Should you buy or build a new home?

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In real estate, a common question often arises: Is it cheaper to build a new home or buy an existing one? As we journey through 2023, the answer to this question has taken on new dimensions.

The current average cost to build a home in the US is around $284,723, while our northern neighbors in Canada face an average cost of around CA $385,321. Meanwhile, the average cost to buy an existing home in the US is approximately $400,000, with Canada’s average price tag reaching CA $662,000. On the surface, the building might be the more economical choice, but this doesn’t consider the additional costs of land acquisition and development.

To paint a clearer picture, let’s delve into the detailed process of acquiring land and building a house:

1. Scouting for Land

The first step in the home-building process is arguably one of the most challenging – finding the right piece of land. The cost of developing the land is separate from the average building costs due to the vast variability in land conditions and utilities.

The location of utilities, for instance, can significantly impact development costs. Some plots might be miles from the nearest utilities, requiring substantial investment to connect your home to essential services. In contrast, other plots might be part of a subdivision where utilities are available just a few meters from the property.

The quality of the land is another significant factor to consider. Some plots may be rocky and challenging to dig, while others may be flat and easy to develop. Additional considerations include potential waterways that need protection, accessibility for development equipment, and future plans for nearby land that could affect your property’s value or enjoyment.

Looking for plots in existing or planned developments might be advantageous to keep costs down. These plots are often more cost-effective as the developer has already invested in connecting utilities, paving roads, and preparing the land for construction.

2. Financing Your Land Purchase:

Once you’ve found the perfect plot, financing your land purchase is the next hurdle. This is not always a straightforward process, as obtaining a traditional mortgage for land purchases can be more challenging than financing an existing home.

Many potential homeowners opt for cash purchases, which may not be feasible for everyone. Alternatively, you could work out a deal with the current landowner to buy on a “land contract” or owner financing. This arrangement allows you to pay off the loan once construction is complete, and you can refinance.

In planned developments, developers often offer financing options, which can make the land acquisition process more manageable and cost-effective.

3. Financing Construction

With your land secured, financing your home’s construction is next. You’ll likely need a construction loan unless you have the cash to cover these costs upfront.

There are two primary types of construction loans: stand-alone loans and construction-to-permanent loans. Stand-alone loans cover the construction costs and usually must be repaid once construction is complete. These are ideal if you’re building on spec to sell right away. Once construction is completed, you may be able to obtain a new mortgage on your finished home to pay off the construction loan.

Construction-to-permanent loans, on the other hand, are somewhat simpler. They are a single loan with one lender that funds the construction and then

4. Preparation for Building

After securing the land and financing, the next step involves hiring an architect and a contractor to design your home based on property constraints and your personal preferences. Architect fees can range between 5% and 20% of the building cost. Builders or developers in a development setting may offer architectural plans at lower costs or even free of charge.

5. The Role of a Real Estate Agent

While not necessary, a real estate agent with expertise in land deals can provide invaluable advice, guiding you through the purchasing process and providing essential connections with reputable lenders and contractors.

The decision between building or buying a home ultimately hinges on a multitude of factors, including your personal preferences, financial situation, and the land’s potential for development. While the building may initially seem more economical, the underlying land acquisition and development costs are crucial to consider in your decision-making process. With the right planning and guidance, either route can lead to the home of your dreams.

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