EPISODE 40: DEVELOPING A REALISTIC BUDGET FOR YOUR HOME PROJECT

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[00:00] INTRODUCTION

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Bill Reid:

A budget is not a construction estimate when it comes to planning your new custom home, renovation, or remodel project. It's vitally important that you establish a realistic budget and, most importantly, share it with the design and construction professionals who are about to help you achieve your dream.

We're going to hop into the studio and talk about methodology—how to start thinking about developing a budget for your project. We're going to come at it from the investment perspective first, and then you're going to balance it with your dreams, visions, and ideas for your new home project. So I invite you into the studio to listen to the entire episode.

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[00:42] THE BUDGET QUESTION: A CRITICAL CHALLENGE

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Bill Reid:

All right, everybody. Bill Reid here, about to tackle one of the biggest questions of the century, I believe, in residential new home or remodel projects. And that is the budget question.

Over the past 30 to 35 years that I've been coordinating the design and construction of residential home projects for people, the budget question is something that needs to be addressed real early in the process between a designer and a customer, or a contractor and a customer, or both. And when that question arises, a lot of homeowners just randomly come up with a number. Some of them don't even understand really where that number comes from. It's just a number that they either feel comfortable with, that they've heard other people have spent on projects, or maybe it's the amount of money that they have available to them.

There's a disconnect between the dreams and ideas of their project and what the real value costs. And it's amazing how many people go down a really long path with architects and designers and contractors, only to come to find out that they're not even close to what they expected to spend. Part of this is because homeowners don't understand what you need to know. They don't understand what things cost and depend heavily on the internet and friends and colleagues. A lot of people join Facebook groups and start listening to all the gibberish that goes on in those groups about costs and design and everything.

My objective today is to try to get a little more rein in on that for you so that you can tap into your finances as efficiently as possible and connect your dreams, visions, and ideas of your project with a real budget as early as possible.

It's almost an impossible question to answer because you haven't designed anything yet. You haven't specified anything yet. Yet people ask day in and day out, "Okay, I want to build a 3,000 square foot home. How much is it going to cost?" And that question gets posed to architects and designers, and that question gets answered so many different ways by professionals. It's because they can range a lot. It depends on the quality, the location, the complexity of the home that you want. And it goes on and on and on. It's a very personal business. It's a very personal journey.

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[CONTINUED] INVESTMENT GOAL VS. BUDGET: THE BALANCING ACT

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Bill Reid:

So that's what we're going to try to do. Now, if you listen to my previous episode, there's two parts in my mind in working with clients that form a budget. Remember, this is not a construction estimate. This is just you getting your head right on how much you want to invest in the project, in your property.

I spoke about the investment goal side, trying to disconnect your mind from all of the emotional attachments to the parcel that you want to buy or the pictures of the homes on the internet that you love, and come at it from an investment perspective. Now what we're going to try to do is balance that with a budget. And a budget is one more step past the investment goal so that you can start to home in and come up with some valuations that you can share with prospective designers, architects, and contractors so they can lead you down the right path. So that's the idea today.

There are some methods that you can use to come up with an evaluation for a project. There are going to be some variables that you will actually have to go out and do a little bit of research on your own in the particular marketplace you're in. But what I'm going to try to do is give you some ideas on how to go about it, and I'm going to try to come at it as simply as possible so that you can at least get something down on paper, something in a spreadsheet that you can analyze and keep picking away at.

Now, eventually, I've mentioned in previous episodes, I'm creating a tool that's going to do a lot of this for you. But I just felt compelled to start getting this information out there so that you can start thinking about it on your own. I know that a lot of people think about a project months, a year, even before they start to embark on it. And that's also why I wrote the book, The Awakened Homeowner book. A lot of this information is in the book, and this is my opportunity to elaborate on it all so that we can really get you best positioned.

So the budgeting methods: one was setting the investment goal, and the second one is evaluating a construction budget. I want you to be thinking about it this way. Think about two teeter-totters, if you know what that is, where you're balancing on a central point. Once we get through the budget exercise, you're going to then go back and you're going to do two balancing acts.

