If you decide you want move to into another house, one of the first decisions you’ll have to make is whether to buy an existing house or build a new one. Each option has advantages and disadvantages. Today’s mini lesson will explore the pros and cons of buying a house versus building a house.
Before moving to the mini lesson and quiz, let’s go over this week’s Pro Term:
A building allowance is the amount of money that you are allowed to spend on different materials, fixtures and appliances when building a new house. Just like you’d give your child an allowance to spend, the contractor gives the homeowner allowances to spend on different items, like cabinets, flooring, windows, appliances and lighting fixtures. A building allowance is for materials that will be chosen by the homeowner during the building process. You won’t need allowances if you pre-select your materials during the planning stages.
So, if you have not pre-selected your windows, and have not specified the type of windows you want in your contract, the contractor is likely to give you a window allowance. And, if your lighting fixtures have not been selected, he’ll give you a separate lighting allowance, and the same is true for cabinets, flooring or any other items. Typically, it's the general contractor or subcontractor who specifies the amounts of the allowances. And if you sign the contract, you’re agreeing to those allowances.
Your contract might state that you have an $8000 allowance for your cabinetry. Buy, if you go cabinet shopping and decide on $10,000 cabinets, instead of $8,000 cabinets, you’ll have to make up for that $2000 difference.
You can either pay an extra $2000 to the contractor, or you’ll have to find a way to save $2000 somewhere else in the building process. For example, if you choose the $10,000 cabinets, you might decide you’re going to spend $2000 less than you’re allowed for windows. If you can balance the allowances out like that throughout the building process, you’ll stay on budget. But most people don’t balance things out, so projects often go over budget.
Sometimes contractors set allowances that are way too low. This can happen either by mistake or on purpose. If your contractor honestly doesn't understand the level of quality and scope of work that you desire, he may mistakenly set your allowances too low. If, on the other hand, you’re dealing with an unethical contractor, he may purposely set allowances too low so that his overall bid looks lower than his competitors'. It's important that compare apples to apples. Don’t just look at the bottom line, adjust allowances up or down so you can accurately compare the final cost of the different bids.
To avoid the challenges with allowances all together, you should pre-select your products, fixtures and materials during the planning stage. You can then purchase the materials yourself and get labor only bids, or you specify the specific items that your want in the contract and have the contractors submit bids including those specific items.
At the very least, have some idea about the level of quality that you want and can afford. Look on the internet, and go into building supply dealers and price out what you like. Are you more likely to need an $8,000 cabinet allowance, or a $15,000 cabinet allowance? Then, you can guide your contractor in proposing allowances, or you can make adjustments to the contract, as necessary.
So, once again an allowance is the amount of money that the contractor says you’re allowed to spend on different fixtures and materials when you haven’t specified exactly what your want in your contract.
Goodness, that felt a little more like a mini lesson than a pro term, but hopefully you have a pretty good understanding of allowances. Let’s move to today’s topic: Should you buy an existing house or build a new house?
Whether you buy or build, you’ll need to figure out how much money you can spend on the house. So that you don’t waste time searching for, or dreaming about a house that you can’t afford, I suggest that you get pre-approved if you need financing. For pre-approval, you’ll need to give the bank or credit union information about your income, debts and assets. Then, the lender will pull your FICO credit score. The lender will tell you the amount that it’s willing to loan you for your new house. Pre-approval may take anywhere from 3 days to 3 weeks to complete.
And keep in mind, you want to get pre-approved, not just pre-qualified.
Pre-qualification can be done in less than a day. With pre-qualification, the bank does not verify all information and your credit score is not checked. So, if you’re simply pre-qualified, you’ll find out a very loose, not-so-accurate estimate of the amount the bank is willing to loan. But what you want is an accurate estimate. To remember the difference, think of this: The "A" in approval stands for an accurate estimate, and the "Q" in qualification stands for a quick, rough estimate.
After you get pre-approved, you’ll have to decide whether it’s wise for you to borrow all of the money that the lender is willing to loan you.
