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Building New Custom Construction on San Juan Island

Updated: May 18, 2022

As inventory is very low for existing single-family homes, more and more buyers are considering custom construction. Building custom allows you to design and build the exact floor plan and exterior elevation that suits your needs, your budget and is well cited to the land.

Step One:

Determine your budget for the project. If you are not using cash on hand and plan to involve a lender, then you need to determine your maximum loan qualification. You need to be pre-qualified by a lender for your permanent take-out loan as that is the loan that pays off your construction costs or construction/land loan.

Funding Arrangements

Prior to finding the perfect parcel It is imperative that you plan your purchasing method. Cash always works but . . . . . .

Seller financing is a good option, they basically act as the bank and take a secured position on the property with a note and deed of trust. Seller financing is typically short term in nature such as 1-3 years, the interest rate is at least 1-2% above a convention residential loan. The down payment is around 20-30%, but typically, no appraisal, or junk, or loan fees. The seller will want to review your credit report and 2-year tax returns. Arrangements for seller financing is quicker than institutional loans and can be processed within 20 days or less from mutual acceptance of the contract.

Institutional financing is more difficult to arrange. Many banks will no longer consider land loans due to the losses they incurred during the great recession. Most land loans are originated by a portfolio lender as the loans are not saleable into the secondary market. The terms are short in nature such as 1-3 years, 20-30% down payment, the interest rates match their perceived risk so they are 3-4% above residential loan rates, 2 point loan fee with underwriting subject to an acceptable appraisal, credit report and tax returns.

A construction loan is an option if you are all ready to go. A construction lender will not fund until their file contains your General Contractor contract, an acceptable appraisal and title report, cost breakdown, description of materials, permit from the County, and a full working set of plans and specifications.

The bank will underwrite your qualifications for the project to ensure that you can obtain a take-out loan upon completion and pay them off. The maximum loan to value on a construction loan is in the range of 70%-75% subject to your qualifications. They want a borrower to have good equity into the project in case the going gets rough; they want to insure you will stick with it until it is finished.

Further the bank may want to underwrite the contractor as well, they will need to submit their credit report, resume, profit and loss and financing statement. This explains while most people choose alternate interim financing while gathering their materials to apply for a construction loan.

Using your other collateral as security for an Equity Line of Credit is a good option. These funds can build the home, then you can refinance and payoff the equity line of credit. Further, during the course of construction the draw process for a construction loan can be very slow and at times painful.

In order for the construction lender to fund each monthly draw, they must first make a site inspection. They may require lien waiver affidavits from each subcontractor that worked on the job during the last month and will only fund the applicable line items. In some cases, it is not adequate as the supplies require 50% up front to deliver but, the lender will only fund the draw for installed items, being on site does not count. Ensure that the checks from the lender are made payable to you and not directly to your general contractor. Some lenders require a joint account.

Not having to process the draws with a construction loan will reduce your stress level and costs as they charge for each inspection that the lender makes. That is why a line of credit on your other assets can be so much more convenient. With alternate funds, you are in control of the draw/funding process versus the construction lender.

As I mentioned above, the easiest of all is out- of-pocket funding.

Use of funds

Once you have your maximum loan or budget based on your cash on hand, you will want to complete an estimated use of funds. It may be similar to the following:

You should allow for a contingency of funds in addition to any contingency that your General Contractor includes. Cost over-runs due to upgrades are not uncommon during the process. Create your budget and stick to it, unless you have surplus funds.

Do not forget to have during course of construction insurance on the improvements. The contractor’s insurance covers their firm and their liability, not your improvements.

Step Two:

Once you know your allocation for the land, you need to purchase the lot. Of course, that is the time you contract your favorite REALTOR, which hopefully is my team. As part of your agent’s service, they will aid you to process your feasibility study to confirm that what you desire to build is possible on the subject lot. See my article “Procedures to Purchase” for full details.

It would be appropriate to ask your General contractor, if already selected, to visit the site and give you their opinion of the site and utilities. Check into the architect control committee for the plat and read the Covenants, Conditions and Restrictions to make sure you can comply with the plat rules and build your design. Many plats have a deadline for construction completion, minimum size, and some have building envelopes.

