The problem of financing the small house is a part of the problem of
building, and to some extent is a very personal affair, and every
prospective owner has his own difficulties and personal solutions.
Those who have saved for a number of years enough money to invest in
this adventure of home-building are quite simply fixed, and all that
they need consider is how large a house they can have for the money
saved.
A method was shown in an early chapter by which the approximate cost
of a house could be determined when the plans were in the rough. This
consisted of studying the houses built in the neighborhood where the
new home was to be erected, calculating their cubical contents and
dividing this into their total cost, so that their cost per cubic
foot could be known. By comparing this result with the figures which
the local builders had offered, a fair idea could be obtained of how
much per cubic foot the new house would run. A few figures were given
for the different types of construction, but nothing certain can be
predicted from them, for, as was pointed out, the cost is definitely
related to the locality and the time.
Once, however, having arrived at a reasonably correct cost figure for
the cubic foot, the question of how big a house is to be had for the
money is quickly determined. Divide this cost per cubic foot into the
total sum of money which is to be used for building the house, and the
allowable number of cubic feet in the new house will be found. If now
the average height of the new house, from the cellar to the average
height of the roof, is divided into this allowable cubic contents, the
allowable ground area for the plan will be known.
For example, suppose the sum that can be invested in the house itself
is $10,000, and it is found that the houses in the locality, of similar
construction, cost per cubic foot about 35 cents. Dividing 35 cents
into $10,000, it is found that a house having approximately 28,570
cubic feet can be constructed. If 8 feet is allowed from cellar floor
to level of first floor, 9 feet from first to second floor, and 13
feet from second floor to the average height of the roof, then a total
average height for the house will be found to be 30 feet. Dividing this
30 feet into 28,570 cubic feet, it will be found that a floor area of
approximately 950 square feet can be had. Now, as the floor area of
the plan of any two-story house is determined by the area required for
the second floor and not the first, the desired sizes of the various
bedrooms should be approximated, and the results added together to see
whether they come within the allowable floor area. Continuing this
example, suppose that the master bedroom is to be approximately 14 feet
by 15 feet, the other three bedrooms approximately 12 feet by 12 feet,
the toilet about 7 feet by 10 feet, the hall about 8 feet by 12 feet,
then by adding the area of these rooms together it will be quickly
found out whether the allowable area has been exceeded.
Master bedroom, 14 feet by 15 feet 210 square feet
Three other bedrooms, 12 feet by 12 feet 432 “ “
Toilet, 7 feet by 10 feet 70 “ “
Hall, 8 feet by 12 feet 96 “ “
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Total 808 square feet
This number of square feet is within the amount allowed, which is 950,
but additional area must be added to this for closets, say 3 feet by
4 feet for the closet of the master bedroom, and 3 feet by 3 feet for
the closets of the other rooms, and other closets for linen and space
for chimneys and the like, making about 60 square feet, which should be
left for this part of the plan. This makes the area about 868 square
feet, and no allowance has been made for porches or passageways. It
is quite evident from this that the number of bedrooms desired, their
approximate size, and the size of the toilet and closets is nearly
up to the maximum which the limitations of cost will permit. Working
with these approximate figures, the plans of the house can be roughly
prepared, the area required for the second-floor rooms being used as
a basis for the allowable area of the first floor, since it is more
than enough, for the second-floor area of a house, as has been said, is
always greater than the minimum area for the first floor.
When roughly prepared plans and elevations have been arranged on this
basis, the cubage can again be checked, and if it is over the allowed
amount, the size should be cut down; if under, increased. The cubical
contents of porches may be computed at one-quarter of the cubage of the
main portion of the house, but if enclosed with glass they should be
estimated at their full cubic contents.
Having thus roughly arrived at the plans and elevations of the house
which is within the allowed cubage, a rough outline specification
should be prepared in which the essential materials, workmanship, and
mechanical equipment are defined. Enough information will then be had
from which a rough estimate can be secured from a local contractor, or
even the architect may make an estimate, based upon previous examples
of other houses. If this rough estimate comes within the allowable
figure which is to be spent for construction, then the contract
drawings can be safely started, and a reasonable assurance can be had
that the cost of the house will not go beyond the amount of money
available. As most contractors will give an outside price on any
preliminary estimates of this kind, unless radical changes are made in
the plans, it can almost surely be the case that the final estimate on
the contract documents will be less. However, there are often times
when the final figures exceed these preliminary estimates, and one
should always be prepared to shrink parts of the building or withdraw
some of the finest requirements of the specifications.
But one of the prime essentials in financing any building operation
is to be sure that the contract drawings contain everything which is
desired in the finished building, and that none or very few changes
are made in the building after the contract is let and the building
is in process of construction. Alterations from the original plans,
after construction work has begun, come under the bugbear title for
all architects, “Extras.” They always mean waste of money. Likewise,
things which were omitted from the plans and specifications, which
are later found to be necessary, run up extraordinary bills, and the
general impression which most people have that a building operation
always costs more in the end than was originally counted upon is due
largely to the neglect of these factors. Competent architects make such
complete plans and specifications that extras of the “omission type”
are avoided, but most small houses are built from plans that are not
complete, or prepared by architects who sell their services at such low
rates that they cannot afford to take the time to check up the plans
carefully. It is right here that the architect has a real business
point to give the client, namely, that if he does not pay for carefully
prepared plans and specifications in the beginning, he will pay out
much more in the end for extras.
