Should I Buy a House or Build It?

Today’s homebuyers are faced with some significant obstacles in their search for a suitable home and affordable financing. In many areas, the selection of existing houses is relatively low, and mortgage interest rates are on the rise. Without a crystal ball, we can’t be sure what the future will bring, but for now, you may be inclined to get creative in finding ways to meet your housing needs.

Building and renovating are the two most common alternatives in a market like this. The best choice for you will depend on your financial situation, the resources you have available to you, and your skill set. Here are some things to think about as you consider your options.

THE PROS AND CONS OF BUILDING

One benefit of building your own home is that you can create a design that meets your specific needs. You may have to compromise in some areas to keep within budget, but you have more flexibility in the functionality and style of your home. Buying land can be less competitive than buying a developed piece of property, so finding a plot in the town of your choice can also be a lot easier. You can also build in energy-efficient features, which can reduce your living costs significantly over the long term.

Building can often cost more than buying, but the calculations can be misleading. Because your house will be brand new, it won’t have the wear and tear that an older house will have. You won’t have to deal with failing plumbing or electrical issues that began before you moved in. You’ll also know that there is no lead paint, asbestos, or mold hiding in the structure. On the flip side, you will have to establish gardens, a driveway, and any other landscaping elements.

With building, there is also a risk that the project will run over budget if changes are made to the plan, or your contractor runs into unforeseen issues while building. You may also need to spend additional money renting an apartment while you build as well. Both of these issues can cause some financial and emotional stress if you’re not prepared for them.

Financing is more complicated with a building project than it is with buying as well. The financing itself can cost more and require more paperwork than would be required by a simple mortgage. In general, you will have to take out a land loan to buy the property, which you will pay off with a one-year construction loan that will finance the whole project. The construction loan will likely have a higher APR than a traditional mortgage, but it is a short-term loan so the higher APR isn’t as big an issue as it would be on a longer-term mortgage. Once the project is complete, you will need to refinance the construction loan with a traditional mortgage at whatever rates are available at the time.

Another issue to consider, in today’s world, is timing. Though lumber prices have come down in recent months, the construction industry is facing a labor shortage and supply chain issues, which can push out the project completion date past the one-year limit on most construction loans. If you plan to build, you will want to set expectations with your contractor and ask your mortgage originator if there is any leeway in timing.

Though the details of building can sound like a lot, building can still be the best option for some people. If you can find a great deal with a friend in the construction business or if you already own the land, your final costs may be below what you’ll find in the current housing market. For those who aren’t concerned about the cost, building may be the best way to create the home of your dreams when you can’t find it on the market.

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THE PROS AND CONS OF BUYING

Buying a house is often the less expensive option, even in this difficult housing market. It is also often the easiest option because the property has already been developed. The style and décor of the house have already been determined so you won’t have to pick out fixtures or other features and you won’t have to establish the landscaping, septic, water, etc.

The downside is that you may have to compromise and purchase a home that falls short of your dreams. You may have to live with some inconvenient spaces as you DIY or contract upgrades over time. The benefit is that you have somewhere to live while you work away at projects over time and as budget allows.

The biggest drawback to buying is that you’re stuck with any issues that have developed over the years and you probably won’t know what they are until you’ve lived there for a year or more. Structural, plumbing, and electrical issues can cost a lot to fix and can become a significant addition to the overall cost of the house.

The house may also need upgrades for energy efficiency, to make the space more comfortable and reduce energy costs. Some simple upgrades won’t put you out too much, but a full retrofit may cost more than it’s worth, leaving you with higher monthly energy costs over the long term.

WHERE DO YOU START?

The answer to the question of whether to build or buy isn’t simple. There are a lot of moving parts to building, but in some situations, the higher cost can be worth it because you’ll have a home that is built to your specifications and doesn’t require the maintenance of an older home. Buying an established home can cost less but may require you to compromise a little and pay more on maintenance and upgrades over time.

To determine which is best for you, you can begin by keeping an eye on the real estate market to see what’s available and how close the options come to meeting your needs. At the same time, you can research land and talk to builders about potential costs, timing, and how big a house you can build given your budget. Keep track of your findings and calculations in a notebook so you can compare your options and make an informed decision.

ARE THESE MY ONLY OPTIONS?

There are a couple of other ideas you may want to consider if your research yields few options.

Seasonal homes are often less expensive than year-round homes. If you find one that you like, renovations to bring it up to code as a full-time residence may be within your budget and worth the cost.

Finally, if you own a home and are in the market for a new house because your current home simply doesn’t meet your evolving needs, you may consider renovating your current home. You may find that you can be very happy where you are with a few affordable renovations that you can cover with a low-cost home equity loan.

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About Tammy Farnham

With over 26 years of credit union experience, Tammy Farnham is a mortgage originator who serves the mortgage needs of Vermont families in Northeastern and Central Vermont, including Essex, Caledonia, Orange, Orleans and Washington Counties. Tammy enjoys helping Vermonters with their financial needs and assisting borrowers with their mortgage needs. Tammy grew up in Plainfield, where she currently lives with her husband and two grown children. She spends her free time helping with her family business, Farnham Farm Maple Sugaring. She likes to do crafts and gardening and spend time with family, friends, and her dog Callie.

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