In real estate is it important not to over build the lot or neighborhood and that is where your agent can assist. One rule of thumb is 1:4 but on view or waterfront lot, is it closer to 1:3. Your lot line item should not be more than 25% of the total costs. In no event do you want to be the highest priced home in the neighborhood when finished as that will have an impact on resale. On estate quality land, all bets are off as it relates to the percentage of entirety.

Cost approach is just one approach to value and most buyers utilize the market approach to determine the offering price for an existing home. They review recent similar closed home sales to determine the market approach.

In my experience, it is important for a buyer to avoid getting too custom and not to over-spend. I realize that at the time of construction, you think you will own this home forever and will most likely die in it, but life changes and sometimes you need to sell before you expect. A one bedroom 6,000 square foot home will be difficult to sell in the future regardless of how many receipts you have on file. The market approach will dictate what a buyer is willing to pay.

General Contractor

It is important to interview several contractors as you are looking for one that is compatible with your communication style, has the time, strong resume’, work force and service providers in place for the size of your project. Checking references, their license, bond and insurance are also very important items. We do not have a functioning Angie’s list in San Juan County, but your real estate agent, neighbors, lumber yard store or acquaintances should be a good starting point.

Insist on a legal contract between the parties with provisions for start and completion dates, description of materials, change orders, punch list items, warranty and cost over runs. Knowing their payment schedule requirements, percentage of override on materials, percentage of profit, plus a clear outline of their responsibilities is very important and should be all included in the contract.

You can use an AIA form if your contractor does not have a contract drawn up by their attorney. If they do not have a decent contract, that may be an indication that you need to keep interviewing contractors.

Many of the contractors on the island will not bid a custom home due to the complexity and unknowns so they offer time and materials contracts. In real estate, verbal arrangements are not binding, be sure to get all agreements in written form and have your attorney review them.

You might be able to convince each contractor you interview to give you an estimate but that is unrealistic to expect. It takes weeks for a contractor and their subcontractors to complete an estimate on a home and they prefer to be selected first and then process their estimate. However, before you select one, they will give you a range on the price per foot which will help you with your use of funds calculation and budget.

Once the contractor is selected, they will estimate out the cost of construction and even if the job is not guaranteed bid, they should provide you with the bulk line-item estimate. The estimate is derived from all the major subcontractors such as plumbers, electrical, concrete workers, framers, etc. providing a bid to the general contractor based on the final plans.

Items on the cost breakdown that are owner’s choice, such as interior design, hardware, hard surfaces and appliances are often just a reasonable budget line item for the buyer to use. The concept is that you stay within the budget or process a change order if needed. During the early stages of a project, it is not expected that an owner will have made their choices for the finish items, and the process evolves along the way. You do want to make the selections as soon as possible so that the materials can be ordered in a timely manner and not delay the subcontractors.

Shopping On-Line

It is great that property owners can shop online and select their lighting and plumbing fixtures as the selection is much better than visiting a showroom. However, be sure to identify the item but have your contractor or subcontractor order it so that all of the parts needed are ordered and arrive on time. Ordering materials should be left to the professionals and those that intend to do the installation.

Designer and/or Architect

Just as stated above for a General Contractor, you should interview several to make sure the compatibility issue is addressed. You also need to decide if you want to use an Architect or Designer. There is a difference in the service providers. On high-end project, architects are typically used during the development of the plans and descriptions of materials. They may also be involved in site selection and citing of the home on the site. They may or may not stay on and provide full services which includes the monthly construction draw inspections, site inspections and review of change orders. To use full-service architects from start to finish can add around 30% to the cost of your project. The architect will add creativity and flare to your project.

Some property owners decide that their project can be processed by a designer, which will cost less. Some property owners buy stock plans and have them redrawn to meet with local County code. Each project is case by case and the out-come of the product is determined by who you choose to be on your team. Many general contractors have designers on staff or are trained themselves in CAD so their firm can also design the plans for permits and the construction.


