Our Experience in Building a Home Over Buying an Existing Home

I mentioned in the previous post Beyond the Numbers: a Closer Look at Renting By Choice that I became a homeowner again after renting for four years. We did it by building a home as opposed to buying an existing home.

Of course we didn’t physically build the home. We paid a builder to have a home built for us. The builder didn’t physically build the home either. They only directed the build. All the physical work was done by their subcontractors.

New Construction vs Existing Home

The news media report two numbers about residential real estate sales in the country: existing-home sales and new-home sales. Existing homes make up 85% – 90% of all homes sold in a year.

New construction homes are often in undesirable locations in many areas because all the good locations have already been taken by existing homes. New homes may be next to a freeway or a major road. Or they may be far away from jobs, good schools, and amenities.

According to the Census Bureau, over 60% of new home sales are in the South region, with another 20%+ in the West region. There are much fewer new home sales in the Northeast and Midwest regions (see Census region map for where the region lines are drawn).

A new home isn’t necessarily better even though it’s new. Fortunately, the area we’re in still has available land in good locations to build new homes. We chose to build a new home as opposed to buying an existing home because building new lets us choose what we want with less waste, it adds to the overall housing supply, and it creates jobs. The major downsides are that it takes a longer time and requires more time and energy from the homeowner.

Less Waste

When you buy an existing home, location, size, floor plan, and finish materials all come in one package. The parts you like about the home and the parts you don’t like are all included in the package. Many people buy an existing home and remodel the parts they don’t like before they move in. They basically treat some parts they just bought at a negative value because it costs money to remove existing things in addition to installing new items.

You don’t pay for something and then throw it away when you build a new home. For example, we wanted a taller garage door in case we get a van for camping. Making a larger door opening costs no more than making the standard size opening when you’re building new. It possibly costs a little less because a larger opening uses less building materials. The incremental cost of a taller door over a standard-size door isn’t that much. It would be a much bigger undertaking if we want to make the garage door taller in an existing home. We would have to throw away a perfectly working garage door, remove a part of the exterior and interior walls, and install a new door.

Add to Housing Supply

You probably heard of people saying “We need to build more housing in this country.” Who’s “we” exactly? We don’t live in a centrally planned economy. Homebuilders are private businesses. They don’t just build more housing because doing so is good for the macroeconomy. The builder we worked with only builds when they have a paying customer signing up to build a home. If the country needs more housing, homeowners must step up to build new housing.

By paying to have a new home built, we added this home to the local housing supply. The local government will receive a higher property tax for the life of this home.

Create Jobs

If we buy an existing home, the current owner gets the bulk of the money. People involved in the transaction — realtors, the title company, the home inspector, and mortgage loan officers — receive some fees and that’s about it.

Building a home involves many more people. 60 different subcontractors worked on building our home. The smallest subcontractor received less than $200. The largest subcontractor received over $100,000. We feel good about creating jobs in the local economy.

Long Overlap

It took almost a year to build our home. It would’ve taken only a month if we bought an existing home. You have to pay for both your existing housing (rent, mortgage, or opportunity cost) and the cost of building the new home during this overlap.

Because many people can’t juggle paying for both at the same time during a long overlap or they don’t want to spend the time and energy required to build a home, an existing home often commands a price premium over the cost to build. I’ve seen existing homes advertised as “No waiting, why build when you can have this now!” This dynamic drives the “fix-and-flip” business model in many places.

Time and Energy

Building a home requires a lot of attention and decisions. We must have made over a thousand decisions, most of which were permanent and costly to change. It prompted me to write Which Financial Decisions Require Extra Attention and Which Don’t. Making decisions can be stressful if you’re the type that must research every detail in everything.

How high should the closet shelves be? What color do we want for the roof shingles? Where do we want to place the hose bibb?

On the other hand, you’re only inheriting someone’s previous decisions when you buy an existing home. Every home was built by someone at some point. The previous owners made those decisions based on their needs and constraints at the time. They may not have given those decisions much thought either. Their decisions aren’t necessarily better than yours.

Planned Unit Development (PUD)

Our home is in a Planned Unit Development (PUD), which is described as a cross between single-family homes and a condominium. A developer bought a large parcel of land. They drew up a plan and got it approved by the city to develop the land into a residential subdivision of about 100 homes. They built roads and brought in utilities. Then they started offering homesites to build new homes.

Each homeowner owns the land beneath their home. The rest of the subdivision is owned by the HOA. The HOA collects dues and hires contractors to maintain the common areas. Instead of each homeowner hiring lawn service individually, the HOA hires one large contractor to maintain landscaping for everyone. It’s like socialism with a flat tax. 🙂

I know some people don’t like HOAs but it works well for us. The subdivision has attracted many retirees although it isn’t designated as a 55+ or active adult community. It’s currently 90% built. It’ll be full in another year.

Semi-Custom Home

Some new construction homes are spec homes, which means that you choose one of several models from the builder based on the size and the floor plan. The builder also offers some upgrades such as using hardwood floors versus carpet or different grades of countertops.

