Until recently, one tried-and-true assumption about buying versus building held firm: Building a custom home was a drawn-out, messy process that in the end got you more bang for your buck — instant home equity.
Today, however, you can’t take that for granted. COVID-related supply chain problems have driven building supply prices skyscraper-high and added about $35,000 to the cost of building an average home.
So, should you build or buy a home in 2021?
What’s Happening to Building Supply Prices?
That said, kinks in building supply inventory are temporary, and lumber prices have been dropping for weeks. The effect of lower prices at the wholesale level has not yet filtered down to builders, who buy at the retail level.
The good news for aspiring homeowners is that the cost of building should fall back a bit in the upcoming weeks.
According to the National Association of Home Builders (NAHB), “Depending on the rate and consistency of price decreases and whether prices have stabilized at the lower level, it may take a few weeks to a couple of months for builders to see price relief on the order initially reported in the futures or cash markets.”
Different Types of Construction
There is more than one way to build a home. You might choose to buy new construction from a developer, have a custom home built to your specifications, or bargain hunt with a fixer-upper and remodel it from the ground up.
You may even consider going with an Eco-Friendly home.
When comparing the cost of building to buying, get a commitment for constructing the custom home you want at current prices. Compare that to a new developer home with similar features, a bargain that requires some fixing, and an existing home in excellent condition with the features you want.
If price is your primary consideration, go with the property with the lowest acquisition cost — including buying, building, repairing, financing, and closing costs.
Note that construction financing costs more than conventional mortgages. However, there are many other considerations in addition to the cost.
You can avoid additional construction loan financing expenses when buying a spec home and getting a traditional mortgage.
Buying a Home: Pros and Cons
Buying a home is the more popular option. That mainly comes down to three advantages:
It usually takes 30 to 60 days to find, finance, and purchase a home, while building a house takes six to 18 months. People who face deadlines — such as moving for a new job or moving in time to get their children into new schools — don’t always want to rent during the building process, and they don’t relish the “opportunity” to move twice.
More Choice in Neighborhoods
If you want an established neighborhood with vintage homes and mature landscaping, there may not be empty lots waiting for someone to build. And if you want the community with the best schools, there may not be lots available at all.
Often, new areas with building opportunities are on the outskirts or suburbs, perhaps not your ideal. Your best bet might be a well-built existing house or a fixer-upper if you live with construction chaos for a few months.
Stretch out Costs
You can usually find a cheaper existing home than you’d spend for a brand-new house. It might be more manageable to buy an affordable house and then upgrade it as money comes in.
On the other hand, older homes can have obsolete systems and be energy hogs. And you might not want to look at 1990s-era bleached wood and brass finishes until you can get around to remodeling.
Building a Home: Pros and Cons
The most popular reason for building a home instead of buying is the ability to get exactly what you want — whether that’s energy efficiency, smart home features, or very specific items such as a dog washing room, home theater, or stone pizza oven.
Another major benefit of building a new home is that your systems are new, up to code, and unlikely to fail. Maintenance costs are much lower for a new home. You’ll also be able to take advantage of manufacturer and builder warranties.
While with a resale home, you’re pretty much stuck with repairs once you close, and the odds of something malfunctioning are much higher.
Regarding which option costs more, it depends on the project, local housing markets, and labor costs. Note that if you purchase a newly constructed home from a builder/developer, the profit (19% gross and 7% net, according to the NAHB) goes to the builder.
While if you contract for a custom build, you split the profit with the builder and typically gain some equity instantly. And you can cut costs substantially with “creative” building plans — tiny houses, modular homes, and kit homes.
These are cheaper housing options worth looking into.
You should commission an appraisal for your property — as-is and as completed. Then you can compare the expected build cost with the projected home value and see if building is cost-effective.
Do’s and Don’ts for Builders and Buyers
Understand what you’re getting in a home. Whether you’re buying or building, make sure everything you need is in your contract. If you want the high-tech refrigerator and hot tub on the deck, make sure the sellers aren’t planning to take those items with them.
Homebuilders often don’t include things you might consider basics — paved driveway, landscaping, sodding, eavestroughs, or air conditioning, for instance. If you’re considering a newly built home, make sure the features you require are included or price them out to determine if your budget is reasonable.
Understand that things will take longer than expected and do everything possible to speed things up. Line up your financing and get your mortgage pre-approval before hunting for property.
If you’re effecting a 1031 exchange (legal in all states from California to New York), get your paperwork in order — you normally have 180 days to complete the tax-deferred exchange or face stiff penalties.
Find a few reputable builders and get bids from each. Builders normally won’t pull permits and start until they have a signed, binding contract and your deposit.
Be certain that any builder you consider is approved by your mortgage lender — that helps you avoid shaky contractors. Expect construction to take six to 18 months, and understand that every change you request once underway will cost you money and add time.
Splitting the Difference: Buy a Fixer-Upper
Fixer-uppers can provide the best of both worlds. You can find a less-than-perfect home in your dream neighborhood. Purchase your rundown house at a discount and then hire a builder to upgrade the systems, increase energy efficiency, and make it safer and more attractive.
You can finance the purchase and rehab with a single loan. Pay attention to the improved value of the property on your home appraisal. That will tell you if it’s cost-effective to buy used and improve rather than to purchase new.
Make Friends With a Good Agent
Building sites that meet your needs, perfect properties in your chosen neighborhoods, and potentially profitable fixer-uppers don’t stick around long on real estate markets.
To get an advantage in your search, find a knowledgeable, reputable agent who can quickly locate what you need and perhaps come up with creative solutions. Not using a good agent puts you at a disadvantage in today’s hotter markets.