Buy vs Build
Why build when you can buy a used home?
Seems an easy question to ask? But for many it’s “why would you ever build?” Given the choice between buying a used home that could be someone’s leaky legacy or building a brand new home tailored to your personal needs, the choice seems so obvious. So why is it that most elect to buy a used home rather than build a brand new one?
Surprisingly, there are numerous reasons why purchasers elect not to build, even though the end result would be a far better solution. Let me cover a few.
We live in a “I want it now” world. I get that, I have kids. But surely such an important and life changing decision, one that could have a very positive impact on your financial welfare, health and lifestyle should not be rushed. The building process can indeed take a long time, but interestingly, this is not why most clients end up with a used home. The main reason many don’t start this journey is they don't know how will they afford this process given most of them will be paying rent or a mortgage while also paying a progress payment loan. This process is unaffordable.
We live in new era of cautious lending. That’s likely to remain for some time to come. So for many, securing finance that will get the home completed, having sufficient deposit or equity in today’s tougher credit market, or being able to service the overlap period all impact on the ability to build. For many, going to their bank for a construction loan puts an end to the dream of building.
Too many purchasers buy an existing home because they think this will give them immediate capital gain. What many do not appreciate is that while existing houses do appreciate in value over time, they are only gaining the inflation rate (i.e., in NZ, house prices have traditionally doubled every 7-10 years. That doubling is not capital gain, but house inflation as the rest of the market is moving at the same pace). Imagine inflation running at 3% and you have $100,000 to invest, but your bank manager offers you 3%. You likely would not find that acceptable, so why accept only an inflation return on real estate? Many find that when they sell up in ten or 20 years time they have not really gained much if any equity, but have just kept up with the market.
The last eight years before the global recession hit saw massive, over-inflated house prices. The markets have corrected and are now much more subdued. Getting capital gain from real estate is likely to be much harder. In my opinion, that’s all the more reason that any real estate you own has a better chance of capital gain over the rate of inflation. Building still holds that reputation when you build the right home in the right location at the right price.
As a purchaser you can make your entire process run smoother and you can get the right results. Tip number one has to be: do your homework and do not take shortcuts. We often select our builder on price, and yet we choose quality as our main priority. These can be in conflict with each other. Your most important decision is selecting a builder you know you can trust to build your home to your budget, on time and to your quality expectations. Let’s add to that a promise by your builder to communicate regularly with you, even when mistakes happen.
The second key decision is one that we actually don’t make. Select a construction loan that will get you to a completed home, that is hassle free and well managed. Purchasers usually turn to their bank, assuming all construction loans alike.
In fact, poor lending decisions may prevent a purchaser from getting a loan, or it can be so poorly structured that it adds cost and stress.
Financial issues seem to be the real reason why building is so stressful. But it does not need to be. A well planned and managed construction loan can make the entire process less stressful, so you can move forward and build your dream.