You can also build a custom home, which means that you engage an architect to come up with a design and then hire a builder to build it.

Our house is a semi-custom home, which falls somewhere in between. The builder has five base models for this subdivision. The outside perimeter and the basic outline of a model can’t change but everything inside can be modified. For example, you can have fewer but larger bedrooms or you can shrink a bathroom but make the closet bigger. You can rearrange the rooms in a way that flows better for you. It’s just a matter of drawing the interior walls and doorways within the floor space. Of course if you don’t care to make changes you can also take the base model as-is.

The builder assigned a floor plan designer to work with us. The base model we chose had a theater room next to a guest bedroom. We combined the two rooms and made it a nice home gym. This was easy when we had a blank slate. It wasn’t any more difficult to build a home gym than a theater room plus a guest bedroom. It would be more involved to make this type of change to an existing home.

Semi-custom also means that homeowners have wide choices in the materials that go into the home. The builder had a designated supplier for everything. We went to the appliance supplier to pick appliances, the flooring supplier to pick flooring, the door supplier to pick doors, and so on. We could choose anything available at each supplier. It was time-consuming but we learned new vocabulary (baluster, transom, soffit, …) and now we know nearly everything that went into our home.

Cost-Plus Contract

Our contract with the builder was cost-plus, which means that the builder billed us whatever their suppliers and subcontractors billed them plus a 12% fee for managing the project as the General Contractor. The builder gave us an estimate of the total cost before we signed the contract but it was only an estimate. We would still pay whatever the actual cost came out to be from their suppliers and subcontractors plus the 12% fee.

This felt risky but we trusted the builder. This reputable local builder has built several hundred homes in our town over many years. Customers are happy with the homes they built. The builder’s owner is selling his mansion to move into our subdivision.

In the tradeoffs between time, quality, and cost, the emphasis in the builder’s selection of their suppliers and subcontractors is first on timely performance, then quality, and finally the cost. Delays and poor quality will cause problems downstream. Prices from their designated subcontractors were higher than we could get if we shopped widely.

Some people may feel uncomfortable with paying a higher price if they’re more used to shopping online, buying things on sale, or getting 3 bids on everything. Of course we would prefer to pay less when all things are equal but we were OK with paying an honest price for honest work.

If you must have a fixed-price contract, the builder has to pad the price to maintain its profit. They would have to set a strict allowance on everything to differentiate between “included” and “change orders.” If the builder runs into unexpected cost increases they may skip things or use lower-quality materials. A cost-plus contract removes the incentive to cut corners.

Schedule Delay and Cost Overrun

Two risks we hear about in building a home are schedule delays and cost overruns. We had a little of both but it wasn’t too bad.

The original estimate from the builder was to complete the construction in 10 months. It took 11-1/2 months. The final cost came within 5% of the estimate the builder gave us at the beginning of the project even though they didn’t know what materials we would choose.

Both the schedule delay and the small cost overrun were acceptable to us. We didn’t go too much above the estimate because we didn’t go overboard in selecting fancy materials. Some neighbors chose high-end Wolf, Sub-Zero, and Thermador appliances and put panels on the appliance doors to match the kitchen cabinets. We went with KitchenAid and Bosch without custom panels. Another neighbor put decorative beams on the living room ceiling. We did not. It was a small miracle that we came less than 5% above the original estimate when it was all said and done.

Financing

Inflation and supply chain problems subsided when our project started. Prices of building materials and labor that went up sharply during previous years stopped going up sharply but they didn’t come down. Still, I would much prefer to pay tradespersons who work on the home than the owner of an existing home.

If you need the equity from your existing home to pay for the new home but you will only sell after you move into the new home, you can get a HELOC on your existing home or you can finance the project with a one-close construction loan, also known as a Construction-to-Permanent (CTP) loan.

The bank qualifies you for the construction loan based on an appraisal of the project using the blueprints. The interest rate is set when the loan is approved. The bank pays the builder during construction and you make interest-only payments to the bank. The construction loan converts to a regular mortgage after construction is completed. You can pay down or pay off the mortgage after you sell your previous home.

Our builder had a contact at a bank to arrange for loans but we didn’t get a construction loan because the interest rate had already gone up at that time. I didn’t sell stocks either when stocks were down. I sold some short box spreads and used the cash to pay the builder every month when they sent us a stack of invoices from their subcontractors plus the 12% fee.

I sold stocks now to close out the short box spreads after stocks bounced back. By coincidence, interest rates went further up after I sold the short box spreads. Closing them out now actually generated a small gain.

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A new home isn’t necessarily better than an existing home in many places but when the right opportunity comes along, building a home can be a satisfying experience if you don’t mind investing the time and energy. You need a good location and a reliable builder.

This is the view from my home gym. The natural grassland is a designated open space for the subdivision. A small stream flows through it at the far end. I often see deer, geese, and cranes in the open space when I work out. I love it.