Do we really save that much by building our own homes?
About two years before I first started any work on my house, I was talking to one of my friends. This guy is the kind of person everybody wants to be around. He constantly has an upbeat attitude and a sense of humor that never quits. He has amazing energy levels and is always working on projects after work. I don’t think he ever rests. Anyway, he is a good carpenter because he built his own house and liked it so much that he took carpentry up on the side while working a full-time job with benefits.
We both worked at the same place and when our plant was permanently shut down because of The North American Free Trade Agreement, he never even skipped a step in his financial stride. In fact, he did better as a contractor building houses than he did working for a Fortune 500 company with many benefits.
He is in a great financial position and has been for a long time. He built his house about 25 years ago and paid cash for most of it. He didn’t have a Home Mortgage payment so he was able to live on what he earned while still being able to tuck a lot away into investments. Before I found out his secret, I had wondered how he could have such a nice home and lots of fun toys. His wife didn’t work and he made less at work than I did. Man, I struggled on what I earned, why didn’t he?
I asked him how he did it and he told me with as much enthusiasm as I’ve ever seen anyone muster. He told me his secret. Then he told me something that seemed so unrealistic, it took a lot of thinking to believe it or even understand it. The part about him building his own house was nothing special. He was a carpenter, that’s what they do. No problem. But then he said, “Here’s something you need to think about to fully understand. Every hour I spent working on my house was worth between $200 and $300 an hour to me.”
I couldn’t understand it completely and didn’t fully understand it until after my house was finished. Here’s the deal: My house cost me $60,000 to build by doing all my own work. Let’s say I had to borrow every penny of it from credit cards or relatives or whatever. My new house appraised for $140,000. To finance both amounts at ten percent interest over thirty years, you will pay for your house roughly three times. So, the house that I put so much of my sweat and blood into will have cost me $180,000 after 30 years.
To have the exact same house built by a contractor, you will have paid around $420,000 at the end of 30 years. The difference between $420,000 and $180,000 is $240,000. That’s the cost of having someone else build your house. Anyway, divide that by the amount of hours it takes to build the house, which is about 1200 hours in total. $240,000 divided by 1200 equals $200 an hour. Check out the graph:
Your Frame Home(2100 sq. ft)
Financed over 30 yrs at 10% interest
These figures are real because most people will pay longer than thirty years on a home mortgage making the total interest paid even higher. Now, you are probably thinking, “ten percent interest, wow, that’s way too high!” Ten percent is a good even number and easy to calculate. It’s also a percentage people would have loved to lock in at during the 70’s and the 80’s when variable went higher than twenty percent for home mortgage owners with good credit and good jobs. Many savings and loans became homeowners and landlords during those two decades. Some became ghosts.
Now, we see how much we can save by doing our own work, but let’s see what that means as far as a monthly mortgage payment is concerned. Let’s also compare the two monthly mortgage payments just to see what I’m talking about.
Monthly Mortgage Payment
That interest factor is very interesting. But let’s go a step further and have some fun with it. This is a real example and it has worked extremely well for a few people I know. Let’s suppose that I have two neighbors. Each has the same house plans to the exact nail.
One has a low self esteem, but a pretty good job, so he decides to have a contractor build his house. The other neighbor really believes in himself, unfortunately, he is the only one who does, so he doesn’t have such a good job, but he decides to do all the work himself.
After both houses are finished and financed, the neighbor with more money than self esteem has a monthly payment of $1100.00, ouch!!!
The other neighbor that has more self-esteem than money has a monthly payment of $475.00, not bad.
Suppose that the neighbor with the lower payment decided to pay as much per month as his neighbor was paying. Both were paying $1100.00 a month until the loan was paid off.By making extra payments, the principal is beat down so that the loan has less interest being charged.
Both pay $1100.00 a month
It would be nice to have a home paid off in less than nine years. Many people escalate the payoff date by paying extra each month. Anything extra goes toward principle and beats down the amount incurring interest. That’s the skinny on that plan.
Some people might be wondering what the deal with contractors is. Why do they charge so much in labor? Are they crooks? I suppose some probably are crooks, but most are good people with a high amount of overhead. Many have crews working for them and the crews need steady paychecks. Some even offer benefits to their workers. It’s a competitive occupation and contractors need to remain competitive so they can get contracts. Some, on occasion, will make mistakes and underbid a job. Then they have to eat it. Contractors and their crews can do in a few weeks what takes one person over a year. The total project hours work out about the same except for the learning curve. First-time homebuilders will naturally take more time to do the same job. The idea is to minimize waste and mistakes as much as possible.
Now, after giving contractors the benefit of the doubt concerning overcharging, I will say one other thing of significant importance. Many contractors and sub-contractors are members of unions. That’s why an electrician can show up at a building site with a few hundred dollars worth of materials; work for a day, then charge the owner a few thousand dollars for work done. It’s the same with plumbers, carpenters, cement workers and many others. Unions typically strive to maintain a high quality work standard among its members, but every member can’t be watched over every second of the day. If you hire a union member to do the job, you’re not necessarily guaranteed top quality work; you are however, guaranteed to be charged for top quality work. Someone has to pay those union dues and keep the lobbyists busy creating ways to benefit those that pay them the most money.