Build or Buy?
Sometimes you just can’t find the perfect house. With inventory as tight as it is, options are slim, and buyers often must settle for a home that isn’t their best match if they’re determined to purchase now. But there’s still a way to get exactly what they want, even if it’s not on the market. They could build the house of their dreams — though the process may be grueling.
Building comes with many more details to keep track of than buying an existing home. You have to get construction permits, work with an architect, worry about staying within zoning regulations. It’s a daunting task that not every home buyer should take on. But for clients who want what they want and can’t find it anywhere, new-home construction could be their best option.
So should you advise your clients to build instead of buy? You have to feel them out first to determine what their goals are. “It’s important to know whether [building a home] is something your client will actually enjoy, or if it will become a job to them,” says Christine Lutz, residential sales director at Kinzie Real Estate Group in Chicago. “Why do they want a custom home? Are they excited to bring their vision to life?”
The most obvious attraction to building a home is the opportunity it provides for customization. Buyers can make their new home whatever they want it to be when they’re creating it from scratch. But there are other advantages and disadvantages to building that your clients may not always be thinking about. Here are some key points to consider.
Cost of Building vs. Renovating
Existing homes commonly are outdated and require renovation. Though buyers will pay less at the closing table to purchase such a home, the additional renovation costs can quickly add up — possibly sending their total expenses higher than if they had built a new home.
According to the 2015 Remodeling Cost vs. Value Report, the following common mid-range remodeling projects can be steep in price (based on national averages).
- Two-story addition: $161,925
- Master suite addition: $111,245
- Basement remodel: $65,442
- Major kitchen remodel: $56,768
- Bathroom addition: $39,578
- Roofing replacement: $19,528
- Minor kitchen remodel: $19,226
- Bathroom remodel: $16,724
- Window replacement (wood): $11,341
- Window replacement (vinyl): $11,198
It might be a helpful exercise to add any of those costs to March’s median existing-home price of $212,100, and see how close it comes to the median price of a new home, which was $277,400 also in March. (Both figures come from the National Association of REALTORS®.)
“When I meet with a customer to remodel after they already made the purchase, many times they find out that it would have been more economical to just buy a lot and build a new home,” says Michael Dembinski, senior vice president of sales at Rinehimer Construction Inc. in Poconos Pines, Pa. “It’s important to always consider the cost to remodel an existing home versus the cost to build new. Many times, I will meet with the real estate agent and their potential buyer to assist them in their decision process.”
However, there are some additional upfront costs associated with building, including the cost to buy the land as well as fees for architects and construction permits.
Difference in Value
Homes built today are likely to command higher values than existing homes, primarily because improved building standards have led to better-quality housing products, says Brett McIntyre, GRI, an agent with John Greene REALTOR® in Naperville, Ill. “The energy-efficiency standards and local building codes that are in place today far exceed those that were in place in prior years,” he says.
The greening of new homes is an important value added that most existing homes don’t have. Many markets now require certain energy-efficient features in new construction, such as a higher grade of insulation and Energy Star windows and doors, that aren’t found in older homes. For people who build rather than buy, their homes will be ahead of the green curve — and that will fetch a better price when it comes time to sell. Demand for green homes is soaring, with more than 80 percent of home buyers across ethnic groups indicating they want energy-efficient features, according to a study last year by the National Home Builders Association. And the median sales price of a home with green features can be as high as $47,600 above homes without them, according to a Redfin study.
On top of that, builders often exceed local and state building codes for quality control, and most new construction comes with a builder’s warranty for up to five years in addition to manufacturers’ warranties. “We all have said at one point, ‘Things aren’t made like they used to be.’ And in the case of new construction, this is a good thing,” McIntyre says.
Convenience and Budget
The transaction timeline is a major plus for existing homes. Buyers can move into a home immediately after closing, which typically takes place 14 to 60 days after a seller accepts a buyer’s offer. Even if the home needs renovations, the work usually won’t displace the new owner. But with building, the timeline to move in extends months — or even years.
“It’s not all peaches and cream,” says Rob Jensen, broker-owner and president of the Rob Jensen Company in Las Vegas. “The building process is not easy. It can take well over a year and requires constant attention. Even when working with some of the best builders your town has to offer, it’s important to plan on making regular trips to the job site — almost daily. Plan on bringing the construction crew lunch once a week as well.”
Buyers who build have to live elsewhere while construction is underway. For most, that means paying two mortgages or a mortgage and rent for a year or more. And if construction delays occur because of bad weather or contractor and inspection issues, the extra costs can eat into their budget quickly.
Another reason buying an existing home may be more attractive than building is because it’s often harder to obtain a construction loan than a traditional mortgage. Construction loans are more complex and involve more risk, and lenders will typically not approve them until building permits are secured. This means buyers need to have more money available upfront.
Traditional mortgages can also be cheaper. They come with the option of a fixed interest rate, whereas construction loans, which are short-term, most often have variable rates. Construction loans are also more difficult to qualify for because they cover a smaller percentage of a purchase than traditional mortgages, says James Roche, CEO of HousePlans.com. Construction loans will finance up to 65 percent of a project while traditional mortgages cover up to 80 percent of a home purchase, Roche says. So buyers will have to bring a much heftier down payment to the table if they’re going to build. That’s a high standard to meet on top of credit score and ability-to-pay qualifiers, which make it hard enough for many people to get any kind of loan at all.
When the build is complete, lenders tend to offer limited options for the repayment of the construction loan: refinance into a traditional mortgage or roll the construction loan over to a five-year ARM. Buyers most commonly refinance into a 30-year fixed-rate mortgage, but that will involve going through a completely new underwriting process.
If location is important to a buyer who wants to build, it may be difficult to find land in the neighborhood of their choice. New subdivisions are the best bet for finding lots, but that means taking a chance on a location that hasn’t been established yet. Existing city lots or unbuilt lots in older subdivisions are rarer to come across. If the buyer places a high importance on living in a location with a lot of amenities, it would probably be better for them to buy an existing home in an established neighborhood.
Here’s the bottom line: If your buyer’s ultimate goal is to have a perfect home that meets every desire — and they have time and cash to see the project through — then you should advise them to build. If the ideal residence is not as important to them and time is of the essence, tell them to buy.