Friday, June 24, 2011

New Home or Existing Construction?

Should you buy an existing home, or a new one in a development?  Or have one built to order?  There are pros and cons to all three, but I think an existing home, a few years old, can be a slightly better deal.

A reader asks:
"What do you think about buying an existing home vs having one built?"
Tough question!  But let's look at it analytically, not emotionally (and home-buying ends up being an emotional decision, no matter how you slice it, and often the arguments made are emotionally-based).

In Real Estate, the three main criterion on any property are:
1.  Location - a good neighborhood with good schools, easy commuting distance, and good resale values will always be a better choice.

2.  Condition - a house needing a lot of work can be a bad bargain, and one needing less work a better one - that goes without saying, depending, of course, upon...

3.  Price - Price is king, even though I listed it last.  A fixer-upper can be a good deal, if it is priced reasonably (the delta being less than the cost of repair).  But price can't really trump location. You can fix a leaky roof,  it is harder to fix the neighborhood or school.
So how do these criteria apply to (A) existing homes, (B) homes for sale in a development, and (C) having a home built to order?   Let talk about it.

1.  Location, Location, Location

For Existing Homes, the market value of the homes is fairly well established by resale values. And that should tell you a lot about the neighborhood as well.  So you can research this and figure out whether the location is right for you.

For new homes, this can also be the case - or not.   In crowded urban areas, there are no places to build new homes - so newer homes may tend to be further out - meaning longer and longer commutes.  And if the neighborhood is totally new, it is hard to gauge resale values and school systems  - if they are still being built.

For example, in the 1990's a lot of people built mini-mansions in Dumfries and Woodbridge, Virginia.  In addition to being an annoying commute in the second-worst traffic city in the nation, the local school systems were not all that great.  Many new developments bordered on really lower-income neighborhoods.  As a result, many of these mini-mansion developments turned into instant ghettos, and most people responded by moving further out (to Fredricksburg, an even more annoying commute) or further in (to existing homes or infill developments, such as the ones built on our home lot).

I think the answer here is, regardless of what home type, to do the research on the neighborhood.  A shiny new development with nicely appointed homes can end up a nightmare if it is built in a bad area.  And I know firsthand that if you build a $500,000 home in a County where the average home price is $150,000, chances are, that will be a very hard home to sell,  down the road.

The location research is a little easier for existing homes, but that does not make it alone, determinative.  If your new home is in a good location, then it may be a good deal.

2.  Condition

You would think new homes would win this one, hands down.   After all, everything is new, right?  Wrong.  As I noted in my posting on the Weibull curve, equipment fails either right away, or lasts a long time.   The "Sweet spot" is in that middle part, where things don't fail very often.

For new homes, usually the builder offers a warranty of some sort - and of course, before you take possession, there is usually a "punch list" of items to be fixed (more on this, later!).  But oftentimes, you hear new home owners bitch and moan about a leaky roof, backed up sewer (very, very common, as Mexican tile laborers wash down the excess grout into the drain, with predictable results, BTDT - on several occasions!) new appliances that fail, or the like.

And yes, sometimes builders go belly-up and leave homeowners having to fend for themselves.  Or sometimes, as happened in Alexandria, VA in a friend's new development, they use a fireproof plywood roofing that ends up rotting off in 2 years.  Or at another friend's condo, they use Dryvit(tm) stucco that falls off after three years, or as happened in Florida, they use Chinese-made sheetrock that turns to sulfur and corrodes all the pipes.  Or as happened in the 1980's, they use plastic plumbing that explodes after five years.

Yes, those are all nightmare scenarios, but they usually occur on the watch of the first owner in the first few years.  And if you have a house built, expect a lot of hassles - new home construction has ended more than one marriage!  More on that, later.

But on the other hand, this does not mean a "used home" is always a better deal.  A home inspection is always a good idea for a used home or a new one.  For existing homes, the inspector can point out how long to expect things to last.  In general, roofs, appliances, air conditioners, etc. all last about 15 years or so.  If you buy a 15 year old house, and all these items are original, well, you have an idea what to expect - just as much trouble, if not more, than a new home.  But if priced properly, and you can budget to replace these things, it may be a better deal.

So again, Condition is not necessarily determinative one way or the other.  A well-built home from a reputable builder with a good home warranty can be a good deal, but expect to have some "teething pains" in the first year or so.  An existing home can be a good deal, but have a home inspection done to make sure there are no hidden defects either.  And by the way, a home warranty for an existing home is not that expensive, and some sellers will offer it to induce people to buy.  Never hurts to ask, if you are tool-phobic.

