Read out the issues relating to choosing the land and location for your custom home, and related financing options in Dallas, TX.

So you’re thinking about building a custom home in North Texas?  Consider that one attractive option is to buy a piece of rural land for your new home, rather than build in a subdivision or in populated areas.  

There are literally millions of acres of land available to purchase in and around the DFW metroplex, located within a 1-hour or 2-hour drive from either Dallas or Fort Worth.  Easy commuting distance.

Whether for your primary residence or for a weekend retreat, or even as an investment property, if you’re going to build on rural land in Texas be aware of the following considerations when buying that land:

  1. Choose your location before choosing your custom home builder – Custom home builders are often limited by their working relationships and the limitations of their trades.  They tend to prefer building in a limited geographic area because it is where they know their trade partners are reliable (which is largely what protects a custom home builder’s reputation and success).  With so much land around and available to purchase in North Texas, you don’t want to limit your choices.
  1.  Property use – If you only intend to use the property to build a residence, then your requirements are fairly simple.  However, if you have intentions to do anything in addition to that, such as farming, ranching, hunting or fishing, then each of these activities dictate different features needed in the land you buy.  Think carefully about what you might wish to do with the property, both now and in the future.  For example:
    1. Farming requires relatively flat land with access to water, great drainage, located outside any flood plains.
    2. Ranching requires soil conducive to growing good feed as well as water resources for the livestock.
    3. Hunting/fishing requires specific resources such as lakes or running water, abundant wildlife, and that you take into consideration other people, animals and structures located near your property, as well as any local laws or environmental regulations that may be in effect.
  1. Property size – 5 acres may be suitable for a home, but if you want to hunt, farm or ranch you need much more land.  Buy with the future in mind, not only with today’s conditions in mind.
  1. Easements – Property easements have to do with accessing the property from the public road, and can have a significant effect on a property’s value.  Property will either have a “Fee Simple” title, meaning you have direct access to a public road from the property, or may instead have a “Deeded Easement” which means the land is accessed by crossing another property.   You should work with your lender or real estate agent to understand what type of easements a property has if it does not come with a “Fee Simple” title.  
  1. Amenities – Amenities are valuable and come in many shapes and forms.  Anything that is already in place such as fencing, stock-tanks, barns or other existing structures, roads and any other type of infrastructures can significantly add to a property’s value.
  1. Utilities – Not every rural property has all the necessary utilities for a home, and you must anticipate additional costs that may be needed to bring electricity, gas, sewer and water to the property if it does not have any of these already. When accurately anticipated, these costs can be rolled into the financing provided by most lenders.  For example:
    1. Is there a septic tank already, or must you have one built?
    2. Is there access to a water line at the road, or will you have to drill a water well?
    3. Is access to electricity nearby, or how much will you have to pay to bring it to the property?
    4. Same with access to natural gas, or cost to add a propane tank if necessary?
  1. Property values – Many factors can influence the price of a property.  Features such as access to water and utilities, attractive topography, tree cover, etc. all add up to make a piece of land more valuable.  Be aware that some properties can also be influenced by their potential for other uses, such as recreational or even commercial ventures.  Make sure you are not paying for features that are not relevant to you.  Compare the price of the property you are considering to other rural properties around your desired areas, to ensure it is not being inflated by nearby businesses or population centers which might use it or other nearby land for commercial purposes, or which might encroach on your property or affect your quality of life.
  1. Deed restrictions – Investigate these to ensure you won’t be prohibited from any desired activities.  General deed restrictions may include items such as no feedlots, no subdividing the property, no raising of poultry or swine, no mobile homes allowed, etc.  It is important to work with your lender, realtor, builder and/or the local appraisal district to educate yourself on those activities that are and are not allowed.
  1. Agricultural property tax exemptions – Commonly called “Ag exemptions”, these are widely used and can save landowners many thousands and even hundreds of thousands of dollars in taxes over time.  Some common agricultural exemptions include:
    1. Owning cattle or other livestock on the property
    2. Leasing the property to another for their livestock use
    3. Raising honeybees
    4. Adding various types of wildlife

If the property does not already have an Ag exemption, be aware it will take you 5 years to be granted one (so start inquiring now).

10. Environmental regulations – Check for endangered species in the area which may prevent you from subdividing or developing or building on the property.  Also check for abandoned chemicals or hazardous waste on the property, as it is very common for rural Texas lands to have old trash dumps or burn pits which may contain any variety of chemicals or contaminants.  Should you have to remove such hazards it may be extremely costly due to environmental regulations.

The two primary types of loans used to build a new home in Texas are:

1) Construction-only loan, sometimes referred to simply as a “construction loan” or “standard construction loan”, which is (usually) an interest-only loan with a period of (usually) up to 12 months, after which you will need to apply for an actual mortgage (aka a “permanent” loan) on the finished house.

2) Construction-to-permanent loan, which combines a Construction loan with a Permanent loan so you only apply one time for one loan package, at the beginning of the building process.

By far the most attractive of the two, for most people, is the Construction-to-permanent loan for a variety of reasons.

