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.”