Author Topic: Question about building a home versus buying a two year old home  (Read 1674 times)

Thomas54

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Question about building a home versus buying a two year old home
« on: February 08, 2016, 09:58:34 PM »
I'm a little unclear on why the cost difference between the two.

For example:

I recently looked at a two year old home that was 2900 sqft on two acres and priced at $369,000 or $127/sqft.  It also was completely fenced at a cost of $15,000 today.

In the same development to build the same home today:

                                       2 acre lot:      58,000
2900 sqft home @ $130 sqft to build:    377,000
                                          Fencing:      15,000
                     Aerobic Waste System:        8,000
                                    Landscaping:       7,000
                             Sprinkler System:       4,000
                                              Total:  $469,000

So, basically $100K more to build a new home at $161/sqft total.

In my area, existing housing costs have increased around 10% over the last two years, but shouldn't that work towards bringing the cost of an existing home closer to the cost of a new construction home?

I'm confused.  Can someone who knows anything about new construction homes vs. existing home weigh in?

Thanks,
Thomas

paddedhat

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Re: Question about building a home versus buying a two year old home
« Reply #1 on: February 09, 2016, 06:29:27 AM »
I retired as a custom home builder a few years back. One contributing factor was the lack of a "split" between new values and existing home sales in my market. I have repeatedly read that in a healthy market, new construction should be valued at 30% more than existing, and in the depths of the recession, when little new inventory was being built, it had dropped to 15%. My market is still suffering from a gross excess of inventory, and changing demographics. The demographics problem being that it is largely a middle class, second home market. As middle class families hit the age where they would traditionally start shopping for a second home, less of them have the income, and quite honestly, more of them are smart enough to pass on doing so. As a result, a lot of builders left the market, and the remainder tend to be bottom feeders, producing some pretty marginal product, and do so at exceptionally tight margins.

JMHO, but my take is that a health market has two parallel markets operating in the same space. Existing inventory is valued using very valid current metrics, and is typically easily justified. New construction is another animal completely, and valued by those willing to pay the price. The price includes a heavy burden of costs that bring little value to the property itself, including impact fees, permit costs, overhead, marketing and profit. Once the house ages a bit, the market is no longer willing to compensate for those, now forgotten, costs.

I watched my buyers with great interest over the years, and many became friends. I was struck by two issues that many encountered, as new home buyers. First, since they were often second home buyers, who lacked available free time, or were not DIY oriented, many ended up spending shocking amounts on landscaping, yards, and exterior improvements. Obviously, an existing home wouldn't have most of this cost, and in a health market be priced lower in the first place. Second, many ended up deciding that the whole vacation home experience wasn't the dream they thought it would be. It isn't unusual to see my customers list the home, right around the fifth year of ownership. The sad part of this is that the total cost of selling at that point, including interest on the loan, upgrades to the home, furnishing, closing costs (x2)
and other expenses, typically ended up costing about a quarter of the purchase price. Had they bought a new home in a normal market, the damage would of been a lot worse.

BeanCounter

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Re: Question about building a home versus buying a two year old home
« Reply #2 on: February 09, 2016, 06:53:58 AM »
I'm probably not really qualified to answer, but I'll throw in my $0.02. I was a controller for a builder about 10 years ago. After that experience and really seeing all the costs and the process I would never do it. It's an over priced luxury that some people are willing to pay so that they can have EVERYTHING the way they want it on the day they move in. Maybe it works out okay if you live there forever, but in my opinion it's way too expensive and not worth it. I think you're better off buying a used home that needs a few updates and do those to make it yours.

soupcxan

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Re: Question about building a home versus buying a two year old home
« Reply #3 on: February 09, 2016, 07:43:58 AM »
There are a lot of people who will pay a premium for a "new" home.