Up to this point the financing of the small house, for the one who
has the money, is not complicated, but this is the unusual condition,
because the average person who builds the small house has not the ready
cash to put into it, for that is the reason he builds a small house.
The average individual who builds the small house generally has a
certain amount which can be invested and the rest must be borrowed, and
there are many who advise that even if one did have the whole amount to
invest, it would be better to borrow some for the building operation,
and keep out as much as possible for investments in other lines where
the money might bring in greater returns.
The problem naturally turns upon where and how much can be borrowed for
the building operation. Here again a very personal matter is involved.
Some will have very close friends from whom they can secure a large
first and second mortgage at a fairly reasonable rate, others may be
able to secure a first mortgage from some financing institution which
will be an amount equal to one-half the total cost of land and house,
and then they may be able to secure a second mortgage from some friend,
for most business houses are not prone to take second mortgages. Often
a greater sum can be raised on the contract system, for by this method
the person lending the money is more certainly assured of securing
quick control of it in case of the necessity of action when payments on
the interest fail. By the contract method, the individual lending the
money holds the deed of the property, and can secure control of the
property more quickly than if he had a mortgage and the owner held the
deed. In many cases where foreclosure of mortgages are found necessary,
there may be a delay of a year or more before the money-lender can
secure control of the property, but if he holds the deed the delay
is shortened, and because of this fact he is apt to lend more money
than 50 per cent of the total value. Of course, in the contract method
the owner secures the deed to the property when his last payment is
made upon the principle and he has wiped out all of his interest
indebtedness.
But probably one of the most satisfactory systems yet devised for
financing the small house is through the various building and loan
associations which have grown to great strength in this country.
These associations not only offer investment opportunities for small
investors, but they make excellent and easy terms for those to whom
they lend money for home-building. The arrangements with these
institutions make the payments on mortgages almost like the payments in
monthly rents, and yet at the same time the principle is continually
being reduced, so that in about twelve years it is completely paid
off. Then, too, one is assured of not being in the hands of some
unscrupulous money-lender, as sometimes one discovers a friend to be,
however trustworthy he may have seemed before this business relation
developed.
These building-loan associations will lend as high as 80 per cent
on the value of house and grounds, provided the character of the
individual in the community warrants it. Their average-size loans have
been computed to be about $4,000. If the minimum payment is adhered to,
the loan is usually paid up in twelve years, although arrangements can
be made by which this can be shortened. The interest charged is from 6
per cent to 8 per cent.
If the money is not secured through the above source, then it is
customary to pay a commission to the agent who secures a loan from
some financing institution or private investor. This commission
differs, according to the locality, ranging from 1 to 4 per cent on
first mortgages, and from 5 per cent upward on second mortgages. If a
contract is desired on a second mortgage, the agent will be obliged to
secure it from some private individual, for first-mortgage companies
will not purchase them. This often leads to discounts of from 15 to 30
per cent on second mortgages and contracts.
It is well for every prospective owner, before he considers financing
the construction of a small house, to sit down and figure out all of
the incidental expenditures which are connected with it, for often some
of the minor items are not taken into account, and they may spoil the
whole scheme. Taking a typical example, the items of expense are as
follows:
1. Cost of the lot.
2. Fee for title search.
3. Tax search and recording fee.
4. Possibly cost of surveying lot, but not always.
5. Broker’s fee for securing mortgage.
6. Interest on each advance of the loan during erection.
7. Cost of the building less the amount borrowed.
8. Architect’s fee.
9. Owner’s liability insurance.
10. Fee for filing plans in Building Department.
_Cost to be Met during Year of Ownership_
1. Interest on building loan.
2. Payment on reduction of loan.
3. Interest lost on owner’s money which he invested in
the lot and building.
4. Fire insurance.
5. Up-keep, usually about 1½ per cent.
6. Taxes on property and water-supply.
7. Possible assessments.
8. Maintenance cost, such as coal, gas, and electricity.
The above list of expenses should be frankly faced in the beginning,
tabulated, and duly considered by every prospective owner of the small
house. There are some architects who for fear of discouraging their
clients from building will not sit down with them and show them a plain
statement of the money they will have to invest, and when all of these
minor items begin to pop up during the progress of the operations, the
client begins to lose confidence, wonders where the next unexpected
bill will come from, and blames the architect for having misrepresented
conditions to him. Any prospective owner who has to be blind-folded to
the costs which he must meet in order to muster up courage to build
ought to be left alone, for he will do the architect no good, but
considerable harm. Individuals who have their castles in the air so
high that they cannot reduce their dreams to dollars and cents before
they begin, ought never to build. These are the kind that start the
cry that it always costs more to build than one ever figured on in the
beginning.
