When homebuyers come to the real estate market, many are conflicted about buying an established home or building their dream home from scratch. There are a series of pros and cons with both options, and making a decision will ultimately come down to your personal preferences, budget and needs. An established home is one that has been lived in, and it may have had a number of owners over the years. When you purchase a brand new home or construct your own, you will be the first living in it. Many small businesses debate the financial pros and cons of buying versus building custom business space. During the process, several factors should be considered, particularly the business’s short and long-term growth plans and the current state of commercial real estate, construction and rental markets. Also critical is the amount of cash the company has on hand and its interest in taking on real estate investment as a secondary business venture.
When you buy a building, you’re likely to incur fees including appraisal costs, a down payment, loan origination and closing fees and build-out to get the facility ready for move-in. When you build a facility from scratch, you have these fees and architectural design fees, building inspection fees and myriad contractor and building costs. In addition to construction costs, you’ll have to purchase land and, in some cases, pay to bring in utilities. You may also have serious downtime between when the building process starts and when it’s ready for move-in and regular business operations.
The fiscal responsibility of buying versus building often rests on the type of facility your business needs. For example, suppose you’re an accounting firm that needs basic office space. In that case, you can probably find a new or resale office complex that meets your needs without the serious overhead associated with building from scratch. On the other hand, if you have a business of a complex nature or you need highly customized facilities, you may be better served to build new than trying to retrofit an existing building you purchase.
You are building a facility that’s larger than what you currently need gives you a variety of options for the future. You can sub-lease the space to help offset your investment costs while retaining the option of expanding your company’s occupancy as your company grows. Depending on the market, real estate has the potential to appreciate in value, so you could potentially make a profit on your investment in the future if you decide to sell your facility.
Depending on your business and your state of incorporation, you may be eligible for certain tax breaks based on whether you buy or build a facility, particularly if your investment will result in significant new job creation. Check with your state’s economic development department to inquire about available tax incentives and factor potential savings into your decision-making process.
The Average Cost To Build Your Own House
“When building a custom home, the only way you can get a solid idea of what the cost will be is to get a set of architectural drawings and specify exactly what you want to build,” he said. To get the most accurate estimate, Gassett recommended choosing house plans and asking a few builders and architects in your area to provide cost estimates. Averaging their bids will help you get a clearer picture. The biggest difference in the average cost of building a house vs. buying (where there wasn’t a house previously) is in the land. While existing home prices factor in land value, building a home requires purchasing land first—an added expense that will determine the final price of your home. There are several things to consider before your dream home can come to life.
- The purchase: The price of existing houses factors the land value, but building on vacant land is another story. If you plan to finance your new home, you can use a construction loan to purchase land, labour and materials, which will convert to a traditional mortgage once the project is complete. Land that doesn’t yet have onsite utilities such as water and electricity may be difficult to finance because your lender would have more difficulty selling it if your loan defaults.
- Utilities: The necessities homeowners take for granted are major expenses for builders. “When deciding to build, a lot of folks don’t take into consideration the cost to get permits and get utilities connected,” said Simran Chandok, a real estate agent in Seattle. “These costs can run into tens of thousands of dollars. City permits to build can also run into issues depending on the area, [which may] prolong timelines to complete construction,” she said. If possible, limit your land search to properties with utilities and access roads already onsite, or consider asking the seller to complete these tasks when you make an offer.
- Excavation: What is the quality of your land? Is there rock beneath the grassy surface? Is there drainage in case of a flood? Will your foundation hold? These are questions answered during the first step of the building process, which can cost several thousand dollars depending on the steps necessary to make the land ready for building. To avoid surprises, ask your real estate agent to include a 30-day inspection period in your offer. This time will allow you to hire professionals to answer these questions, estimate costs and determine whether the land is a sound investment. If not, you have the option of rescinding your offer.
The Average Cost Of Buying A House
The average cost to build a home in some parts of the U.S. is $237,760, but there are additional expenses you’ll need to think about before moving day.
- Closing costs: Average closing costs include an appraisal fee, survey fee, wire transfer fee, underwriting and origination fees, document preparation, title insurance, and more. Expect these to cost between 2% and 5% of the purchase price.
- Real estate agent commission: The buyer and seller’s real estate agents usually split a 6% commission on the home sale.
- Property taxes: In 2018, property taxes in the U.S. rose to at least $3,498 per home, according to ATTOM Data Solutions, a property database company. Your taxes may cost more or less per year depending on your property value, neighbourhood and state tax rates.
- Homeowners insurance: Like property taxes, homeowner’s insurance rates vary by state and property value, and your credit score also plays a role. The average annual cost in the U.S. is $1,083, according to ValuePenguin, a Lending Tree company.
- Private mortgage insurance (PMI): If you purchase your home with a down payment of less than 20%, you’ll pay PMI on your mortgage until your equity reaches that value. PMI typically costs between 0.5% and 1% of the loan amount. For example, a $200,000 mortgage would have PMI costs of $1,000 to $2,000 per year.
- Homeowners association fees (HOA): You may have shared expenses with your neighbours to keep common areas. “When the neighbourhood has an association, there are almost always common fees that go along with it,” Gassett said. “It is important to know exactly what you will be required to pay and what it is going toward.”
Risks Of Building A House Vs. Buying A House
Even so, transitioning from a renter to a buyer has plenty of practical advantages: increased equity over time, mortgage tax deductions, and design and pet ownership choices. Owning property can also provide a sense of stability and a “home” that many crave. But the perks of homeownership aren’t without risks. So keep these potential outcomes and suggestions in mind before you move forward:
- Job loss or change: A loss of income can be devastating under any circumstances, but the risk to homeowners is more pronounced than their renting peers. Failing to pay your mortgage can result in foreclosure—which, in addition to losing the roof over your head, can damage your credit for up to seven years. A career change is less serious, but you may still need to sell your home or abandon your building project at a loss. Consider your career plans over the next few years, including how you feel about the area. Talk to your boss about the stability of your job, and ask what you can do to make things more secure.
