William Reid: [00:00:00] All right. Welcome back everybody. This is Bill Reid with the Awakened Homeowner Show, and today we're gonna begin tackling the infamous budget question and what that really is all about. This will be the last part of the discovery series, which is all the activities we want to do before we start picking up the phone or calling any architects or contractors.

There will be multiple episodes for the budgeting part of the Discovery series. But let's refresh real quick. In the Discovery series, we've created a personal profile. We've created a property profile. We've started to collect dreams and visions and ideas.

And then I presented to you a lot of the delusions out there that can really start to throw you off and derail your project. So the last element is building a budget, and the whole objective of this discovery series is to end up with a package that we can send out to an architect and let 'em know all of these elements so that [00:01:00] they can get a really quick jump on who you are, what you want.

And how much you wanna spend. So here we go. Let's dive into this episode. What I want you to do first is I want you to break free of some of the delusions or all of the delusions and even your inspirations. We're gonna set those aside for right now so that we can detach you from the emotions that tie into the inspirations and dreams and ideas and back up a little bit.

And start building a foundation of a budget. We're not gonna build a budget today that's gonna come, but we're gonna start to build the foundations of a budget.

So a budget is, it's really, it is numbers, but really it's about protecting your peace of mind and your project. So that you can actually build what you want, and that is one of the big goals of building a budget. A budget is a benchmark of your design and your [00:02:00] construction desires and the benefits.

There's some real big benefits of building a budget before you start engaging with a designer, and one of 'em is accountability. So when you start working with a designer. And you start sharing your ideas and visions and they get excited and everybody's excited. Having a budget component within that starts to spread.

The accountability starts to bring in a level of reality for everybody involved. You, your designers, maybe your contractor, if they're involved that early, and they're spreading the accountability across the board. It should be something that's discussed early on so that they know that when they're proposing solutions, that they're headed towards your budget.

Having a budget and then analyzing proposed design solutions allows you to be effective when you're making design decisions. So when they propose to you a fancy, big sliding glass door wall and you love it, one of the questions is gonna be is, do you think we're gonna be [00:03:00] able to fit this into our budget?

And that's just a microcosm sample there of all the things that are come at you. And the more you emphasize, and this will be up to you, this is your personal choice of how much weight you wanna put into the budget. Of the design process, everybody's financial situations are different, but touching on it at least a few times during the design process is really imperative to make sure that you haven't wasted time, you haven't wasted money on design fees, and that the chances of you actually building your project are getting higher and higher.

A good idea about building a budget. And those will be very project specific, but phasing a project out, compartmentalizing a project, designing modules, if you will, of a project, especially in remodeling, large scale remodels. If you have an established budget and you have a master plan, it's very common that clients come into the studio and say, here's my list of everything I [00:04:00] want to do.

Coming up with a master plan for a renovation or large remodel is a good idea. And then when the architect can understand your budget and understand your goals, the two of you can put your heads together and decide if you should be thinking about phasing this project out or providing options. So that you can decide to do one element or all of the elements of the project.

The sooner a designer or an architect knows that this is the strategy, this is the angle, they'll be thinking about how they propose design solutions in order to make it as feasible as possible to phase out a project or provide options. Sometimes that's not as easy as it sounds. Because the complexity of remodeling now a new construction, it's very possible that you may or wanted a basement or not, or you wanted a big shop in the back, or you have certain components of a new home that could be [00:05:00] compartmentalized, modularized, if you will.

And then what's gonna happen with that is when it comes time to estimating a project. You can request that your contractor option out certain areas that have been identified by the architect. It's a lot easier and a lot more productive for that to happen early on rather than later. For example, if you've designed the whole project, you haven't clearly identified options, and you get your budget back, your estimate back from your contractor, and it's more than you wanted to spend.

It's very difficult to go back and start to figure out how to compartmentalize a project if it's possible. So establishing a budget, balancing it with your dreams and visions is a really good way to option out a project or phase out a project, and then it'll help you understand the value of the project better.

