Looking For a Home? Build or Buy?
Elaine Bedel established Bedel Financial in 1989 in Indianapolis.
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As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe NowIf you are checking on-line for that perfect home and it’s not there, maybe you should build? But if you want it now, then buying an existing home may fit your timing better. It’s important to consider all the angles, before you sign a contract.
According to the MIBOR Realtor Association, which tracks housing data for Marion and twelve neighboring counties, the Indianapolis housing market is booming. About three years ago, it began to rebound from the financial recession. There was acceleration last year as the Indianapolis region saw its strongest growth since 2006.
Existing home supply has been shrinking rapidly, inventory is down 10.4 percent, and sales are up 7.9 percent year-over-year as of April. With supply dwindling, buyers are now looking more closely at the option of building a new home. Deciding between building a new home and buying an existing home can be challenging. While there are pros and cons to each, you might be surprised when you compare the two.
Buying an Existing Home
Time. If time is of the essence then buying an existing home makes more sense. Once the purchase is complete, the buyer can move in immediately. Conversely, the average time to build a new home is about 7 months. The timeframe can quickly double should issues come up.
Certainty. Existing homes can provide a sense of certainty since you can see and feel what you get. Many times, but not always, existing homes are already part of an established community or neighborhood. You know what amenities are available and how close you are to shopping and entertainment.
Upgrade costs. If the house needs renovation, be sure you consider the investment of both time and money. Even the simplest remodeling projects can cost thousands. According to Remodeling magazine’s, "Cost versus Value" for 2016, the average cost of a bathroom and a minor kitchen remodel in Indianapolis is $17,808 and $20,114, respectively.
Building a Home
Customization. Building allows your dream house to become a reality. New homes can be custom built and tailored to individual specifications. They can be made according to the unique vision of the buyer and altered during the building process. According to the National Association of Home Builders (NAHB), a custom home in the USA costs an average of $150 per square foot to build today. This is cost of a finished move-in-ready house with appliances, but does not include acquisition of the land or furnishings. To save on cost, you can opt for a tract home which allows limited customization. Builders of tract homes generally provide one or two floor plan choices and other limited variation. They are less expensive because building similar structures cuts down on labor costs.
Less maintenance cost. New homes have the most up-to-date features, technology, and building materials. According to NAHB, 26 percent of all homeowners spent $100 or more a month on various upkeep costs. However, 73 percent of new homeowners spent less than $25 a month on routine maintenance costs. Additionally, since everything is brand new and under warranty, you don’t have to stress about running into hidden costs.
Construction cost overruns. Construction costs can be significant and original estimates unreliable. According to the NAHB 2015 Construction Cost Survey, direct construction cost (materials, labor, and subcontractors) for a single-family home represents about 61.8 percent of the total sales price. Budget overruns can happen as costs increase or upgrades are made during the building process.
Which is the Better Deal?
Historically, new homes have been more expensive. According to Trulia.com, new homes are typically listed for 15 percent to 20 percent more per square foot than existing homes with similar features in the same neighborhood. Additionally, the gap may be widening as construction costs increase. In 2015, materials and labor increased by 4.5 percent and 3.3 percent, respectively.
Nevertheless, you might be amazed at what you can afford if you decide to build your own home. Many builders offer discounts to encourage potential buyers to build. To determine the more affordable option, make a list of features that are important to you as well as what you are willing to give up, then compare costs.
Summary
There is no precise formula when deciding between buying an existing home and building a new one. Both options have advantages and disadvantages. Ultimately, the decision comes down to your financial situation and personal preferences. Given that it may be your biggest investment, think through your options before you sign the contract.
Anthony Bykovsky, CFA, an Associate Portfolio Manager at Bedel Financial Consulting, contributed to this article.
Elaine E. Bedel, CFP, is CEO and president of Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. She is a featured guest each Wednesday on the WTHR (NBC, Indianapolis) Channel 13 News at Noon, "Your Money" segment. Elaine’s book, "Advice You Never Asked For… But wished you had," is available on Amazon.com. For more information, visit or email Elaine at ebedel@bedelfinancial.com.