Uh-huh, that's right. You’ll have to decide if it’s wise to borrow all of the money that the lender is willing to loan you.
Here’s why I say that. After the mortgage crisis, federal laws were introduced in 2014 which hold lenders more responsible for the loans they underwrite. However, the banking guidelines still allow most people to borrow more money than they can comfortably afford. By comfortable, I mean, a lifestyle allowing you to save for the future and not live from paycheck to paycheck, and a lifestyle that will allow you to pay for unexpected expenses, like medical bills or car repairs.
Take a look, not only at how much the bank is willing to lend you, but at all of your possible expenses and goals. Then, after considering all that information, decide how much money you want to spend on your house.
Ok, after you figure out how much money you can, and should, spend on a house, you should consider the pros and cons of buying an existing house and building a new house.
First, let’s cover buying an existing home.
The 2 primary advantages to buying an existing home are convenience and cost.
Buying an existing home involves numerous steps, including selecting a real estate agent, locating homes within your price range, touring homes, making offers, getting a home inspection and all of the paperwork involved with closing. But despite all those steps, it usually takes less time to buy, rather than build, a home. And you’ll have the convenience of being able to move into an existing house right away.
For people with a looming deadline, or tight schedule because they need to move before a job or school starts, for example, buying an existing home is the better option.
Then there's cost. In many cases, it is cheaper to buy an existing home than to build a new one. Now, there are exceptions, but in general, you can buy a house cheaper than you can build one.
According to the National Association of Home Builders, in November 2016, the median price for a newly built house was $305,000 versus $237,000 for an existing home. Because newly built homes tend to have more up-to-date and higher-end features than existing homes, it’s not surprising that newly built houses have higher prices on average.
Another advantage of buying an existing home is that you have more choices within specific, established neighborhoods. If you want to be in a certain school district, or near work, friends and family, finding an existing home is usually easier. Mature, established neighborhoods may a have a few empty lots, but you can more readily find an existing home.
Mature landscaping is another advantage of buying an existing house. With an existing home, you don’t have to go to the expense and effort of planting grass, shrubs and trees.
Alright , moving on to the disadvantages of buying an existing house.
The biggest disadvantage of buying an existing home is that you have to make compromises. You won't usually get exactly what you want. The kitchen may have darkly stained cabinets instead of the white, painted cabinets you’ve always wanted. Or you may not have as much closet space as you had hoped.
Since you’re unlikely to find an existing home that is exactly what you want, you’ll either have to live with those compromises, or spend additional money for remodeling and upgrades. These additional expenses should be factored into the overall price when comparing it to the cost to building your own house.
Other disadvantages of buying an existing house are that existing homes are usually less energy efficient than new builds. In addition, existing homes will typically require more maintenance and repairs than a house that you build.
Okay, let’s talk about building a house.
The main reason to build a new house is that you are much more likely to get exactly what you want— the exact number of bedrooms and bathrooms that you want, the layout and flow that you prefer, and the colors, fixtures and finishes that you like.
For most people, that’s reason enough to build. But there are other benefits to building a new house. Although there are always exceptions, for the most part, building a house has the following advantages over buying an existing home.
1. New houses are more energy efficient than most existing houses. Newly built homes have newer heating, ventilation and cooling systems. They’re better insulated and have better air filtration systems. You can also choose Energy Star appliances and windows. A more efficient home is better for the environment and your wallet. You’re likely to have lower utility bills with a newly built home, as opposed to an older existing house. Even though the upfront costs of building can be higher than buying, it’s often easier to recoup your investment from a newly built house because of the increased energy efficiency.
2. If you build a new house and eventually decide to sell it, the resale value of that newer house will be greater than the resale value an older existing home with the same square footage. Most people prefer a newer home, especially a custom built newer home. And people are usually willing to pay more for a newer home.
3. If you build a quality house, the house will require fewer repairs and less maintenance over time than an existing house will. Needing less maintenance and fewer repairs means that the newly built house will cost you less money over time and it will allow you to have more free time.
