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Boston’s “Big Dig” tunnel project was supposed to be completed in 1998 at an estimated cost of $2.8 billion dollars, but wasn’t  completed until 2007 at a cost of nearly $15 billion.  An extreme case, but it makes the point that construction projects – from home remodels to office towers – often take longer and cost more than originally budgeted.  You don’t want to find yourself in a situation where you run out of money before a project is completed, or are forced to stretch yourself too thin or move into an unfinished home. So setting a realistic budget at the outset is critical.

As discussed in the section on buying land, a $100,000 lot can easily turn into a $150,000 expense when development, permitting, and utility fees are factored in.  In addition to land development, there are a number of “soft costs” to consider in putting together a budget, whether you are financing the project yourself or applying for a construction loan.

Before you start designing your dream home,  looking for land, or tearing up your current home, you’ll need to establish a preliminary budget to work within. You may find early on that you can afford an 1,800 sq. ft. house on the lot you want, but could afford a larger house on a less expensive lot. Or you may discover than you cannot afford a new kitchen and addition right now, but can afford one or the other. It’s best to know this before getting too far along in your planning.

How much can you spend? In its simplest form, your maximum budget consists of how much cash you are able and willing to put into a project, plus how much you are able to borrow. The best way to determine your borrowing limits is to talk with a couple of loan officers, who can quickly determine your eligibility. You can also get pre-approved for construction financing if you plan to start the project soon. Pre-approvals typically last for 30-90 days depending on the bank, and can usually be renewed easily if they expire.

How much will you need? The flip side of the coin is establishing how much will need for the project you have in mind – both the hard costs of construction, plus the “soft costs” such as design, permits, fees, and finance if you are borrowing.  As you establish a ballpark estimate for your project, you may find that you need to raise more money or scale back your project to make ends meet.

Soft costs are easy to overlook, but can be substantial. It is hard to generalize, since costs of fees and permits vary so widely, so you need to research these for your area and project. They can range from as little as $5,000 to over $100,000 in high-cost metro areas. Key soft costs include:

  • Plans and specifications: designers, engineers, consultants
  • Permits and fees: plan review, zoning, building, inspections, electrical, plumbing, mechanical, sidewalk, curb cut
  • Impact fees
  • Utility connect fees
  • Legal costs
  • Surveys
  • Insurance: Builders’ Risk
  • Financing costs if you are borrowing

See also: Preliminary Budgeting



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