You're going to balance your dreams and all those fancy ideas that you love and want and the overall scope that you want with your budget. And you're going to look at how balanced that is. Are you getting everything that you want? Are there modifications or changes that you need to make?

And then you're going to balance your budget with your investment. So if you came up with a $500,000 investment goal—in other words, that's a fancy name for guess. A lot of people just guess how much they want to spend. They have very little data to support their guess. They get that stuck in their mind and then they go at it hard on a project, only to come to find out that it's a waste of their time.

So I've turned it into an investment goal. Now you're going to take that flat-out guess or some delusional information that a builder on the other side of town gave you about how much he's building this particular home for, and you're going to dig into it from an investment side. I went through that in the last episode, but you're going to balance that with your budget.

So if you set your investment goal at $500,000 and you go through this budgeting exercise we're about to do and you come up with $750,000, then you know that there's got to be some changes that have to be made. There are a lot of different changes that you can make—not necessarily just to your scope of work or your dreams and visions, but maybe to the investment itself.

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[CONTINUED] UNDERSTANDING SQUARE FOOTAGE PRICING

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Bill Reid:

Now, when it comes to understanding square footage pricing and doing research in Facebook groups, you'll see people asking questions: "What does that include? What didn't that include? What quality level?" And if you see some of the pictures that get posted and you start to pay attention to some of the answers, you'll start to get a sense.

Some of the answers were, "That didn't include any of the land," and "I'm going to do a lot of the work myself. I did a lot of the work myself. I acted as my own general contractor. My brother-in-law did the electrical." These are people that are trying to do it on the cheap or trying to maximize their dollar. I don't blame them. I don't blame it. And if that's you, great. If you're going to really dive in deep, all the more power to you. And I'd love to hear your stories, your true stories, what you really spent, including everything—the architectural fees, all the materials, everything that went into the project. I would love to hear it.

Because the more data I can gather—but my niche has always been remodel and new construction projects, full service. And some of the guys out there, the builders might be listening to this thinking, "$500 a square foot?" Some of them might even be thinking I'm crazy. I might be, but it's a hell of a lot better than some of these other things that are getting set all over the place.

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[CONTINUED] RECAP: THE DISCOVERY SERIES

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Bill Reid:

So let's recap, because I'm getting a little windy here. This has been the discovery series of The Awakened Homeowner podcast—everything that you do right before you start engaging with any designers. We went through this early, and I welcome you to go back and look through all that, because what we're doing here is we are establishing a foundation of expectations. Once we set realistic expectations that have been thought through, you are not going to be one of those victims. When somebody's screaming and yelling at each other across cubicles about how their remodel hell is going on, you can walk right by with a little grin on your face because you know you got it together and you got your project.

So let's review. When you are creating a budget for a remodel project, you're going to enter the data. In the case of a remodel, you're going to enter the data of the existing square footage of your home that is going to get affected. Take a guess. So if it's a 1,500 square foot home and the back end of the house is going to get affected, put 500, 750, whatever.

Enter the new square footage of your addition, or just simply enter the new square footage of the living area of your new home. Budget for other special items that might come into play. That was that scope of work element that I was talking about.

Select the square footage values. I talked about some. I'm going to post something here about this. Be realistic. Do a little bit of research on your own. Include the cost of the design and permits. Put a provision in there for that.

Determine a budget range. So you may come up with $1.3 million to $1.6 million for a budget. What is a budget again? It's not an estimate. It's a tool for you to compare to your investment goal. That's it.

So you know you should even pick up the phone and call. If you thought you were going to spend $500,000 and it's $1.5 million, you got a problem. Even if you start hacking away at the per square foot price and say, "I'll get my brother-in-law to design it and I'll do this myself," you're just on the wrong path. But if you're getting closer and you feel like you can manipulate the numbers and the scope of work and your desires and compromises, now you're in the driver's seat. Now you're able to continue on and then start asking relevant questions.

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[CONTINUED] NEXT STEPS IN THE DISCOVERY STAGE

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Bill Reid:

Lastly, let's do a recap of the next steps that you should do in this whole discovery stage, because this is the end of the discovery stage.

