Is It Cheaper To Build or Buy a House?

You have two choices when looking for a new home: build or buy. A few years ago, it almost always cost more to build a home from scratch than to buy your dream home. However, the existing home market has seen double-digit price increases in the past couple of years. So is it more expensive to build a house or to buy one in 2022?

Pros and Cons of Building a House: Overview

Building a house in a competitive real estate market might seem like a worthy investment, but making your own home has pros and cons.

Here are some different factors to consider:

Pros of Building a House

Fully customizable: When you build a house, you have more freedom to customize it with the features you want and need. You can select the floor plan with the number of bedrooms and bathrooms you need. You can pick the finishes in a custom home and add details like tray ceilings, French doors, and kitchen islands. Or, build an accessory dwelling unit (ADU) like a cottage or other attached structure to rent and help your home pay for itself.

Less maintenance: New homes typically require less attention than existing ones since everything is brand new. If any problems arise in the new home's construction, many home builders offer warranties where they will fix any issues that occur within a certain period.

Energy-efficiency: New homes tend to be more energy-efficient than older homes. As a result, you can usually expect to pay less for utility bills like heating and cooling for new homes than for old ones.

Cons of Building a House

Timeframe: Building a house from scratch takes time, which isn’t something that all home buyers have. It can take six to 12 months to build a house from start to finish.

Permitting and inspections: When it comes to building a new house, there are a ton of regulations to be aware of, involving things like structural framing, building height, landscape maintenance, plumbing, sewage, and more. Patience is a virtue when dealing with and waiting for building inspections and city or town permitting. Be prepared for a fair amount of scrutiny.

Price increases: Since the home-building process takes significant time, initial final costs for building materials and labor can differ from initial estimates. If construction costs increase substantially during the building process, you might pay more than you initially agreed to pay for the house, although you can mitigate this by working with reputable professionals who can forecast costs accurately.

Lack of landscaping: Most home builders only include basic construction in their estimates and bids, which means that landscaping is totally up to you. Establishing lush and mature landscaping requires a lot of time and effort with grass, trees, shrubs, and flowers.

Pros and Cons of Buying a House

Buying a house may seem more straightforward and less strenuous than building, but existing homes often come with their limitations and issues. Alternatively, here are some pros and cons of buying a house to consider.

Pros of Buying a House

Quicker move-in: When you buy a house, you can close and move in relatively quickly. Some sellers request temporary closes in 30 days; however, the average time to complete is about 45 days.

Upgrade as you go: While an existing home might not have every detail you want, there’s always the possibility to upgrade things and make changes over time. With this approach, you’re not building these extra costs into your mortgage with expensive interest. It’s also relatively easy to work with your existing space, turning a basement, room, or similar attached structure into a rentable space in the form of an ADU. This can help you quickly establish a form of income to help finance your home projects.

Ability to negotiate: Negotiation isn’t possible in all markets, but individual sellers are sometimes more willing to negotiate than builders that are typically trying to maximize the profit of their build.

Save money without breaking a sweat: Buying a home allows you to invest in an existing structure and work with the skeleton already in place. Construction and labor for minor renovations can be less strenuous.Cons of Buying a House

Expensive maintenance: Maintenance and repairs can be extremely expensive, depending on the age of the home. For example, you might have to replace the roof or the heating, ventilation, and air conditioning (HVAC) system soon after moving in, spending thousands of dollars out of pocket.

Intense competition: Securing a contract on an existing home can be highly challenging if you’re in a competitive market. Buyers may have to bid against lots of others seeking the same homes.

Old material means old problems: Dealing with old material, mainly regarding renovations, can be limiting and, at times, dangerous. Older homes may have asbestos, mold, or aging drywall and plaster issues. Old plumbing systems and electricity can often cause hurdles.

More compromises: Since you cannot customize your home ahead of time, you might have to make more compromises. For example, if you like white cabinet kitchens, you might have to buy a house with a darker kitchen and change it later on. Or, if you want hardwood floors, you might have to buy a home with laminate floors and make the switch yourself.

Is It More Expensive To Build a House or Buy One?

Housing is expensive regardless of whether you build or buy. But which one is more cost-effective? Let’s break down the average cost of building a house compared to buying one.

The Average Cost To Build a House

If you’re not careful, the cost of building a house can add up quickly.

Here are some prices associated with various home-building components to keep in mind.

A Plot of Land

When building your own house, you must find somewhere to put it. Having a lot big enough to build a home can be challenging in highly populated areas, especially since land in prime locations tends to cost more. Depending on the location of the land, you might be able to pay as little as $3 a square foot for empty lots in existing neighborhoods.

In many cases, it will be necessary to clear this land before the building process can begin. Factors like the topography, accessibility, and amount of debris will add to the budget.

If you are looking to buy land with a loan, you have a few options:

Buyers can choose between raw land loans, unimproved land loans, and improved land loans. These three factors depend on how developed the land already is (like if sewage, water, and utilities are set up). Or, if you already have plans and a contractor, construction financing and the mortgage can be combined into one sum.

Site Preparation and the Installation of Major Systems

Some lots come fully prepped for building a house and include connections to city utilities like water lines, sewers, and electric grids. These lots often come with a premium price.

