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Cost overruns more common than many think Bernice Ross, Inman News

Whether you’re thinking about building or perhaps just remodeling your current property, there’s one mistake almost everyone makes — and it’s a costly one.

HomerepairBack in the mid-1980s, I was one of three listing agents on an 83-lot subdivision called “The Summit Above Beverly Hills.” (You might have seen it in the tabloids — it’s where Britney Spears lives currently.) I decided to build a home there, and lived in it for 11 years. Recently, we just finished building our current home plus doing a major remodel on another property we own.
On virtually every single custom home at the Summit, as well as on my own properties, I’ve seen the same pattern repeatedly. The final cost of the project was always 30 to 40 percent higher than what we initially budgeted. When you start a major building project, you’ll hear stories about cost overruns. The builder will warn you about making changes once the plan is complete. You will vow it won’t happen to you. Don’t fool yourself — you will probably go over budget just like everyone else.

What causes cost overruns? In the case of my Summit house, my lot was compacted fill. The building inspector decided that we needed 12 caissons to anchor the house more securely in an earthquake. The result was that the architect had to redraw the plans. We then had to go back to the city for approval. The additional cost was $12,000. While I wasn’t happy about this expense at the time, when the Northridge Earthquake struck in 1994, the only obvious damage was a crack in the marble on the powder room floor. The caissons did their job. Later inspections revealed a crack in the foundation and some twisting in the doorjambs. Given that nearby properties collapsed, I was happy my house was still standing.

Another common way that people go over budget is with upgrades. When we built our current house, we wanted to add “cans” in addition to the chandeliers and other overhead lights. The cans weren’t that expensive — about $40 apiece. What we didn’t figure in was the additional time that it would take the electrician to install the lights. What appeared to be a relatively inexpensive item ended up costing about three times more than we anticipated.

When you’re building a custom home, your radar is attuned to all the new gadgets and doodads that you can include in your house. For example, you may have planned on having a media room but didn’t realize that you would need special wiring to accommodate the cutting-edge system you just ordered. Now the builder has to open up the walls to do the installation. You may be having allergy problems and hear about a filtration system that removes most of the dust and allergens from the air. It’s not that much money in the scheme of things — it’s just that all these changes add up.

It’s common for a custom home to take 18 to 24 months to build. Wood, concrete and steel all fluctuate in price. Depending upon the type of contract the owner signs, the costs are either passed through to the owner or to the builder. If the builder agreed to a fixed price, you can bet that he or she will cut corners elsewhere to complete the house within the original budget.

One of the most expensive mistakes owners can make is deciding to rip out something after it has been installed. For example, the granite we ordered for our master bath was no longer available. When they installed our second choice, the granite didn’t match the cabinets. In this case, not only would we have incurred a $500 change fee, but we would also have to pay to rip out the granite we had selected. This meant we would have paid for two sets of granite countertops, two sets of installations, plus the removal of the first set of countertops. Fortunately, once the floors were installed, we realized that the cabinetmakers had stained the cabinets with the wrong stain. The builder had to pay for that error.

While new houses have their problems, remodels can be even more costly. The older the house is, the more likely there will be unexpected surprises that will take you over budget.

For example, the house we recently remodeled was 50 years old. We wanted to update the kitchen and add a master bedroom and bath. We knew the horizontal pipes needed replacing because they were galvanized steel. What we didn’t realize was that the vertical pipes needed replacing as well. When we replaced those pipes, we had to replace the sewer lines since they couldn’t handle the additional flow of water from the new plumbing. We also wanted to install a dishwasher, which required a new electrical box. That project went over budget by almost 100 percent.

To keep costs down, investigate thoroughly before committing to your final plans. If possible, avoid doing change orders. The bottom line — if you’re like everyone else, you will go over your budget by 30 to 40 percent — budget for it!

Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of “Real Estate Dough: Your Recipe for Real Estate Success” and other books. You can reach her at [email protected] and find her on Twitter: @bross.
Copyright 2009 RealEstateCoach.com

See another Bernice Ross feature, Smart Remodel, Big Returns.
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