In the current market is it more affordable to buy an existing home than it is to purchase new or custom construction?
The costs of materials and labor have escalated over the last few years to all-time highs. The agents that work with General Contractors are quoting no less than $550 per foot and many of the higher-end contractors are starting at $650. This price per foot will afford some hardwood floors, custom cabinetry, granite and a high-end appliance package, if you spend wisely.
We used to think that $1000 per foot was rare on the island, however; it is not that uncommon now. Only time will tell if those sellers that decided to sell after building their dream home at these levels will lose money in the future. In the past and most likely again in the future, the market struggles to supports those extra fine improvements and unfortunately, all the receipts in the world do not make a home more valuable than the market is willing to pay. The buyers rely on the market approach to value – comparing similar homes available, more than the replacement cost approach.
Now that home inventory is brutally low and the selection is a challenge to buyers, custom construction is considered a viable option. However, the financial impact can be shocking to some as compared to buying an existing home for less money. There are numerous advantages to purchasing an existing home and remodeling to a buyer. Those advantages include views, foot-print and other amenities such as guest houses and docks that current regulations make difficult or impossible.
To demonstrate existing versus new construction comparison, I’ve created two hypothetical options for a hypothetical buyer, these transactions are loosely based on real properties.
Option A: This week our clients can buy an existing northwest facing home on a .73 of an acre lot with 100 feet of low bank gravel beach frontage. The waterfront home offers 2850 square feet with 3 bedrooms, 2 baths, an attached 2 car garage with 800 sf studio above. It has nice landscaping and good sun exposure and views. The home was originally built in 2014 and is still very current with interior design and was well maintained. The home was on the market for 11 days and was offered at $2.9.
The buyers were lucky to get this home for the full price of $2.9 and not have to compete with other buyers and be forced to escalate their offer.
Other advantages of buying existing and remodeling, if needed:
The lot may have been originally cleared back in the 1970s letting the sunshine in and widening the water views.
If they wanted to make some changes, there is less time needed for a remodel than to build a new custom home. Due to the regulations, the remodel permit process is less complicated than new construction. Of course, if they needed a remodel, the cost of that would need to be factored into this proforma of comparison.
Option B: If my buyer was unable to find a suitable existing home and decided to build custom construction their costs may be similar to the following:
Waterfront Lot .73 of an acre/100 FT $1,000,000
Main home 2850 sf @ $650 $1,852,500
Garage 528 sf @ $100 $ 52,800
Studio 800 sf @ $400 $ 352,000
Well $ 35,000
Septic $ 55,000
Power $ 10,000
Landscaping, driveway, patios $ 100,000
This proforma under Option B for new construction assumes a nice level lot with a typical foundation expense. It also assumes none of the utilities had been installed which is not always the case. Many of the lots on the market have at least some or all utilities nearby.
The advantage of new construction allowed my buyer to construct exactly what they were looking for in a floor plan and use of materials. Unfortunately, they were not able to finish the home for 2.5 years and during that time, they had what seemed like an interrogation by their lender and had to interview three general contractors and architects prior to finding one they felt was compatible. During the construction period, they elected to make change orders which increased their costs and delayed the process.
Further, they had to hire a consultant to submit to the County the storm water management plan and due to an Indian Midden, an archaeologist had to be retained as well. In addition, their well required a 4-hour draw down as it was within 1000 feet of the shoreline and the draw down could only be processed during July to October to comply with County regulations.
There were only two dead or dying trees on their lot that could be removed so their view remains filtered. Below is a photograph of their view from their deck which is approximately 110 feet back from high tide mark with the first 35 feet being a “no touch” buffer. They are able to trim up to 4% per year. They have yet to figure out how to measure the 4% and may have to hire an arborist to process the calculation and do the work.
As they used a federally insured lender, they had to pay $3,500 in survey costs to prove to the lender and Corps of Engineers that they were eligible for a Letter of Map Amendment and waiver of flood insurance.
For some people, the new construction process can be very stressful however, a major remodel can be just as stressful, and both can be a character-building experience. Other people enjoy the process very much.
Of course, I have exaggerated the list of problems my hypothetical clients dealt with during the course of their construction, and I admit that if all of these items actually happened during their project, they most likely would be stressed out.
Option B proforma would also apply to a “remodel by backhoe”. Basically, a nice lot with a tear down house should be considered as new construction as well. Of course, you need to add $75,000+ in dump fees to the budget. The advantage is that the tear down cabin is most likely in a location closer to the shoreline and is considered non-conforming. You should be able to remodel in that location, but you may not increase the non-conformity, therefore you can build up or back, not to the front or side to side. There are other regulations that you must also comply with as well. Further, these types of properties were most likely cleared years ago so offer more sun and good water views.
In this sample case the cost of custom construction $557,000 or 16% above the cost of buying an existing home. This happens to be the same percentage the last time I updated this case study in 2019. The only difference is the waterfront home was only $1.1 back then. These last few years of escalating prices and appreciation on existing homes has kept pace with the higher costs of labor and materials. The cost of an existing home is still less than new construction but…. supply and demand.
Sample View from a New Home with 110 foot Setback
Below is a sample view from the existing home that they may remodel.
The increase in the number of buyers currently interested in custom construction has had an impact on the general contractors and related service providers; they are all very busy and many have 1-3 year wait lists. Many are working on remodels as the buyers were able to find an existing home that met their criteria. Further, there are always people that are willing to pay for getting the exact home built that they want for their lives.
Merri Ann Simonson
Managing Broker/Sales Manager
Coldwell Banker San Juan Islands