Now, what is a budget? How about that question? You know the word budget's thrown around in the world of design and [00:06:00] construction a lot, and I'm not even sure anybody even knows what it means anymore. Sometimes a homeowner just has a random number in their back of their brain that they wanna spend a project with no data or research or anything backing it.

And it could be because they just heard rumors how much it costs per square foot. Or their neighbor did a job similar. So you figured you'll spend about the same amount of money. And then an architect and designer, they are a little more qualified, a lot more qualified a contractor, especially to, establish a budget for a project because they have multiple actual projects in the back of their brain that they've done that they understand the value of those, and they can blurt out numbers too.

That's can be helpful, much more helpful than the delusional approach that a homeowner has. But think about this. When you start thinking about your budget, what is that based off of? It could be based off of how much you want to invest in the property. It [00:07:00] could be how much money you have in the bank.

It could be how many dollars you have in your stocks. All kinds of different criteria come in, personal criteria come into play with a homeowner when they're establishing their budget, the budget's so overused, it's so distorting and confusing and deluding that is one of the big objectives today or in this series, is to get away from all of that and give you some sort of

methodology actually to establish a budget. One thing I want you to know what a budget isn't. A budget is not a construction estimate. A construction estimate is a valuation that's placed in a project after all of the plans, scope of work and specifications. Have been 100% completed. Then a valuation can be put onto the construction project, and that is an estimate, and then you'll receive a proposal from your builder [00:08:00] of how much it's going to cost to build the project.

So let's keep that really clear. Think about it. When you create a budget for your household finance, that's a goal, right? That's a boy, I hope I only spend this much money, but it's, you do have some data to base it off the past car payment, past mortgage payment, things like that. In this case, we don't have as much data to base it off of, so it's not even as accurate as a household budget.

We're gonna try to conquer that as well. The first step in my opinion, to establish a budget is to back up and think about it from an investment perspective. And what I mean by that is trying to come up with a valuation of your property today in the case of a remodel. And your property in the future, in the case of a remodel or new home.

And what this is gonna do is it's gonna empower you to do many things before we start [00:09:00] building a budget specific to your project, your inspirations, and your ideas. And we're gonna talk about that. I call it an investment goal.

Strictly coming at it from an investment perspective.

We're gonna look at the current value and we're gonna look at the future value of your project. So number one, you may have heard the word comps and technically they call it a CMA comparative market analysis that. Real estate agents do real estate, appraisers do, banks do, and that is to build a foundation of what the valuation of your property is today.

In an example of a remodel project, you could own a 1500 square foot home, let's say, in a suburban neighborhood with many other properties surrounding you. And there is a valuation I. It's pretty easy to determine the valuation of that property. You can even do it yourself, and that's what I'd recommend to start with.

If you go out on zillow.com, you've probably heard of these [00:10:00] websites, realtor.com, homes.com, and type in your own address first and look to see what Zillow says Your property's valued at today. And these websites. Base their valuation off of just a few criteria, and it really boils down to the square footage, honestly.

They do have algorithms that are, I'm sure much more complicated than we're gonna talk about today, but it's really square footage. So that's the first step is to understand the valuation of your property today before any work has been done. In the case of a new home build obviously you don't have a home to look at to base your valuation, but what you can do is you can go out in the development you're planning to build, or if you're in a very rural area with a large parcel, it might be a little bit more difficult to do this, but you can still do it and you can look at.

The valuation of other homes in the area with the same tools. Now, if you're in a rural area or a area that [00:11:00] doesn't have as many comps, and this is where you might want to get a couple more of individuals involved to understand the valuation, going back to the current market value, the best way to do this is to look for comparable homes as it is today.

That are either on the market or recently sold. And this will give you the best valuation. And remember that the statistics are all based off of this data. So if your in a track neighborhood, for example, and some people have exactly the same floor plan, you're gonna wanna look at the ones that have sold recently.

And that's gonna give you your current value on Zillow and realtors. Sometimes you can drill down into existing properties that have never been on the market, and there are valuation numbers there. But what you really care about right now is the cost per square foot for the current value of your home today.

