Why Owner Builders need to Manage their Schedule
Whilst I get their way of thinking, I often wonder if the owner builder has considered the cost of money.
Now if you are one of the fortunate owner builders who are self funding the project, then this will not have as great an impact however if like most of us you need to borrow to complete you project then time is a significant cost.
I will keep the figures very basic and easy to follow, and of course every owner builder project will be different and each of us will have different financial circumstances but you will get the idea.
Lets consider you are building a new home as an owner builder and you your estimate the project cost, including land value, legals, insurance etc, to be a neat $500,000.
With most banks only lending 60% to owner builders, it is likely you will may a loan in the order of $300,000.
Lets assume the owner builder has estimated the timeline to run for 12 months from first turning soil to practical completion and has factored in the finance costs over that period.
What is the cost of a 60 day overrun?
If we take an average 5% on an interest only loan (typical of a construction loan), and assume 90% has been drawn down awaiting final completion, then the owner builder is paying an amount of $1125.00 in interest each month.
60 days will mean an overrun of $2250.00 in interest alone, but of course there are other associated costs such as rent until you can gain occupancy, extended project insurances, temporary fencing, hire gear and such.
So even a two month delay is likely to have a negative impact approaching $10,000.00 and that is not taking into account the personal cost and stress that often is associated with building a new house.
The figures I have provided are very basic and we are in a current low interest rate period so the cost of money is very low. Imagine the impact where interest rates are 10 to 12 % and higher.
So if you think you can afford to let your project just amble along and do not keep a careful watch on your schedule and timelines, it can be a very expensive exercise.
Best Regards and Happy Building,