Diary of a Dream House – Part 3: Determining a Budget

How do you determine the budget when you are building an entire home from scratch? Well, here are some tips to get you started.

Let’s Start with What NOT to do.

The excitement of building a home of your dreams is something I wish everyone could experience.  The thought of knowing you can create it any way you want, to work with your family’s needs and fix all those things about your current house that bug you…is well, empowering. Most of us eagerly start scanning through Houzz or Pinterest, or purchase home magazines and start tearing out photos of the perfect kitchen or the perfect exterior. The next step is to take it to an architect and have them put it all together to create the house of your dreams….that you could never afford. So, my recommendation is to start with the money, then move on to the fun!

Determine a Budget

So, How Much Money do You Have to Spend?

Hahahaha, sounds weird, but it is the bottom line isn’t it? How much money can you allocate to buying property and building a home? You must have some idea in mind. Most of us want as much house as we can get for our money, though others can afford much more home than they truly want or need. If you can, determine what cash you are willing to put into your home and then how much you can afford in monthly payments to cover whatever money you may need to borrow.

For help with this visit your local lender, like your bank or credit union. They have formulas they use to help determine how much you can afford in a monthly payment. It’s usually a pretty simple comparison of income versus debt.

Some people use the simple guideline that your monthly mortgage payment should not exceed 25% of your stable monthly income.

Is it possible you are using the dollars you net from a home sale? If so, tally that up. Start with the lowest you’ll take for your current home and subtract the usual closing costs – your realtor can help you estimate them. And, don’t forget moving costs and storage or rental fees if you need to stay somewhere while the house is being built. Use the resulting figure as a ballpark budget to build your new home.

Blend in with the Neighborhood.

You’ve heard that you don’t want to be the most expensive house in any neighborhood, and that is a very good place to start. Check the real estate section of the paper or look online at the various real estate sites to find what houses are going for in your neighborhood.

In my new neighborhood there were a couple houses in the $900,000 range and yet there were those in the 400′s as well. Land was going for $75,000 – $200,000 for at least 5 acres. I paid a premium for my lot because it is over 6 acres and it has a beautiful pond on it. It is also a flagpole lot which means the property (the flag) sits behind the lots that are on the main street, and it has a long narrow driveway (the pole) to it, so there is a level of privacy that is desirable. However, paying a premium for the lot means I can’t go crazy on my house if I want to be in the right price range for my neighborhood.

This assessment of the homes in your new neighborhood will get you in the ballpark. Just take the highest purchase price in the neighborhood (not asking price) then subtract what you’ve paid for the land and you have a top line for the budget of your home.

Check with the Neighborhood Homeowner’s Association or Architectural Review Board.

No, these people can’t tell you how much to spend on your home, but they may have neighborhood rules about the house you are planning to build. For instance, there may be a square footage minimum, there may be certain materials that must be used, like roofing requirements or special driveway surfaces, all things that will impact your budget.

Talk to Your Builder.

Since you’ve already chosen a reputable builder that you trust with your project, you already know that he or she is willing to build in the neighborhood you’ve selected.  Ask them their thoughts about the budget for your home. Often they have a rough square foot price that they can give you to work with to help you determine about how much this endeavor is going to cost.

Sometimes, as with my property, the homeowner’s association has rules about building. One of our rules is that a home must be at least 2,400 square feet.  So, if your builder generally builds homes for about $175 per square foot, you are looking at approximately $420,000 to build your dream home!

Keep in Mind the Upgrades.

You know yourself well enough to know if you always have to have the best of everything or if a mid range General Electric Dish Washer will be fine for you. I say this because most square footage prices given out by builders is for the mid-range price point materials. If you want a Sub Zero Refrigerator, special tiles, custom color cabinets, and marble counter tops, you need to add back in a substantial amount of dollars for upgrades. Be honest with yourself with this one!

Ask Your Realtor.

We have a team of two realtors that we have counted on for various home purchases and sales since our move to Florida. We call them all the time for information and they are very good with home values because they see thousands of homes and neighborhoods every year. They are surrounded by buyers and sellers and have a keen sense of the market. This should be on your mind as you build a home because the day will come when it’s time to sell and you want to make sure you will have a marketable property.

Our realtors told us that although we are in a more rural area, we are still only 5 minutes from the major highway. There is a new development being created between the highway and our neighborhood meaning people are interested in moving away from the bustling urban areas. This means our property will increase in value as more people are searching for larger pieces of land that are conveniently located. Our realtors know our neighborhood and they see that there is fresh new building going on along with refurbishing of older homes. There are homes listed near the 1 million dollar mark…now they aren’t selling at that, but there is a perceived value in the land, the quiet, and the convenience.

We learned a lot about paying a bit of a premium for our property from the realtors as well. They helped us get appraisals of the land we were looking at to give us a clearer picture what others might find out about our property when it’s our turn to sell. This gave us some piece of mind as we wrote the check! Remember, the relationship with your realtor is key because you both know that when it comes time to sell, you’ll be back on the phone with them!

I used most of these suggestions when I was purchasing my land and preparing to meet with an architect. But as in most situations in my family, my husband tells me how much I can spend and that’s the budget. Maybe that’s all you’ll need to do for your dream home budget as well?

Yay! Time to move on to the fun stuff!



  1. Mary Lee Rossmaessler says

    I am even more excited about your new house! 6 acres with a pond – peace and quiet – heaven for sure! Can’t wait for the good stuff to come.

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