May 112018
 

Is Building a New Home a Better Deal Than Buying an Existing One?

Just the other day, a friend of mine argued that building a new home is more cost efficient than buying an existing property.

Her new home is almost finished, and will be move-in ready in about three weeks — so she’s understandably excited. Plus, she said, she’ll be saving all kinds of money because she built.

While I understood her excitement, I found that part puzzling. Was building a new home really cheaper? Please say it isn’t so.

She went on to explain that her new home came with a warranty on its construction and individual components, which would save her money if her home had any structural defects.

“Plus, I won’t have to replace a roof or an air conditioner for a decade,” she said. Since everything in her new house would be straight from the box, she felt sheltered from many of the surprise costs of home ownership we all complain about.

Why Building Usually Costs More

I wanted to dig deeper, so I reached out to an array of experts on the topic. As I suspected, there is no hard and fast rule. Just like the “rent versus buy” conundrum, the cost of building versus buying depends on a number of factors – some of which aren’t even in our control.

Still, the numbers don’t really lie. According to the National Association of Home Builders, the median price of a new home in the United States was $301,400 in February of 2016, while the median price of an existing home was $212,300.

That disparity can be explained at least partially by the idea that those who build new are often investing in larger and more luxurious homes. The median age of an existing, owner-occupied home in the U.S. is 37 years old, according to the NAHB. Back when such a house was built, around 1979, the median size of a newly constructed home was 1,645 square feet. In 2014, the median-sized new home was up to 2,453 square feet. A home that’s nearly 50% bigger is certainly going to cost more.

However, most experts concur that building new simply costs more on the front end. Here are a few reasons why:

Builder profits: Any new build is going to include some expectation for profit, which is part of the reason building a home costs more than buying an existing one, says founder of Beacon Real Estate, Stephen Maury.

“One contributing factor is the profit margin that a homebuilder will necessarily tack on to their cost of construction,” says Maury. “Sellers of older homes are less concerned with replacement costs than they are with capturing a profit on their investment,” he says. “Also, those homeowners will have benefited from value appreciation in the years since they built or purchased their home.”

More stringent energy policies or building codes: One instance where building new can cost more is when codes and rules have changed over the years, says Maury. “Depending on the age of the existing home, new homes may be required to be built to a more stringent energy code, to withstand higher winds, or at a higher elevation based on new FEMA projections for flood risks.”

Then, there are upgrades that are voluntary. One current trend is building “green,” or environmentally friendly homes, says Andrew Leff, national builder executive for Bank of America. Many newly-built homes come with energy certifications covering everything from roofs to appliance packages, while many existing homes were originally built to lower standards.

Then again, investing in an energy-friendly home could be a better long-term investment, says Leff. “While environmentally-friendly homes may cost more upfront to build, it could save you more money in the long run in terms of energy bills.”

The cost of land: When you buy an existing home, the cost of land comes with it. Buying a new home, on the other hand, generally means hunting down the perfect plot first. And that can be expensive, says Yariv Bensira of real estate firm Hyde Capital and investment management firm Lennox Companies.

“From my experience, if you’re looking to buy or build in a high demand area, the cost of purchasing land and then having to build a new home is more expensive than buying an existing home,” says Bensira. “The cost of the land [by itself] might be comparable to or near the cost of an existing home, so if you add in the building costs, permits, and time involved, you’re looking at a much more expensive proposition.”

The rising costs of materials: Where an existing home – and especially an older home – was built with materials that were purchased long ago, new homes require new materials that can be a lot more expensive.

“Building materials and building costs keep increasing,” says real estate investor Mark Ferguson of Invest Four More. “Building permits get more expensive.” While these costs can vary from home to home, increasing supply costs have a tendency to drive up prices for new homes across the board.

The Hidden Costs of Building a New Home

In addition to the many known and common costs that make building a new home an expensive proposition, a slew of hidden costs can also drive up the price of building. While some of these expenses are obvious if you really think about them, they still catch people off guard from time to time – and can send your building budget straight out the window.

What are some of these hidden costs? The experts weigh in:

  • Window coverings: “These usually come with an existing home, but can add up quickly if you have a lot of windows or if any are custom,” says real estate investor and consultant Eilene Wollslager.
  • Landscaping: “Most new builds either do not include landscaping, or only include front landscaping,” says Wollslager. “Depending on the size of your lawn and the detail of landscaping, this can add thousands of dollars.”
  • Random incidentals: There are always the unexpected costs, says Wollslager. These “extras” can include things like picture hanging supplies, decorating items (your old ones never seem to fit the style of the brand-new home), additional cable and electric outlets (they never seem to be where you thought they should go), extra keys and garage door openers. “There are always myriad small expenses that if you add them together can mount to a sizable expenditure,” she says. “Since these don’t always happen all at once, they often get overlooked as part of the expense.”
  • Furniture: If you’re building a bigger house, you might be surprised at how much more furniture you need. And whether you really need more furniture or not, you might find that your old pieces don’t work that well in your new place.
  • Upgraded finishes: “The biggest surprise cost in building a new home in a city usually appears with custom upgrades,” says Oregon realtor Kim Crieger. Add in the fact that most builders put in the least expensive paint, plumbing, and flooring at first. Whether you want to upgrade those finishes now or down the line, you’ll need to pay for them.
  • Driveways: With a country property especially, the most common unexpected expense is road and/or driveway building, says Crieger. “This usually costs far more than buyers anticipate, and is often taken for granted.”
  • Fences: If you want any expectation of privacy and have close neighbors, building a fence might be a necessity. Depending on the type and size of the fence, this can add several thousand dollars or more to the cost of building a new home.

And the list goes on and on. Depending on the size, location, and geography of your home, you could be on the hook for anything from custom sprinkler systems to alarm systems. At the end of the day, there is no limit to the “extras” you might find you need when you build a new home from scratch.

The Bottom Line

As with anything else, the difference in cost between building a new home and buying an existing one depends on a whole host of factors. The size and type of home you’re interested in will surely play a part, along with the location you hope to end up in.

To weigh the pros and cons of each option, Maury suggests sifting through some of your options and potential costs with a real estate broker. Start by searching available homes for sale. Then, once you find one you like, look for available lots where you might be able to build a similar home.

If you’re intrigued by the idea of building a home, talk to a contractor and ask about having a new home built in a similar style to the one you like. Find out the price per square foot of the construction, add in the cost of the land, and then compare the total to the cost of similar existing homes. Just make sure you’re taking into account everything that might be involved, including some of the hidden and unexpected expenses people don’t always plan for.

Either way, don’t listen to realtors, builders, or even friends who say one way is definitely cheaper than the other. With so many factors at play, it’s impossible for anyone to know with certainty. Building a cheaper starter home might be less expensive for one person, while buying an existing home and then adding custom upgrades could cause another person’s housing budget to explode.

At the end of the day, it pays to err on the side of caution and run all the numbers on your own. Whether building or buying, the best decision you can make is an informed one.