To avoid paying this premium, you can purchase an unprepared lot and often prepare it for less.

Keep in mind that this can be a lengthy process involving a fair amount of permitting and building inspections. These processes can often be time-consuming and have associated costs that are not insignificant.

Architecture and Design Fees

Unless you’re an architect, you’ll have to pay for someone to design your home so that it’s structurally sound, up to code, and meets your needs. Most of these professionals charge per hour. The average cost of an architect is likely around $100-$200 per hour and similar per hour for an engineer.

A draftsperson might charge around $100 per hour. You could expect to pay $130 per hour for an interior designer and $100 per hour for a landscape architect. Once you acquire blueprints, you’ll need to get the ‘okay’ from the city or town and find a construction company willing to work with the design.

Permitting

Building permits are always required to build a house, and they aren’t free. Generally speaking, you can expect to pay for permitting to handle everything from electrical wiring to roofing, HVAC systems, plumbing, fencing, and more.

Additionally, prepare to meet a fair amount of surprises as walls, ceilings, and structural components are opened up and rearranged. An inspector may find something previously uncovered that needs to be addressed.

Construction

Even with everything we’ve covered so far, most of your home building costs will come from the construction of the house itself, namely material and labor. You will likely need to work with a general contractor and subcontractors in a new home build. Home construction is very specialized, so be prepared to deal with several companies, inspectors, and specialists.

Finishes and Fixtures

Finally, you need to consider the cost of adding finishes and fixtures to a new home (for example, flooring, paint, trim, cabinets, sinks, toilets, bathtubs, showers, doors, windows, and lighting).

These costs can vary depending on the quality of the finishes, fixtures, and the size of the home.

The Average Cost To Buy an Existing House

The cost of buying an existing home is more straightforward, but that doesn’t necessarily mean that the home prices are less high.

17.02% of all the homes in LA are worth over one million dollars in the 2022 market. When listed, the median price in Los Angeles was $950,000 in January of 2022, with an average price per square foot of $629.

This translates into a $1.25 million purchase price for a 2,000-square-foot house compared to $900,000 for a high-end custom-built home of the same size (not including the lot purchase).

How To Choose the Best Option

Now that you know all about the pros, cons, and costs of both building and buying, consider these three factors to make the right choice for you.

1. Local Real Estate Market

The market for new homes and existing homes varies by location. In some markets, building a new home is easier and cheaper. In other markets, it might make more sense for you to buy an existing home.

2. Time Frame

Your moving time frame should also determine whether you should build or buy. If you need to move sooner rather than later, you may not have time to wait for a new build to be completed since this process can take several months.

3. Customization

Finally, you need to consider the different degrees of customization between building and buying a house. Unlike building a house, buying an existing home is more of an adaptive construction process: this means performing renovations based on existing structural components. You may want to consider building if you’re set on having specific features in a house.

When you buy a house, you can still customize your flooring, wall material and color, siding or shingles, appliances, cabinets, countertops, backsplashes, and more. Buying can afford customization in structural components like a floor plan, additional rooms, detached structures, chimneys, and roofing (although these are more complex). This approach ensures you get everything you need and want in your new home.

How To Minimize House Building Expenses

While building a home can be more affordable than buying an existing one, that’s not always the case. So if you’re looking to save money by minimizing your home-building expenses, here are three tips to keep in mind.

1. Build an ADU — Accessory Dwelling Unit

With the cost of an entirely new house building potentially so high, one of the best ways to save money on new construction is to create a smaller home.

Smaller living spaces like ADUs and tiny homes are more popular than ever. They come with all the features you’re looking for in a smaller footprint that is typically less than 1,000 square feet. These smaller spaces don’t just have a lower price tag; they also come with more affordable utility and maintenance costs in the short and long run.

Additionally, you can take an existing structure on a property and renovate it into an attached or integrated ADU: Rent out a basement, garage, or other room in a larger house.

2. Choose an Existing Floor Plan

Consider choosing an existing blueprint to avoid costly architecture and design fees for your new build. Check out these efficient ADU floor plans from Cottage:

• The Nelson has one bedroom, one bathroom, and 450 square feet
• The Ashbury has two bedrooms, one bathroom, and 750 square feet
• The Haskell has three bedrooms, two bathrooms, and 1,176 square feet

Cottage also offers custom-built ADUs if you’re looking for specific features and finishes in your space or a different floor plan that suits your site and needs.

3. Work With an Experienced Builder

For an affordable build and a smoother experience with the experts in the ADU space, you should work with an experienced builder like Cottage. Cottage is well-versed in the intricate building rules and regulations in various Southern California locations, including Los Angeles, San Diego, and the San Francisco Bay Area. Cottage has a team of in-house architects and designers and an extensive network of licensed, insured, and vetted contractors.

Homeowner-To-Be

In today’s crazy housing market, the choice between buying and building isn’t an easy one. One way to bypass bidding wars, cash offers, and contingency waivers is to build an ADU with Cottage on your property or a property you want to buy. Contact Cottage today for a free consultation and estimate.

Sources:

Housing Market Just Jumped the Most in at Least 45 Years | Business Insider

How Much Does It Cost To Build A House? | Forbes

This city has the highest percentage of million-dollar homes in the US | NY Post