Homeowners have trouble finding a contractor to build addition

While it is a modest project, there are structural issues and some unusual elements, including relocating basement steps while avoiding a grease trap. Most of the builders who have been available — even before the pandemic — are non-licensed. They either want us to take on the job of getting the building permits from the city or they are willing to go ahead with the work without a building permit.

Even though we don’t need a loan to complete work, we are beginning to think the only way to move forward is by borrowing money from our bank. That entitles us to hire one of their vetted, licensed contractors. How much more would taking out a loan add to the cost of a project like ours?

A: At first glance, your question seems to be about the costs relating to a loan. But your real issue is finding a contractor to do the work on your addition.

For you to obtain the permit, you’ll need to hire an architect. That architect will draw up the plans for the family room and other alterations to your home. The architect (or someone in the firm) can obtain the necessary building permit from the city. Or, the homeowner can work directly with the city or municipality through the permitting process.

It’s quite common, by the way, for contractors to look for ways to avoid obtaining permits. They’d much prefer to hand that chore over to the homeowner.

The good news is some municipalities streamline the permitting process for homeowners that do it themselves. You should look into the process of getting your own permit and figure out what you will need to do. We suspect that even if you go through your bank, you’ll have to get the required permit yourselves.

We do believe you should hire a licensed contractor to do the work. Having said that, be aware that not all municipalities require contractors to be licensed. But if the municipality does require the license, you should hire someone who is licensed. The local municipality may require the contractor to be listed on the building permit, and they may not issue the permit if the contractor is not licensed by the municipality.

If you are able to hire a lender-approved contractor, we suspect they’d be licensed. But be aware that not all “recommended” contractors are licensed or insured. Be sure to check all recommendations and credentials during the interview process.

Is the real estate market slowing in your neighborhood? A silver lining may be that more local contractors are looking for business. Ask your friends and neighbors if they’ve had a good, recent experience with a contractor. It’s not easy finding a good contractor, but there are many out there.

If you go the bank route, ask the lender what the costs will be for a loan. We suspect they’ll be quite high. You can expect to pay closing costs that may include closing fees, lender charges, title insurance policy fees and municipal recording fees and charges. In addition to these fees, the lender may treat the loan as a construction loan. That might add additional fees for disbursements to the contractor, site visits, and costs to review the lien waivers that they will require of the contractor, subcontractors and suppliers.

Lastly, you shouldn’t forget that you’ll also need to pay interest on the money you borrow from the bank. While interest rates on fixed rate mortgages may be between 5.5% and 6.5% depending on the loan product and the length of the loan, you could see interest rates several points higher than that on a construction loan.

If your project costs $100,000, going the lender route could increase your costs by $5,000 to $10,000 when you consider the lender fees, closing costs, lender inspection fees, and construction escrow expenses; plus, you’ll still have to consider the interest on the loan until you pay it off. That’s a lot of money to pay just to find a contractor willing to do your small project and pull permits.

Finally, no matter where the contractor recommendation comes from (friends, family or a lender), it doesn’t mean that specific contractor will be the least expensive or best available. You still need to shop around to make sure that the contractor’s pricing matches your expectations and needs for the project. Plan to get at least three estimates so you have a baseline for comparison.

(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, a financial wellness technology company. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)