In a perfect world, the architect, designer, or contractor that you have selected has a relationship with San Juan County building department and will submit your package for permitting. If you selected an off-island team, you may want to hire a local land use consultant to manage the permit process as they have the relationships at the County and local knowledge that is very helpful.

Items needed to submit for a permit include, but are not limited to:

  • Plans – foundation, floor and elevations.

  • Plot plan – lot dimensions, setbacks and easements, topography.

  • Description of materials and their specifications.

  • Storm water management plan and all structural engineering.

  • Archaeological, if applicable.

  • Certificate of Water availability and all associated reports.

  • Septic design or permit approved by San Juan County.

  • Private road, well and septic maintenance agreements, if any.

Site Management

It is imperative that you are available to your general contractor for regular communication. The optimal situation is you live on island and visit the job site once a week. That way you can note the progress or lack of progress, and react accordingly.

If you live remote, most contractors are able to Facetime or video the job for you so that you can answer their questions. It is very common for the floor plan to change slightly during the course of construction; maybe another closet, an interior wall alteration or a deletion. It is very difficult to review plans and notice minor changes that would enhance the project, until you actually see the framing.

You can also retain your architect or designer or a consultant to visit the site monthly, photograph and record progress and any problems and report back to you. However, it is always best to have direct communication with the General Contractor.

Cost Over Runs and Change Orders

Verbal agreements are never a good idea so insist on written change orders for materials and line-item cost revisions. These orders are written authorizations to the contractor to make a change or addition to the work described in the original contract. Most will affect the cost and schedule. Document your file with working notes and photographs. Make sure you clearly understand the change that you are agreeing to.

Final Payment

Be sure not to make the final payment until you are satisfied with the work and know that the major subcontractors and suppliers have been paid. You can require copies of the subcontractor lien waiver affidavits and obtain one from the general contractor as well. Make sure to get the County certificate of occupancy and all historic permit inspection cards and the working set of plans for your record keeping.

Those firms that work on your project or provide materials and are not paid have a right to enforce their claim for payment against your property. They may file a construction lien which will be a cloud on your title and if not paid and cleared, will interfere with any future refinance of home sale. If you receive a notice of intent to lien during the course of construction, take it very seriously regardless of the explanation that your general contractor may give you. Insure that the subcontractor claiming the lien is paid or a settlement reached before moving forward. Any lien will stop your lender, if any, from disbursing future construction funds.

Typically, the contractor’s profit is in that last draw so they are always very motivated to finish the job to the owners satisfaction.

Be sure you understand the terms of completion with your builder. Was site clean-up and trash hauling included in the price? Typically, the contractor’s contract includes “broom clean” and a cleaning person for the windows and job scrapes. Remember, you are not allowed to burn dimension lumber, even though it makes the best kindling.

New Home Warranty

Washington state does not require a general contractor to provide a warranty of construction labor and materials. However, most contractors offer their own and a punch list with follow-up on a job is standard procedures.

Contractors and their subs offer this as part of their business model and to maintain their reputation in the industry and community.

You will want to have a list of all major subcontractors that worked on your home as a convenience. You may want to call back one of them for additional work or changes. The contractor may also provide you with copies of the subcontractor’s warranties for materials and workmanship.


Keep all paperwork related to your project in one place. This includes the contract, change orders and correspondence with your home builder. Keep a log or journal of all phone calls and activities. You might also want to take photographs as the job progresses. These records are especially important if you have problems with your project – during or after construction.


Building custom construction on the island can be character building and may even give you a few grey hairs. However, in the end, the home is designed and built to your exact specifications. In our market it will take about 20 months from the lot purchase to walk over the threshold. This quote of timeline is subject to your general contractors schedule as well.


  • General Contractors manage all aspects of your project, including hiring and supervising subcontractors, getting permits and scheduling inspections. They work directly with you, your architect and/or designer.

  • Specialty Contractors or subcontractors install a particular material during the project such as cabinets and plumbing.

  • Architect and Designers design the homes. They typically bring in engineers for structure work and specialty design items such a storm water management.


As usual, this article is meant for informational purposes only and not intended to be relied upon in its entirety.

Written by:

Merri Ann Simonson



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