand an explanation of change orders.

We added some $11,000 of change orders due to unforeseen items, such as soil conditions, pier foundation, and some additional soil off-haul. This represented less than 2% of our construction cost. Typically you should budget 5–10%.

7. MARKETING AND SALE — Finally! After all the hard work you get to have some fun with marketing. Call local brokers, and understand the market and pricing. Staging can also be arranged as partial, and if you have a nice product there’s no need to do a full-blown $6,000 staging. Pick an escrow company that communicates well and provides good guidance and an up-front fee estimate.

Inspection costs can range between $500 to $2500. It helps to have some done by yourself, but the buyer will do their own inspections as well.

8. DISCLOSURES, LIABILITIES AND WARRANTIES — Last, but not least. Talk to your land use attorney and the listing broker. Obtain disclosures of other new construction homes on the market. Be detailed, and disclose everything to avoid future “misrepresentation” claims. Our disclosures comprised over 1100 pages and 44 items on our list. This included all City approvals, reports, inspections, revisions to plans, even communication emails. Land use attorney’s help can be easily $5,000 — $10,000.

Few Final notes:

• Certificate of Occupancy — Communicate with the City ahead of time to find out what is needed to issue this certificate, as this can take weeks.
• City Inspections — Communicate with the Building Department as to who the inspector is and try to get a schedule of inspections. Your GC might miss some. Such as property staking, foundation rebar, blocking before you pour, after you pour concrete, electrical before you close the walls, etc. I know what you are thinking, the GC should know — well, that is not always the case.
• City Departments — City Departments don’t talk to each other. For example, Public Works is a separate division from Building and Planning and so on. Be proactive. Lead the process.
• Utilities — PG&E is big headache in California. The approval process takes 10 to 12 months, so be proactive. Also the sewer capacity fees here are a $33,000 item. This is just for the right to connect to the system. Also, clarify with the GC what the plan is regarding temporary power to avoid delays.
• Notice of Completion (NOC) — This document is important to file to put everyone on notice that this job was completed, and to make sure everyone was paid. This is mainly to protect you from the mechanic’s liens of subcontractors.
• Lien Release — have all subcontractors and the GC sign final conditional, and subsequently unconditional, lien release stating that everyone was paid and there is no money due to anyone.

Whoa! If you made it here, I applaud you! Certainly, there is more to building a house, and this is just a compressed summary.

Whether you build one unit or two hundred units, the process and energy it takes are pretty much the same.

Would I do it again?

Absolutely. While this process is an energy vampire, it is also very satisfying to see your house standing where there was once vacant land.

I am happy to help you with your project.

Most importantly, don’t sweat the small stuff — it’s all small stuff.

See more photos below.

About the Author

Hi there! I‘m Tomas Janik, a real estate investor, developer, hospitality, and proptech enthusiast.

I love learning about and exploring new business ideas.

If you’re thirsty for valuable insights on real estate investing, proptech, and hospitality trends, then buckle up and hit that follow button! Trust me, you won’t regret it.

I am the founder of RitzandHammock.com, an early startup focusing on converting vacant commercial spaces into cash-flowing assets.

Connect with me on Linkedin.

Happy reading, my friends!