The debate on whether to buy a pre-existing house or construct a new one is an endless one. Both have their benefits and drawbacks. You need to evaluate your options before making a decision. There are several factors to consider.
Some of the factors to consider are the costs of buying a house against building, repairs, and renovation considerations, ownership costs, benefits, and drawbacks of each approach, and whether real estate investors should modify their acquisition approach.
#1 Cost Considerations
Some of the factors that influence the cost of building a house are lifestyle preferences, budget, finishes, size, and location.
The average cost of building a single-family home is $300,000(not including acreage), while the average sale price is $ 278,600 as reported by the National Association of Home Builders (NAHB).
Realtor.com reports that the average sale price per square foot for single-family homes in 2017 sat at $123, while the average cost to build per square foot was $154 in the same year. This implies that the sale price per square foot of a pre-existing home was $31 more than the price per square foot when you are building your own home.
Data indicates that building a home costs 20-30% more than buying a home. These numbers are based on surveys of realtors and builders. Actual numbers may differ due to reporting errors and other factors such as supply and demand, location, and the builder you decide to use.
#2 Renovations and Repairs
A lot goes into the cost of a house. You should consider any additional costs you will incur on repairs and renovations. A new home will not require any repair for at least five years. Any repairs in a new home are covered under warranty. You can also custom make your home which means little to no repairs after completion.
A pre-existing home may require renovations which increases the overall acquisition cost. Before purchasing a home, you need to ensure the inspection is done. Doing this will ensure you know of any repairs and renovations needed beforehand and the cost implications on the purchase price.
Some pre-existing houses have unique architectural designs rarely achievable in custom-made homes. This can potentially offset the cost of any subsequent renovations or repairs.
#3 Extra Ownership Costs
Besides the purchase price, there are additional costs for owning a home. Older houses are often less energy-efficient which translates to higher monthly expenditure for new homeowners.
There are several other things such as old pipes, water heaters that may require replacement. There are also higher Homeowners’ Association fees for houses older than five years due to increased maintenance costs.
New homes are energy efficient since they are built with newer building materials, better insulation, and improved building technology. Energy costs are therefore lower with newly constructed homes.
Homeowner’s insurance costs on older homes are higher than for new homes. This is because older homes are a higher liability depending on the age and its’ condition. New homes have been built up to current standards and building codes and hence pose less risk.
Taxes on a new home are higher than taxes on an older home. This is because older houses are less costly than newly constructed homes
#4 Simplicity of Purchase
It is important to consider financing when deciding on whether to build or buy a house. There are several financing options such as mortgages, loans, and borrowing from other lenders. You need to have a good credit score and down payment to qualify for financing.
It is easier to obtain a mortgage for building a new home than for purchasing a pre-existing house.
#5 Masked Factors of Building Versus Buying a New House
Some of the hidden factors for real estate investors to consider when deciding whether to build a house or buy a pr-existing home are:
- Oversupply – When acquiring a new house ensure you will not face oversupply down the line. If there are too many houses of the same floor plan, and size in the same location your exit strategy in the future will be complicated.
- Appreciation happens if you acquire a resale home at below the market value. A newly built house appreciates as construction is ongoing. This gives you some built-in equity.
- Services- You need to have money to connect your newly constructed house to services. You need to have alternatives for services if the newly built house cannot be connected. For example, you may need to have a septic tank and a well.
- Construction loans – You may need a construction loan as opposed to a standard residential mortgage if you are doing the build yourself. Construction loans have higher interest rates than residential mortgages.
- Energy efficiency – pre-existing homes are often older hence do not have finishes such as HVAC and other energy-efficient appliances. This means they are less energy-efficient and therefore translate to higher utility bills.
#6 Newly built home
Benefits
- You can customize your floor plan and have control to come up with your dream home.
- Lower energy costs due to better energy efficiency
- Lower maintenance costs – there are little to no renovations and repairs to be done
- Less competition for acquiring a plot of land and building a home on it compared to buying an already existing house.
- It is easier to qualify for a mortgage through the builder
- Newness – you are the first owner of the house
Drawbacks
- Take time to build- can involve several complications and delays
- More costly than resale properties
- Has a higher tax burden
- Harder to negotiate price – most prices for newly constructed homes are fixed. There isn’t so much leeway on the closing costs.
- Limited options in choosing a location
#7 Pre-existing Home
Benefits
- Less expensive – there is leeway for negotiating the price
- You have the convenience of choosing your preferred location
- Lower tax profile
- Buying a pre-existing house is a quicker process – takes around three months to complete the process.
- Proximity to schools, hospitals, and shopping centers
- Property value can be determined before purchase
Drawbacks
- Homeowners insurance is costlier for an older home and harder to acquire depending on the age and condition of the house.
- Obtaining financing can be more difficult.
- May need expensive renovations and repairs to get the home up to standard
- Smaller inventory of pre-existing homes on sale
- The home may be old hence may not be sufficient energy-efficient – this implies higher energy bills.
Overall, it is cheaper to purchase a pre-existing home than build a new home. Consider all aspects of your investment and weigh both the pros and cons of both buildings a home and buying a pre-existing one before making a final decision. Find the best deal and stick to what you can afford.