4. Most new builds come with at least a one year warranty. So, if something goes wrong, you’ll be covered. Most existing homes will not have a warranty.
5. There is a sense of satisfaction that comes with building a house that you don’t get from buying an existing home. When you build a house, you’ve created something that reflects you and your taste and personality. And when you see the finished product, you can’t but feel some proud.
Despite all the pros of building a house, there are a few cons too.
First and foremost is the extra money it will take to build a new house when compared to buying an existing house of the same square footage and detail. Again, there are exceptions, but typically a building a house will cost you more up front than buying one.
The second biggest disadvantage to building a new house is that it takes more time. According to GoBankingRates.com, it takes, on average, about 2-3 months to purchase an existing home. Of course, that depends on several factors, perhaps most importantly, how long it takes you to find the right house.
A 2014 Survey of Construction from the US Census Bureau shows that the average time to build a single-family house is around 7 months. So, it takes over twice as long to build as it does to buy an existing home.
Going over budget is another drawback of building. The risk of going over budget is much greater when building than when buying. When you’re buying an existing house, you get what you get. You have no choices to make within the house. When building, though, you’ll have lots of choices to make and it’s so easy to choose options that are more expensive than your building allowances. So, going over budget is a common occurrence.
Another disadvantage…It takes more planning and leg work to build a house than to buy one. Before you build a house, you’ve got to find land, choose an architect or designer or pour through numerous house plans. You’ve got to find a reputable general contractor, or find subcontractors if you going to be your own builder, and you’ve got to make decisions about every feature of your house. For some people, all that planning, finding and decision-making is exciting. And for some people, it’s overwhelming. If just thinking about making all those choices gives you anxiety, buying an existing house might be the better choice for you.
Alternatively, you could hire an interior decorator to help make your choices. Or, you could build a semi-custom home in a developing neighborhood. In many of these developing neighborhoods, regional, large scale builders will provide you with a limited number of choices for floor plans, exterior materials and interior features.
If you are still not sure whether you want to buy an existing house, or build a new home, why not start by looking for an existing house? You don’t even have to do a formal house search with a realtor at first. Just do some internet searches for houses in your area on realtor.com or zillow.com or Trulia. See if there are any homes that catch your eye. If so, go take a look at some of those houses. If you find one that you really like, buy it. Finding an existing home that you can purchase is simpler, faster and cheaper than building a home.
But, if you can’t find an existing house that you want, or if you just can’t shake the dream of building your own home, there’s nothing wrong with building your dream house. What’s important is that you know what you’re getting into, and that educate yourself about the process. There’s no right or wrong answer to whether you should buy or build. Just choose the route that is best for you and your circumstances.
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Ok, it’s quiz time...
1. Which gives you a more accurate estimate of the amount of money you can borrow from a lender, a pre-approval or a pre-qualification?
The answer is pre-approval. The pre-approval is more accurate. You can get pre- approved by the lender after you give them documentation about your income, assets and debts, and after they check your credit score. A pre-qualification is a quick, rough estimate that usually does not take into account your credit score.
2. Which of the following is false?
A. Building a new house takes less time and is more convenient than buying an existing house.
B. You can usually get exactly what you want when building a new house
C. New builds are usually more energy efficient than existing homes
D. Building a new house gives you a greater sense of satisfaction
The answer is A. Building a new home usually takes more time than buying an existing one, and building is less convenient than buying an existing house. It usually take 2-3 months to buy an existing home and you can move right in. It takes on average 7 months to build a new house.
Please remember that the purpose of this podcast is simply to educate and inform. It is not a substitute for professional advice. The information that you hear is based the only on the opinions, research and experiences of my guests and myself. That information might be incomplete, it’s subject to change and it may not apply to your project. In addition, building codes and requirements vary from region to region, so always consult a professional about specific recommendations for your home.
Well, that’s all I have for now. Let’s do again next week. Join me for the next episode of BYHYU.