#1 Latvian house party - can you build a house?
Don’t judge - pandemic happened & I thought that building a house is one of the only logical decisions to be made. Fast forward 3 years - there is still no house, but I sure learned something
There are quite a lot of things to consider even before you buy a land plot & unfortunately, it’s super likely that the whole process will be much more expensive than you anticipate at the beginning. This piece will be followed by another one on this topic.
The question remains - should you, should you really build a house?
Probably no. Nevertheless, if you are known for not picking the easiest path in your life, then why not really? It will be a capital & time-intensive project that will take you through a sea of emotions - from imagining your dream house in that perfect land plot to wanting to murder some of the involved parties & maybe, just maybe even your loved ones.
🚩 Also important to note, I have no fucking clue what happens after the actual construction starts, but that’s a story for future me.
🎬 Where to start?
I believe that the first misconception is that it all starts with picking the land plot. But no, not really - it starts from the size of your money bags. That will impact pretty much everything. If you are filthy rich & want to live in a beautiful place, then get a person that helps you or buy a house. For the other 99.99%, you can keep on reading.
Ok, what money bags?
I am assuming that the main source of funds will be coming from a bank in a form of a mortgage loan. Be warned - you will need pretty large personal savings as well. Btw, there is a rather fun origin story of the word - mortgage.
How large loan can you get? Allegedly.
A theoretically good starting point is to go to some loan calculator & find out. For sake of an example, let’s assume that the family’s after-tax income (& official) is very generous €4,200. It might feel pretty high, but it will give a good illustration of a couple of important things later on, so bear with me.
Ok, so in this case it’s around €280,000 & the amount definitely feels sufficient to build a house, right? The monthly payment; however, is pretty steep €1,561, as the Euribor is already >3%, but let’s take that aside for a minute.
At this point you have to take into account that those €280k should be supplemented with a minimum of 20% down payment by yourself, so in this example, it’s €56k. Sheesh! But, what is a down payment in our example? Part of the money paid for the land plot? Well, unfortunately, not really, but to understand it I suggest that we take a step back. And regarding those €280k, could you really get them in the example? Again, probably no.
How does the bank think about mortgages?
It’s always a good idea to step into the shoes of the other side. For banks, this is a business decision; not an emotional one like it is for you & me. Among their main risk indicators is loan-to-value (LTV) or how much they are ready to give against the collateral (a house).
Collateral - it’s the future house & land. In the unfortunate case, if you stop paying back your loan, then the bank can take it away.
Loan-to-value - this is the tricky part. The most important word of the two is “value” & how it is calculated. Our very wishful brain says that it should be just the money spent on acquiring the land & building the house, yet I have to disappoint you right here. The bank is not that much interested in your costs & potential fuck-ups as they are interested in the value for which the house could be sold in the open market. Why it would be sold? Well, that’s for the worst case if the bank has to take the property from you & sell it to a new buyer.
How do you get to the property’s value?
You need to get an official property valuation. They would compare your future project with actual deals that have happened during the last few years in the area where you plan to build your nice little (let’s be honest here) place & they have to be somewhat similar to your building.. wait, what?
You do not even have a land plot, not speaking about some building plans or construction cost estimates. Yes, that sucks, but that’s the reality. So the best that you can do here is put on your smart pants or face or whatever else & speculate!
🥸 Our hero Matīss meets his mistress Fakebella
As you know by now - I believe in examples. Hocus pocus.. Our hero from the past - Matīss has met a girl & they are married now. Her name is Fakebella & yes, you guessed it - she’s pregnant.
💭 Their financials & expectations
Financials
Their combined after-tax income is the aforementioned €4,200 & there is one family car on a €420 lease; no other liabilities. Fakebella happens to be pretty cash rich & she has saved up some €42,000 (🤑🤑🤑) & well you know Matīss, he is not cash rich, but there is something, so combined they have €50,000. Very good financial standing.
To sum it up:
Household after-tax income: €4,200
Liabilities: €420
Savings: €50,000
Desired future property
They have been speaking & agreed about the potential house - a classic two-store building with a livable area of around 180 m2 & land of at least 1,200 m2. Pretty much a classic. No fancy requirements, but preferably with other families around & somewhat ok public transportation.
🗺️ Land plot
Their choice
Matīss has been on a lookout & finally found a beautiful land plot for his very real family. It’s a new development project located near Mucenieki with 24 land plots & their favourite is 1,200 m2 large & costs €35,000. A great deal - €30/m2. To make it as sweet as it goes the developer is giving them a discount & they can get it for €33,000.
They have read the first part of this post, so they decide to check the deals that have happened in the area; you can do some checking by yourselves on this website. Matīss even contacted a real estate valuation expert that said the following: “There are not many deals in the area, but there are some. We would estimate that the future value for comparable deals is around €200,000 - €250,000. Nearly impossible to go higher“.
It means that the maximum possible loan that they could get from a bank is 80% of that value: €160,000 - €200,000. To be fair, it can be pushed slightly higher with government support programs by Altum. However, that would increase their monthly loan repayments.
It’s the first major decision time for them - (1) buying with cash or, (2) taking a loan.
Financing the land
Banks don’t love it, but they still finance it. Meaning that the financing conditions are not that great compared to just buying an actual house or apartment.
Typical conditions:
Lower LTV: be ready for around 50% of purchase value. €16,500 for Matīss.
Higher interest rate compared to a mortgage loan: it’s more likely to be at least 3%, so together with Euribor around more than 6%.
Term: bank might not be too eager to give 30-year maturity for this loan.
There are some other costs that would arise at this point:
topography & geotechnical survey - not mandatory, but strongly recommended to get the full picture of the land & see if there are any limitations (encumbrances): costs around €500 - €600 combined.
banking, notaries & land registry fees: €1,000 combined with the largest part being 2% of the purchase price to the land registry.
As you noticed - they have decided to finance it partially through the bank, meaning the following:
Savings decrease by €16,500 + €1,500 to €32,000.
Liabilities increase by this new monthly payment of €128, so now €548 together with the lease.
! IMPORTANT ! The amount of the loan will impact their future mortgage loan. The borrowed €16,500 will be subtracted from the maximum borrowing amount (80% of the property’s future value). Because if the bank takes away someone’s home, they can’t sell the land separate from the house, can they?
A tl;dr summary
A wonderful couple with an after-tax income of €4,200 & savings of €50,000 wants to build a house. They are relatively good clients to a bank for a mortgage loan.
Bank’s calculator gives an estimate of a potential loan of up to €300,000, while their hypothetical valuation for future property comes in the range of €200,000 - €250,000. This is being evaluated based on similar houses sold in the market not the potential construction costs.
They did not have a land plot, but they found one & bought it for €33,000. Partly (50%) financed by the bank.
👉 Next up: a) finding an architect, (b) getting a quote for their lovely house & (c) going to a bank for the larger loan. Finally, of course - finding out whether they can actually afford this.
I will leave you with what Nas has to say:
“I know I can Be what I wanna be If I work hard at it I'll be where I wanna be“