Take some time to think through your goals and write them down. Go back to some of those earlier podcasts. Be aware of the outside forces that can totally derail you. That was my episode on delusions. There's some cool little stories in there. I even talk about some square footage stuff in there. So be aware of those delusions and don't let them screw you over.

Understand the value of your property when your project is complete. And that was part of the process of establishing an investment goal. And then you decide and prioritize how important that really is. That allows you to make an informed decision about how much you want to invest, and then you can begin balancing that with your budget and your dreams.

Share all these goals with your design team. It's important that they know that you've taken these steps. One of the first things—and I'm just going to hit hard on this—one of the first things a designer thinks about when you call them up is: you are excited about your project. You have all these things you want to do. They want to understand if you know what reality is when it comes to budget before they do anything, because it is how they get motivated or not.

And if you are close to balancing your investment and your construction budget, good ones will help you get there. Because again, very rarely do people say, "Yes, that's what it costs." Very rarely. The good ones will help you get there. But they're going to ask you what your budget is. And you shouldn't go on the defensive there. You should share the exercises that you've gone through.

And that kind of equals that little playing field. You're not buying a car. It's not a car salesman asking you how much you got, that kind of stuff. This is a solution provider, service provider. It's a consultative sale, whatever you want to call it. These people—you might spend years with these people, you might spend months or even a year, maybe even longer with these people helping you get there. So empower them with your budget.

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[CONTINUED] THE IMPORTANCE OF BUDGET TRANSPARENCY

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Bill Reid:

That's a little bit easier said than done because some people don't know what their budget is. They don't understand. They want to understand the value of certain components of their project. That's great. And if you know that going in, tell them.

Tell them, "Look, this is my forever home. I ran through some numbers myself based on a 3,000 square foot home. I think I want to spend $1.5 million, but if you come up with some really cool stuff I love it, I might bump it more." You might say, "This probably isn't my forever home. I'm really tapped out at about a million, and I need help getting there. And this is what I would love to have, but I'm willing to make those compromises and those revisions to my project to get me there."

The worst thing you can do is not share your budget or share an unrealistic budget or not address the budget early on. It's the worst thing you can do.

And even if the architects don't ask you, or the designers or contractors don't ask you, bring it up. Let them know. Because this is where you're going to get reality. And if they say, "Wow, that's going to be tough to get there. Really tough," then the next question is, "Wow, really? Can you show me a project that you think would be in my budget that you've designed? Or could you show me a project that's similar to mine and how much it cost?" So you can make informed decisions.

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[CONTINUED] MANAGING EXPECTATIONS THROUGH DESIGN

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Bill Reid:

The best part about all of this is you're setting expectations for you, and you're setting expectations for your contractor, your architect, and designers. They know right out of the chute. Unfortunately, it's not over yet. And when we get into the world of design, which is where I'm about to go in the next many episodes, we're going to talk about how you manage this budget process during the design.

You can't forget about it once you start designing. Guess what? Energy starts flowing. Ideas start getting thrown at you that you love. Excitement comes out. And all of a sudden, everybody wakes up one day and says, "Wait a minute, can I afford this? Do I want—" It may not even be, "Can you afford it?" "Do I want to invest in this? Can we stop? Can we pause?" I'm going to get into a lot of that.

That was my stab at the budget, and it's not going to be the end. But I wanted to get that into your head to start thinking about it.

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[CLOSING] WRAP-UP & RESOURCES

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Bill Reid:

And I can really help you with this too. So if you're a serious homeowner that's really considering a project, maybe you haven't even purchased a lot yet, which is not a bad idea, you can reach out to me and I can help consult with you just on an hourly basis or something just to begin with. We can work together on it, and you can share your dreams and ideas.

I really can't wait to get my new application out called BuildQuest, because you're going to be able to do all of this online. You're going to be able to save your project summary. You're going to be able to reach out to me or your local architects that we help you find. And you're going to be able to—you won't have to think as much. How about that?

That's what I have for you today. My name is Bill Reid, and I am the author of the book, The Awakened Homeowner, and the host of The Awakened Homeowner podcast. It's all me. Thanks for joining, and I'll see you next time.

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