How to Decide Whether to Buy or Build a HouseIs buying a house cheaper than building a house? Here's how to decide which route to take.

 

The home-buying process can be an exciting time for first-time homebuyers and experienced homeowners. As you start to look at homes, you might be wondering, “Is it cheaper to build your own home or to buy a house?” Although there are pros and cons to each, you might be surprised when you compare the two.

The median sale price of a new home in the U.S. was $322,500 in December 2016, according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development; the median price of an existing home was $232,200 in the same month, according to the National Association of Realtors. With home prices increasing and mortgage rates remaining low, the time might be ideal for buyers to secure a deal on a new or pre-existing home. Considering all the costs of a new home, which is the better investment: building or buying?

Building a House

Because new home prices are higher, your first thought might be to buy a pre-existing home. But you might be amazed at what you can afford if you decide to build your own house instead. Because builders want to keep their crews working, they offer many discounts to encourage potential buyers to build a house.

5 Pros of Building Your Own Home

Building a new house can come with many benefits and opportunities to save money; so although you don’t have to know how to build a house yourself in order to get the best house for your needs, you do need to know some things before you dive into such a commitment.

Here are some advantages to building your own home:

  • Discounts on materials: If you’re working with suppliers, like your local lumberyard, ask for a builder’s discount. Some suppliers will offer higher discounts the more you buy, according to Bob Vila, a home improvement expert. On lumber and millwork, expect around a 10 percent discount; for lighting fixtures, expect higher savings.
  • Everything is new: Moving into an existing property can come with hidden costs, as you might need to make significant home upgrades that might not be entirely obvious during the purchasing phase. If, for instance, you purchase a pre-existing, 1,600 sq. ft. home in Los Angeles and need to repaint the exterior, you can expect to spend between $1,900 and $4,000 on the project, according to Homewyse, an online reference for the house and home.
  • Annual savings: If your air conditioning unit is new, you can save a few hundred dollars a year by omitting the service plan normally carried with an older system. If you purchase an existing home, on the other hand, you can expect to pay between $3,692 and $7,134 for a new air conditioning unit, according to HomeAdvisor, a nationwide online home improvement marketplace.
  • Design control: Everything is what you want from the start, so you won’t have to spend additional funds redoing the home after you purchase it. One expense you might be spared with a new home: the cost of a bathroom remodel, which can cost $18,000 for a full bathroom, according to The Spruce, a website about homes.
  • Easier entertaining: Entertaining is easier because new homes often have an open floor plan that supports large groups. Older buildings often feature design choices that don’t make sense — such as a setup requiring you to walk through a bedroom to get to a communal bathroom — that newer homes don’t have.

Find Out: 10 Signs You’re Not Saving Enough to Buy a House

5 Cons of Building Your Own Home

Even when you build a new home, it’s still likely that not everything will be perfect. Whether you run into issues with permits or other delays, building your own home can come with a lot of unexpected costs.

“I have never seen a home that was built come in on budget,” said Sissy Lappin, founder of ListingDoor, a service that helps people sell their homes. “I cannot tell you how many times I have had a client buy a lot to build, gave the architect a budget of how much they wanted to ‘be all in the house for’ then bid the plans out only to find out the cost to build the house is 30 to 40 percent more than their budget.”

Consider these disadvantages to building a home:

  • Time: It can take anywhere from four months to six months to build a home. That’s a long time to wait, and things can change while you are waiting to move.
  • Limitations: You might be limited in the style of home you can build within your price range. You might also find that making a lot of changes and purchasing upgrades from the builder can be expensive.
  • Construction loan and permits: You might be required to carry the construction loan on the building process if the builder does not do this for you. Even if the builder handles the permits, it’s a good idea to understand what’s needed to ensure everything is built up to code. If you’re unsure, it is best to hire your own inspector to make sure the job is done correctly the first time — and factor that expense into the cost to build a house.
  • Legal considerations: The agreement between you and the builder might limit your rights if there’s an issue with the home-building process and you need to take the builder to court. Read documentation carefully and consult an attorney in your state for legal advice, if necessary.
  • Temporary housing: You might have to move into temporary housing while you wait for your home to be built. Doing this can mean added expenses from hiring movers and paying for rented storage space: Depending on the market, the average cost of a storage unit rental can run between $40 and $225 per month, according to CostHelper, which provides consumer information on products and services.

Buying a House

Buying a house is an attractive option for many people because in most cases, you can move into the home soon after closing. Oftentimes, homebuyers might fret over the purchase of a home that has some less-than-stellar features. But the home you buy — whether it’s your first home or not — doesn’t have to be perfect down to the wall paint. You can update the unattractive features of a home over time, and you might even profit from a few upgrades.