Another way you can do that is you can contact a real estate agent. And you could, maybe you say that you were [00:12:00] thinking about remodeling when you're thinking about selling your home, they have proprietary tools that they subscribe to do an accurate CMA comparative market analysis beyond what I just spoke about.

And they can crank out a valuation pretty close, and that will be a good way for you to compare to your benchmark of your own research. Another option is to contact the real estate appraiser. Now you're gonna have to pay for that, so I don't know if that's really necessary, but if you are the type of individual that wants to really understand as best as possible, they can do a appraisal for you.

Advantage of having an appraiser at hand. Is some of the next steps that we're gonna take that you can go back to. We'll talk about that in a minute. Another person you're gonna want to get involved with is a construction lender, and that's if you're planning to finance the project. It'd be good to get in [00:13:00] touch with a mortgage broker that has construction loans for large scale remodels, and especially new home projects.

So we've got a current value. Now we're gonna look at future value. So in your mind, you've had an idea of what you want to do with your lots or your existing home that you wanna remodel, and you're gonna go out and you're going to search for homes that are similar to what you want to build in your neighborhood.

Or you may have to expand out past the. Current neighborhood, but do the same thing. Just look for properties that have been remodeled in the past, in the near past, especially ones that have sold recently that or that are on the market. And look at those homes in your neighborhood or surrounding areas and figure out a cost per square foot.

I think even on some of these websites, they even have a dollar per square foot right on there. You can scroll down [00:14:00] and you can find the value per square foot. You can also go out to new developments that might be in your neighborhood and how much those homes are being sold for, and that will also help you

so let's say you wanna expand your home to 2,500 square feet from 1500. So you can filter your search for new homes, 2,500 square feet or more, and get a pretty close match. It's cool 'cause they can just show 'em to you on the maps. And again. So we're gonna compare current value to future value.

So let's say you come up with a current value of $300 a square foot. And homes that are, another thousand square feet and newer, or brand new or fully remodeled are $425 a square feet at current value. The more recent they've sold, the better because that's gonna give you the most accurate.

It can sometimes be hard to find these comps, but there's usually some, unless you're in a very remote area. If you're building a new [00:15:00] home, then you can look at other homes that have been built in the neighborhood that have sold, if there's none available and there's other homes under construction, another suggestion I have is to contact the architect or the builder, let 'em know what your plans are.

We're gonna be able to kill two birds with one stone here. Let 'em know. What your plans are. You've seen their work, you love their work, and you're in the process of establishing a budget for a project before we begin the design. And you're curious how much if you don't mind sharing how much a project like this you think is costing to build.

And we would love that information so that we can build a budget. And by the way, can we schedule an appointment? So that way, you're not just asking for free advice. You're, genuinely interested because if you have an architect in the builder building in the same development, they could be a candidate.

You're not committed to 'em, but at least you've killed two birds with one stone there. That's a really good way to do that. And even in the world of remodeling, you can [00:16:00] go. Traveling around your neighborhood and see signs up for contractors and even construction lenders too, and start asking questions.

Anything you can do to get a realistic budget instead of listening to some joker next door over the fence. That said, they spend $150 a square foot. Come to find out they did all the work themselves, and you have no interest in that. I think you're getting it. It takes a little bit of work. And eventually you'll be able to have a more realistic set of expectations.

So now we have the current value versus the future value, and this is how you're gonna establish an investment goal for your project. So now you go back and look at your project and you say, okay, I have. A 2,500 square foot home in the future at, $400 a square foot, that's a million dollars in valuation.

When I'm done, I owe $400,000 on my house. I have [00:17:00] $600,000 in equity.

A construction lender will only lend you upwards of 70 to 80% of that for a project, things like that. So you've got some baselines, so you're gonna create a spreadsheet and it's going to, allocate the new valuation when your project's completed. The existing valuation as it sits today. The square footage, the dollar per square foot, and come up with an average.