3.  Price

Traditionally, new homes were sold in a different manner than existing homes.  In a development, the developer hires salespersons, who generally are NOT Real Estate Agents, and they sell you the home.  And in general, in the past, the prices were pretty fixed and not open to negotiation.  In General.

Sometimes, a builder might need to make a payment to the bank, and want to unload a house quickly.  But such deals are offered to friends, first (and we turned down one such offer, for a town home in Del Ray for $180,000 that in two years was selling for $450,000).  And sometimes while they may not lower prices (this affects appraisals and marketing, not to mention the risk of being sued by previous buyers who paid more - I kid you not!) some builders will offer to "throw in" upgrades of one sort of another - which are really their gravy.

Upgrades are a problem, as the builder makes a lot of money on them.  For example, if you want a deck installed, the builder will say "Sure" but quote you twice what a local carpenter would charge.  So you see many of these new homes with no decks, because the house-poor buyer can't afford the outrageous charge the developer wanted, but doesn't have the cash to hire a local carpenter.

So, you may be able to use upgrades as a leverage - get a free or reduced price upgrade in the place of a price cut - the builder keeps his prices stable, and you get something.

Of course, today, things are different, and there may be desperate builders out there willing to bargain.  Maybe.  In hot markets, this is less so, and in places like Washington, DC, the market is still hot.  A builder won't build a house for less than cost - and many major home builders did not have a lot of inventory out there when the market crashed - and as a result are doing OK, but not desperate.

Existing homeowners, on the other hand, are getting desperate - and many are facing foreclosure, short sale, or their homes are in foreclosure.  There are super-bargains galore out there right now, in many markets (like Florida) and in such markets, building a house makes no sense at all.  Why build a house for $500,000 when the same house can be bought at foreclosure for $250,000?

It is a simple equation.

Also in some places, like Central New York, the staggering construction costs (due to high labor costs) make building a house a nightmare.  You will be instantly upside-down on the house, the moment it is done.  I would never build a home in Central New York - you are instantly upside-down.

So, before you build, check resale prices on similar houses and make an informed decision - and expect cost over-runs on new construction, particularly of you are having a house custom "stick-built" to order.

4.  Hassle

This is a factor I did not mention explicitly above, but alluded to.  If you buy an existing house, you can close in 30 days and be moved in, with the kids ready for school and your husband ready to go to work.

A new house takes longer to build than anyone thinks it will.  And the hassles are enormous.  Most folks report it is like having a second job, just monitoring the progress of construction, making decisions with your builder, and whatnot.  And if they say it will be built in a month, factor in three months.  It usually works out that way.

So why do people build new homes?  For many, it is emotional reasoning - "We get to have exactly what we want!" people say.  But there is a problem with emotional argument.  First, chances are, what you want is what other people want - and an existing home is out there that is pretty close to what you want.  Unless you are building a Frank Lloyd Wright home, you will likely end up with a traditional home that will be remarkably like everyone Else's.

And this is a good thing, as oddball houses are very hard to sell, down the road.   An Eco-Yurt or a Buckminster Fuller Dome Home may be very cool and eco-friendly, but very hard to sell.  A medieval castle may be really cool, but one wants a home with a dungeon (well a few people do, and they scare me!).

So getting "just what you want" is a pretty specious argument.  Odds are, you want what is already out there.

My secretary bought a new town home on the argument that it was "all new" and she liked the new home smell, fresh sheet rock and new appliances.  Her's was the town home with the problem with the fireproof roofing sheathing.  It ended up being a major lawsuit and nightmare.  And the contractor-grade appliances did not last very long.

New is nice and all, but it becomes "used" in short order.  So buying a home on the emotional logic of new paint smell or new sheet rock, is sort of a bad idea.

One other thing:  Bear in mind a new home has no lawn, trees, shrubs, plantings, deck, or a lot of amenities.  In many cases, you may not even get a driveway.  Factor in those costs and hassles into the equation.  Living on a bare lot with a scraggly lawn and no trees is no fun.  An existing home may have lush landscaping and a lot of accessories that you would have to pay for.

And living in a construction site is never fun, and if you buy a home in a new development, you can expect a lot of noise and dust until it is finished out.  Your home may be done, but what about the one next door?

So what's the Answer?

I have none, as each situation is unique - it depends on the location (city) and market - and in the USA, the local markets run from HOT (DC, NY) to NOT (FL, NV) and everything in-between.

My personal take is that I would look to see if there are motivated sellers in the market area I am looking in, and see if I can score a great deal.   If there are lots of foreclosures in a particular area, I suspect you would get a much better deal on existing homes than new construction.

And finally, even if the prices were a wash, I would think hard about the hassle-factor.   Having a home built for you may sound like an ego trip, but it can be annoying as all get out.

So I would lean "existing home" - but like I said, it is never cut and dried.