Lappin said that she once remodeled a home that had Venetian columns in the dining room, baby blue carpet and mirrored walls. “It was on the market for 18 months,” she said, saying the home had some tacky design choices. But after remodeling the home, she said, “Someone rang our doorbell and offered us a ridiculous amount of money. Yes, we sold. My husband would have thrown in the kids, he was so happy.”

See: Top 20 Cities Where Home Prices Are Skyrocketing

5 Pros of Buying a House

In order to know buying a house could be the right choice for you, you need to first understand this kind of purchase and how to weigh the pros and cons. Here are common benefits to purchasing an existing home:

  • Opportunity to flip your home: If you buy a home and make much-needed upgrades, you have the potential to flip the home, allowing you to roll over profits into a newer and better house. According to a RealtyTrac report on single family house sales in Q3 of 2016, the average gross profit of completed flips was 47.1 percent of the original home purchase price.
  • Upgrade costs can be delayed: With a pre-existing home, you can take your time making upgrades, allowing you to better budget for the expenses.
  • Ability to move quickly: In most cases, the buyer can move in immediately after closing; you don’t have to worry about a wait time or temporary housing.
  • You know the neighborhood: If you’re buying a home in a pre-existing neighborhood, then you already know the neighbors, property values and other details.
  • Easy to visualize: You can see the floor plan and the layout of a pre-existing home. When you build a home, it can be difficult to visualize the layout and ensure you’ll both be able to build and afford the home you’ve dreamed up.

5 Cons of Buying a Home

You’ll need to consider some disadvantages of buying a pre-existing home, too. Some cons of buying a home, rather than building, include:

  • Buyer’s remorse: You need to discover and get used to the quirks in the house that didn’t stand out when you were in the home-buying process.
  • Upgrade costs: Having to move into a home and make upgrades can be a major time and money investment. Even the simplest home remodeling projects can cost thousands; the average cost of a major kitchen remodel in the U.S. in 2016, for example, was $119,909, according to Remodeling.
  • Being stuck with the layout: You can’t easily change the layout or floor plan of a preowned home.
  • Decorating costs: Aside from paying closing costs and other upfront costs, you might have to invest some time and money to bring the home up to current standards by removing wallpaper, changing paint colors or updating flooring. The typical costs for a home repainting project is between $938 and $2,442, according to data collected by HomeAdvisor.
  • Higher home insurance: Compared to a new home, your home insurance costs will be higher with a preowned home. New homes come with features that are new and up to date, unlike some pre-existing homes.

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Average Costs for Home Remodeling Projects

Remodeling’s “Cost vs. Value 2017” report determined national averages for typical home remodeling projects. Whether you’re building a home or upgrading a pre-existing property, you’ll want to weigh these costs against your plans so you can better decide what’s cost-effective for you.

Home Remodeling 2017: National Average Costs
UpgradeCost
Attic insulation (fiberglass)$1,343
Basement remodel$71,115
Bathroom remodel$18,546
Deck addition (wood)$10,707
Entry door replacement (steel)$1,413
Family room addition$89,566
Garage door replacement$1,749
Kitchen remodel (major)$62,158
Kitchen remodel (minor)$20,830
Master suite addition$119,533
Roofing replacement$20,664
Second story addition$176,108
Source: Remodeling “Cost vs. Value” 2017

Learn: Sneaky Expenses of Renovating Your Home

Is It Cheaper to Build a House or Buy a House?

When it comes to deciding between buying a pre-existing home and building a new home, there isn’t an exact formula, said Gloria Shulman, founder of Centek Capital, a mortgage brokerage in Southern California. “In my opinion, it is better to buy a habitable house and do a major overhaul,” Shulman said.

Lappin emphasized that the cost of building a house can be more expensive than you might initially plan. “I had one client that told the architect ‘this will be our forever house.’ When he got the building bid he said, ‘It was going to be our forever house and it would have to be our kid’s kids’ forever house.’ It was so over budget, it would not break even for 50 or more years if they had to sell.”

Homebuyers might forget the cost of window coverings, extensive landscaping, pool, light fixtures and upgrade finishes, Lappin said. “A builders allowance is usually for the minimal finish, and then you have change-order fees. It adds up to thousands,” she said.

When it comes to building versus buying a home, Lappin said, “If someone has lots of time or can hire a designer to pick out the finishes, then they should build. If someone is spending a lot of money, then they should build.”

To help you understand if it’s cheaper to build or buy a house, make a list of the features that are most important to you, then compare costs. Know what you are willing to give up and what you must have in your next home. Then, look for homes in your price range that meet your criteria. Your home is your biggest investment so it’s perfectly acceptable to be picky and take your time to find the perfect home.

Up Next: How Long Does It Take to Buy a House?

Ruth Sarreal and Michael Galvis contributed to this article.