- A declining market: Between 2007 and 2013, the average American household lost 43% of its net worth, according to a Stanford University study, thanks largely to the 2008 housing crash. Home values ebb and flow with U.S. market trends and employment, which means you have limited control over the stability of your investment. Before buying, research your city’s projected growth, unemployment rates and neighbourhood values.
- Rising property taxes: Property taxes always have the potential to increase, and if you’re building a home, the X-factor of that first tax assessment could impact your budget more drastically than anticipated. Consider asking your real estate agent or builder to help you estimate property tax costs in your area based on the latest data. Budgeting ahead of time can help you prepare.
- Unforeseen maintenance: Building a home can carry unforeseen construction costs, but even established homes can present costly repairs. “Older homes will need roof and siding repair that can drive up the cost,” Chandok said. “The home furnace and water heater will also need to be replaced between 12 and 15 years” down the road. Other costs that drive up ownership of older homes include dated wiring and plumbing. “Other than these functional repairs, you will have to take into consideration updating appliances and other aesthetic features to modernize the look of your home,” she said.
A home inspector can help you determine the extent of your potential property’s repairs to gauge whether it’s the right choice. So be sure to include an inspection clause in your initial offer to buy.
Which Is Best Building Vs. Buying?
Aesthetics aside, there are some things to consider before making your decision and it’ll mostly come down to finances. So ask yourself two important questions before making a decision.
- How is my credit? Whether you’re building or buying, good credit is essential to locking in the lowest interest rates and keeping your expenses in check. Credit-scoring companies, such as FICO, calculate your credit score based on the information in your credit reports. These are compiled by three separate credit bureaus: TransUnion, Experian and Equifax. Sites like Credit Karma allow you to check your scores for free, but for the most accurate picture, it’s best to purchase your credit reports and scores directly from the bureaus.
- Can I lock in certain rates and expenses? While building a home comes with a lot of variables, you can plan for fixed expenses. Working with a contractor who is open to helping you save on building materials and third-party subcontracting can help you save on costs. Ask whether your participation would be welcome. A fixed 15- or 30-year mortgage is the best way to lock in interest rates and secure a predictable monthly payment when it comes to buying.
The Pros and Cons Of Buying or Building a House
Who doesn’t love getting something brand-new—especially if it’s custom-made just for you? The problem is, custom-made things tend to come with higher price tags and longer delivery times—which are important factors in deciding whether you should buy or build a house.
A house is way too big of a financial responsibility to make a wrong choice here. So, to help you land the best decision for you and your budget, we broke down the pros and cons of building a house.
Pros of Building a House
Okay, now that we covered pricing, let’s look at the specific benefits of building a house:
- Customization. If you build a house from the ground up, you’ll get to personalize the details to suit your lifestyle and tastes—from the layout, cabinets and flooring to the sinks, lighting, paint colours and doorknobs! Even tract homes built within subdivisions allow customization in colour choices, flooring options and certain finishes.
- Low to no competition. It might come as a shocker given the state of the world over the last year, but the 2021 real estate market is hot. In February 2021, existing homes were on the market for an average of 20 days!4 With homes flying off the market so quickly, competition to find the best existing home at the lowest price can be tough. But if you already own the land you want to build your home on, you have zero competition!
- Lower maintenance. Since new homes are built to meet current building codes and have up-to-date technology, you probably won’t have to worry about big repairs or serious maintenance issues for the first few years—meaning no leaky roofs or failing HVAC systems! Plus, many homebuilders offer a limited warranty if something should break.
- Lower energy costs. New homes often feature the latest energy-efficient systems and materials, which usually leads to lower energy bills—woo-hoo!
- Newness. You get to start fresh as the first owner of your home and enjoy brand-spanking-new systems, finishes and fixtures.
Cons of Building a House
Okay, we already know one disadvantage of building a house is that it’s more expensive—which isn’t so bad if you can budget for it. But now let’s consider all the other cons of building a house just to cover our bases:
- Longer wait time. It takes an average of seven months to construct a new house—not counting the planning and approval stages.5 This means you’ll likely have a gap in living arrangements between the time you sell your old place and build your new one. So you’ll need to be prepared to cover the cost of renting until you can move into your newly built house.
- Harder to negotiate price. Most buyers go into a home purchase hoping to lower the price. While that’s super common in the resale market, new homes are a little different. Usually there isn’t much leeway on closing costs or purchase price with a builder—unless your real estate agent brings a creative mind to the negotiation table. Still, you’d probably get more bang for your buck with an existing home.
- Noise and mud. If you build a house where other new homes are being built, you might have to deal with construction noise, traffic and glops of mud along your commute. Sure, things will eventually calm down as other homes get completed, but it’s something to consider if your tolerance for noise level and messiness is on the low end.
- Stress. When you build a house, you’ll have to purchase land, decide on a home design, pick out flooring, fixtures, cabinets, countertops, interior trim, exterior trim, and on and on it goes. You’ll have to do all of this and stay within your budget. Managing all the details that go along with building a home takes time and effort. Don’t underestimate the depth of stamina you’ll need to make sure it’s all done the right way.
- Hidden costs. Those dollar signs you see on the sticker—for things like countertops, fixtures and appliances—are just the tip of the price-berg. Upgrades can quickly drive up the price of your new home and may or may not be rolled into your contract price. Play it safe by budgeting for only those you can cover with cash. And don’t forget about post-move costs like landscaping and blinds—they’ll sneak up on you too.