The three biggest traps in construction costs

Calculating construction costs: The three largest costs of building your own home.  Calculating construction costs: some building costs lurk in building houses.

For many people it is not only health and a happy, healthy family that the goal of life is paramount: building one’s own house. Especially in times of low interest rates for building loans, the temptation to finally fulfill the dream of home ownership is great. But those who ignore some essential basic rules during construction finance ultimately end up quickly in the debt counseling, rather than in their own house.

Above all, if low interest rates lure, some may decide to build a house, which for financial reasons would otherwise have tended to dare to build their own building project. This, however, can become dangerous and often end in ruin. Some basic rules for safe building financing must always be observed.

Building costs

Regardless of whether it is built with a developer or an architect: the pure construction costs are not the amount actually paid by the client. The construction costs are considerable and must be taken into account from the outset in the calculation.

For small differences in the various federal states, the builders are entitled to a basic income tax of approximately five percent. Notary and court costs account for approximately one to 1.5 percent of the construction costs. If a broker is involved, the broker receives about three to seven percent commission. If the site is not yet fully developed, additional costs will be added. The costs for the outdoor facilities as well as gas and electricity connections are often not calculated.

Overall, the building costs account for between ten and 30 percent of the construction costs and thus quickly reach a clearly five-digit amount.

Too short-term financing

But it is not just uncommitted ancillary costs, which put many builders in trouble. In addition, many a building project is failing due to insufficient financing. Many home builders, for example, surpass their own efforts in the run-up to the work they are able to do with their friends and family. In addition, a house construction is so complex that it is always necessary to make repairs or work which were simply not thought of during the calculation.

Therefore, builders should plan a sufficiently large buffer when financing their construction project. The folklore is valid: “In the end every building is more expensive than initially thought.” And when the money goes out in the middle of the building process, the builder is in the worst position at all. He then has to knock as a petitioner at his bank for an additional financing. If this grants him any further credit, then usually only against horrendous interest. In the worst case, there is a threat of an incomplete financing gap. The construction cannot be continued and the client may be financially ruined.

In the case of mortgage financing, one should also pay attention to a sufficiently high equity ratio. Even in times of favorable interest rates, one must not take too much risk. The more equity capital available, the lower the risk for the mortgage lender or the bank is that the remaining loan cannot be repaid. For the builder, this is profitable in the form of low interest rates. In general, an equity ratio of at least 20 percent of the total construction costs is recommended. Those who come to 40 per cent, however, receive much more favorable terms.

Find a cheap mortgage loan

In order to find a favorable financing for your personal building project, you can use the mortgage financing calculator. If you want to have planning security for the entire financing period, you should pay attention to fixed interest rates when signing a contract. Then the once fixed interest rate is fixed for the entire financing period. This is, of course, particularly recommended when the interest rate is very low.

The black sheep of the construction industry

As in any industry there are reputable and less serious construction companies. A popular trick of the black sheep in the industry is to announce bankruptcy after payments have been made. The money of the builder is then usually lost. The responsible persons of the bankrupt company then often make a new company under the name of a family member or friend. However, the risk of falling into such a dubious enterprise can be minimized:

Ask for references, so builders who have built in the past with the company, and get in touch with them. If you have friends in the area around you, for example at your workplace, who have recently built, ask what construction company they have worked with and how they were satisfied.

Also check the construction and performance descriptions carefully. A checklist of the Federal Ministry of Transport, Building and Urban Development will help you understand whether all essential cost items are included. This way you avoid unexpected additional costs afterwards.

In addition, you should agree on a payment schedule already in the construction contract, which stipulates the payment according to construction progress. This payment plan for the individual construction sections has to comply with the requirements of the brokerage and property developers’ regulation and at least ensures that their losses are limited, you should get a fraudulent company. For if this does not provide or only deficient services, you can refuse further payments.