First, with a Construction-to-permanent loan you only have one closing so you only pay closing costs one time.  With a Construction-only loan you pay closing costs on the construction loan, but you will have to apply for a permanent mortgage when construction is complete, so you pay closing costs again.

Second, with a Construction-to-permanent loan you are usually getting a locked-in interest rate for the final, permanent loan (verify this with your lender).  When you use a Construction-only loan, you are hoping that interest rates do not rise during the 4 to 6 or even 12 months it takes to complete construction, when you will then have to apply for a permanent mortgage.  This is called interest rate risk.

Third, you are eliminating the credit risk you have with a Construction-only loan, which is that something will negatively affect your credit score during the many months it will take to complete construction of your home and then apply for the permanent loan.  With a Construction-only loan, you must not purchase anything on credit that would lower your score, and you must hope that something unexpected does not happen that would cause damage to your credit while your home is being built (such as the death of a partner leading to loss of income or default on credit cards, an illness requiring you to use up your credit, etc.).  This is called credit risk.

Fourth, you only have to apply for one loan, not two.  The loan application process is tedious and painful and requires a lot of time and paperwork, so if you can avoid doing it twice you should.

Fifth, depending on your lender, you can usually roll the cost of the land you are building on into the loan.  

Sixth, your home’s appraisal is done up-front, eliminating the risk that an appraisal done later for a permanent mortgage will be too low.

Since the Construction-to-permanent loan is our preference, let’s look at what the bank will require in the way of documentation and assets (note: this is a general outline, and you may be required to produce more based on your credit or the lender’s guidelines).

General requirements for home loan applications:

  1. 2-6 months of pay stubs
  2. 2 years of W-2 forms
  3. 2 years of tax returns
  4. 2-6 months of bank statements
  5. Employer information and verification
  6. Driver license information
  7. Social Security information
  8. Detail of all debts
  9. Down payment
  10. Cash reserves equal to 6 months of mortgage payments
  11. Proof of any extra income (such as royalties, rents, alimony, disability, etc.)
  12. Contract with a qualified builder or contractor
  13. Plans and specs of house
  14. Draw schedule from your builder

It’s unfortunately far too common that people will end up working with builders that are far under or above their budget because they don’t fully understand the costs associated with a custom house.

In this article, we’ll discuss these groups of builders, the differences between them, and the costs associated with each one to paint a picture of what exactly you can expect price-wise when building your custom home in the Houston area.

Production Builders

Production builders are going to be the cheapest option when building a house, but it’s important to understand why this is the case. Production builders will often build hundreds, if not thousands of homes per year and will typically build in new developments.

Because of the scale at which production builders operate, they offer very little customization options and will typically finish their homes with cheaper materials to cut costs. For example, production builders will typically use cheaper doors, appliances, and usually use carpet instead of hardwood to keep their prices lower.

In regards to customization, a production builder will provide you with a limited amount of pre-designed floorplans to choose from, accompanied by a limited amount of finishes to go along with that. With this, you can expect to pay around $100 to $150 per square foot to build a production home in Houston. So, for a 2,000 square foot production home, you’d be paying anywhere from $200,000 to $250,000.

Dallas Custom Builders

Custom builders are a step up from production builders, what they allow you to do is make your house Custom, just as the name would suggest! With a custom builder, you typically will find yourself working with an architect to make a custom plan for your own home, rather than working with pre-designed floorplans. In addition, custom builders can build on any land you own.

With a custom builder, your house truly is custom. Because of this, a lot of the costs will be determined by you and where you choose to spend or save money. However, it’s important to note that a lot of the builders in this category will tend to spend a little less on architecture and interior design. 

Building with a custom builder will typically cost around $150 to $250. With this, you may be getting less skilled tradesmen working on your home, along with cheaper appliances and finishes. If you’re accustomed to more luxury features, these builders may not be exactly for you.

Custom Plus Builders

Custom Plus Builders are a step above custom builders, but a notch below luxury custom builders. Custom plus builders follow all the same building protocols as regular custom builders, but really shine when it comes to things like architecture, finishes, appliances, and the tradesmen hired to do work on the house.

Custom plus builders hire well regarded, experienced tradesmen and award-winning architects to work on their homes. These builders also have more of a budget when it comes to nicer appliances and features, allowing clients to experience some of the luxury elements of a luxury custom home while still maintaining some of the affordability of a regular custom home. 

Because of the added quality that comes with a custom plus builder, it would cost you about $200 to $250 per square foot to build your home with this kind of builder. A typical 4,000 square foot home here would cost about $800,000 to $1 million.

Ultra-Luxury Builders

These builders are the best of the best, usually with multiple awards and the greatest workers in all categories. These homes use the latest technology and will go above and beyond when it comes to luxury. 

Usually being built in high-class neighborhoods and coming with features like walk-in closets, huge yards with great views, and top-of-the-line appliances and architectural features, building a custom home with ultra-luxury builders will cost you north of $250 per square foot. Multiplying this price per square foot by the average house size in this category of 7,000 square feet, you get a price tag of $1,750,000 starting.