But coming back to the question of securing the building loan, it will
be found that nearly all lenders will insist that the owner put his
money in first. That is, he must meet the first payments to the builder
himself, until he has put in all of his share. The rest will then be
taken up by the financing institution, but always enough will be held
back to assure sufficient funds for the completion of the house and
the payment of all bills. The lender generally states at what periods
of the construction money will be passed over, and this schedule is
generally adopted as the one for the periodic payments to the builder.
Of course the contractor must be consulted on the matter and his
approval secured, but there will be little difficulty on this score,
for he will recognize the power of the financing institution to dictate
the dates of payment.
As to the matter of contracting for the construction of the small
house, there is little doubt that for so small a building the method
of securing one general contractor to assume the responsibility of
the whole work is the best. There are many who believe in employing
day labor, and hiring the services of a supervising builder. The cost
is itemized and the contractor adds a percentage as his share. This
insures better-class work, but in practically all cases it is more
expensive, and no assurance can be had of the final cost.
When the plans are let out to various contractors for bids, there
should be no obligation attached to them that the lowest bidder will
secure the job. This is a protection, for the human element often
enters into relations of this kind, and the lowest bidder may not be
the most trustworthy personage, nor have the best reputation.
When the contract is finally let, there are a number of things which it
should cover that are intended to protect the finances of the owner.
For instance, the contractor should be required to maintain insurance
that will protect him from the claims under workmen’s compensation
acts, and from any other claims for damages for personal injury,
including death, which might arise from the operations of building. The
owner should also maintain a similar liability insurance to protect
himself.
The owner should carry a fire insurance on the entire building and
materials to at least 80 per cent of the total value.
When there is doubt as to the financial strength of a contractor, he
should be required to furnish a bond covering the faithful performance
of the contract and the payment of all obligations.
Then, too, it is customary to set forth cash allowances in the
specifications to cover certain items, like plumbing fixtures,
hardware, and electric light fixtures. The contractor should be made to
declare that the contract sum includes these cash allowances.
Careful understanding with the contractor should be arranged as to the
method by which he will be paid. Generally, as was previously stated,
the financing institution has control over the schedule of payments,
and, once this is agreeable to the contractor, he should be required to
submit to the architect an application for each payment, with receipts
and other vouchers, showing his payments for materials and labor,
including payments to subcontractors, at least ten days before each
payment falls due. It is the duty of the architect to determine the
accuracy of each one of these applications for payment before he issues
the certificate of payment for such amount as he decides is properly
due. There are some architects who make it a practice to hold back a
certain percentage of the first payment, and continue this with every
later payment, until the last, in order to have a club over the head
of the contractor and also a factor of safety, lest the builder has
rendered an application for payment in excess of the amount of labor
and material delivered. This, of course, will cause hard feelings
sometimes, and create friction between architect and contractor, a
thing studiously to be avoided, and for this cause such procedure
should be dropped when the architect knows the character of the
contractor.
The architect should always reserve the right to withhold part or all
of the certificate of payment when defective work is not remedied,
or when any claims are filed, or there is reasonable evidence that
claims will be filed, or when the contractor fails to make payments
to subcontractors, or to dealers for materials, or when there is a
reasonable doubt that the contract can be completed for the balance
unpaid, or when any damage involving liabilities has been done by one
contractor to another. The architect should also hold back the final
payment, if there are any liens existing against the building, until
they are removed.
In order to avoid many of the trivial and annoying expenses which occur
in a building operation, the contractor should be required to pay
for all permits and licenses (but not permanent easements) which are
necessary according to local laws. The contractor should also be made
to pay all royalties on patents, if there are any, and all license fees.
But, probably, the most difficult part of the building operation to
finance are the extras. When something is found to have been omitted
from the plans and specifications, and the contractor did not cover
it in his bid, or when the owner changes his mind and requires an
alteration, then this extra work must be paid for at a high rate, for
nearly all contractors look upon such extras as good pickings. In fact,
there are some contractors who deliberately go over the plans and
specifications to note what extras may be needed, and then counting
upon their profits from these extras, they put in a low bid, so that
they can beat their competitors, secure the job, and then proceed to
make up their losses with bills which they put in for the extras.
Likewise, a contractor who is honest, if he finds himself losing money
on any building operation, will try to ease his losses and gain profit
with the extras.
There must, therefore, be some basis upon which estimates for these
extras will be determined. The values for these extras or changes in
the work may be determined by a submitted estimate and acceptance in a
lump sum, by a unit price named in the contract or subsequently agreed
upon, or by the cost and percentage, or by the fixed-fee method. If
the contractor claims that any instructions, by drawings or otherwise,
involve extra cost under his contract, he should be required to give
the architect written notice of it before proceeding to do the work,
within two weeks after receiving such instructions.
A final problem of financing should be considered, and that is the
emergency which might arise should the contractor neglect to prosecute
the work properly or fail to perform any provision of his contract. If
such is the case, the owner should reserve the right in the contract,
that after three days’ written notice to the contractor he may make
good such deficiencies and deduct the cost from the payment due the
contractor at that time. Of course every contract should provide for
the owner’s right to terminate the contract should the contractor fail
to do his work, or prove bankrupt, or persistently disregard laws, or
continually violate the provisions of the contract.