And this is gonna give you a really good sense of what your market price for your future project could be. And that's at least a baseline that we're gonna use. ' cause what we're gonna do with that in the next episode is first we're gonna build a budget. Then we're gonna compare your budget versus your investment goal.

So the exercise that we just went through, you are gonna establish an investment goal of how much you want to put into that property strictly based on return on investment. [00:18:00] Now, that may not be that top of a priority for you. The ROI return on investment, but at least you have some kind of baseline to go off of.

So if you owe $400,000, you think it could be worth a million. When you're done, you're probably gonna want to put $400,000 into the project at the most. That's probably what the bank will lend you. You can always kick in your own cash if you want, on top of what the bank lends you. But that's up to you.

So you, now you know that your investment goals $400,000 for your remodel. Now we're gonna do budgeting with some budgeting tools. That I'm gonna describe to you, which is a little bit harder than a podcast, and eventually this is gonna be a tool that I'm gonna have available through my Build Quest app that's in development, and that's coming down the road.

But for the meantime, I want to give you some advice on how to build a budget, compare it to your investment goal. I call it balancing your budget. You're gonna balance your investment goal with your valuation then we, when we do the budget, you're gonna balance the [00:19:00] budget with your dreams and visions.

Visualize a teeter-totter here, and then you're going to tailor your dreams and visions to meet your budget. Or you may tailor both so that you can get a balance. I don't need this, but I want that. I'm gonna increase my budget to 500,000. I know that's getting close to the valuation and you can teeter this.

And this is the biggest missing piece of the puzzle for homeowners is getting way better than all those delusional forces out there . So now you've got that in hand. And what you're gonna do is when you start engaging with architects and builders, you're gonna talk about all the great things.

Here's who I am. Here's my property, here's what I love. This is what I want, and I've done some exercises and I have an idea of what I want to invest in the project. What do you think a project like this could cost? So it wouldn't necessarily divulge your budget to begin with eventually you should though.

And I emphasize that because a lot [00:20:00] of people think it's, you're buying a car. You shouldn't tell an architect how much money you have. That's baloney. They need to know because they're gonna be able to design that car Exactly. To meet your budget. Whether you like it or not, it's a different story but now you're gonna ask, start asking questions once you divulge your criteria.

I want a 3,500 square foot home. I want this. I want that. Here's my dream and vision boards. Here's my lifestyle, everything. Here's my lot, my property. Can you give me a sense, would you be able to show me any past projects that you've done that are similar so we could have a budget conversation before we even begin engaging in the design?

Let them explain to you. What the project cost, their methods and backgrounds to how they came up with that valuation. Many of the times you'll be engaging with an architect to begin with, or a designer, and then you could ask the contractor too. You could ask the name of the contractor and you could talk with them too, a little bit about it.

[00:21:00] So you may think you wanna spend 400,000 on a remodel. Okay, let's go back to the new home. Let's say you wanted to spend. $1.5 million on a new home, and they come back and say, $2 million. And you say, okay would you have a sample of a project that you think costs that much and start comparing?

These are exercises that you need to go through, otherwise you're gonna get burned later. Let's just put it that way. So as long as you know what you need to know in order to build this budget, that's the goal here. That's the objective, is to get you to stay in the driver's seat. Now, before you start designing, and especially after you start designing, and when we get into the design process episodes, we're gonna talk about what I call budget checkpoints.

So this episode is all about building a foundation of a budget, setting an investment goal, then deciding how much you wanna adhere to that investment goal. That's the foundation of a budget. Then we're gonna move into actually building a [00:22:00] budget. , I wanna thank you for listening to this episode.

This is a tough one. The budget's gonna be the toughest of all of this. Once we get past this, we're gonna get into more of the fun stuff. Again, I encourage you to subscribe to the podcast and even join the Awakened Homeowner community, where it's just growing and growing. I especially like your questions.

If you have any questions, you can shoot me an email, which is WW Reid, REID, at the Awakeneded homeowner.com if you prefer to send a private message. And I would love to answer any questions you have and even on the podcast so that other people can learn from it too.

So thanks again. This is Bill Reid of the Awakened Homeowner Show.