Increased competition may mean that buying can now be more expensive than building. Learn about the pros and cons of each option with Cottage.
Updated Nov 03, 2020
When looking for a new home, you mainly have two choices: build or buy. A few years ago, it almost always cost more to build a home from scratch than to buy an existing home. However, the existing home market has seen double-digit price increases in the past couple of years. So is it more expensive to build a house or to buy one in 2022?
Here’s everything you need to know to make an informed decision:
Pros and Cons of Building a House
Building a house in such a competitive real estate market might seem like a great investment, but building a home comes with both pros and cons.
Here are some different factors to consider:
Fully customizable: When you build a house, you have more freedom to customize it with the features you want and need. You can select the floor plan that has the number of bedrooms and bathrooms you need. You can pick the finishes in a custom home and add details like tray ceilings, French doors, kitchen islands, and other great features.
Less maintenance: New homes also typically come with less maintenance than existing homes since everything is brand new. If any problems do arise in the new home's construction, many home builders offer warranties where they will fix any issues that occur within a certain period of time.
Energy-efficient: New homes tend to be more energy-efficient than older homes. As a result, you can usually expect to pay less for utility bills like heating and cooling for new homes compared to old homes.
Less competition: The market for existing homes is extremely competitive right now, especially in places like the San Francisco Bay Area and Los Angeles. It’s not unheard of for a single home to receive 10, 20, 30+ offers well over the asking price that waives contingencies like financing, appraisal, and inspections. On the other hand, new homes typically do not come with bidding wars and waived contingencies.
Time frame: Building a house from scratch takes time, and this isn’t something that all home buyers have. Right now, it takes anywhere from six to twelve months to build a house from start to finish. There’s also always the possibility of delays due to supply chain issues that are currently impacting things like lumber, concrete, and appliances.
Price increases: Since the home-building process takes a significant amount of time, builders cannot always accurately plan their estimates for supplies and labor costs. If prices increase substantially during the building process, you might end up paying more than you initially agreed to pay for the house.
Lack of landscaping: Most home builders only include basic construction in their estimates and bids, which means that landscaping is totally up to you. Establishing lush and mature landscaping requires a lot of time and effort with grass, trees, shrubs, and flowers.
Pros and Cons of Buying a House
Alternatively, here are some pros and cons of buying a house to consider:
Quicker move-in: When you buy a house, you’re able to close and move in relatively quickly. Some sellers request quick closes in 30 days; however, the average time to close is about 45 days.
Upgrade as you go: While an existing home might not have every detail you want, there’s always the possibility to upgrade things and make changes over time. With this approach, you’re not building these extra costs into your mortgage with expensive interest.
Ability to negotiate: Negotiation isn’t possible in all markets, but individual sellers are usually more willing to negotiate than builders that are typically trying to maximize the profit of their build.
Expensive maintenance: Depending on the age of the home, maintenance and repairs can be extremely expensive. For example, you might have to replace the roof or the heating, ventilation, and air conditioning (HVAC) system soon after moving in, spending thousands of dollars out of pocket in the process.
Intense competition: Securing a contract on an existing home can be extremely challenging if you’re in a competitive market. Buyers are constantly beat out by corporations and investors who are able to offer cash well over the asking price and waive all contingencies.
More compromises: Since you’re not able to customize your home ahead of time, you might have to make more compromises. For example, if you like white cabinet kitchens, you might have to buy a house with a darker kitchen and change it later on. Or if you want wood floors, you might have to buy a house with carpet and make the switch yourself.
Is It More Expensive To Build a House or Buy One?
Housing is expensive whether you build or buy. But which one is more cost-effective?
Let’s break down the average cost of building a house compared to the cost of buying one.
Here are some prices associated with various home-building components to keep in mind:
A Plot of Land
When building a home, you first need to find somewhere to put it. In highly populated areas like Los Angeles and San Francisco, finding a lot big enough to build a house can be challenging. Depending on the location of the land, you might be able to pay as little as $3 a square foot for empty lots in existing neighborhoods.
If you’re looking for land in a prime location, you might have to pay as much as $30 a square foot. So if you’re looking for an average-sized lot that’s around 9,000 square feet, you can expect to pay anywhere between $27,000 to $270,000 for the land alone.
Site Preparation and the Installation of Major Systems
Some lots come fully prepped for building a house and include connections to city utilities like water lines, sewers, and electric grids. These lots often come with a premium price of up to $100,000.
To avoid paying this premium price, you can purchase an unprepared lot and prepare it yourself for around $2 a square foot or a total of $18,000 for a 9,000 square foot lot.
Architecture and Design Fees
Unless you’re an architect yourself, you’ll have to pay for someone to design your home so that it’s structurally sound, up to code, and meets your needs. Most of these professionals charge per hour. The average cost of an architect is likely around $145 per hour and $162 per hour for an engineer. A draftsperson might charge around $100 per hour for a. You could expect to pay $130 per hour for an interior designer and $100 per hour for a landscape architect.
Building permits are always required to build a house, and they aren’t free. Generally speaking, you can expect to pay between $3,000 and $7,500 for permitting to handle everything from electrical wiring to roofing, HVAC systems, plumbing, fencing, and more.
Even with everything we’ve covered so far, a majority of your home building costs will come from the construction of the house itself. You will likely need to work with a general contractor and subcontractors in a new home build.
For example, you can expect to pay between $2,500 and $7,500 for roofing, between $6,000 and $12,000 for electrical, $15,000 and $72,000 for framing, $15,000 for plumbing, $7,000 and $12,000 for HVAC, and $12,000 to $75,000 for HVAC for a grand total that can range between $50,000 to $200,000 for the construction alone.
Finishes and Fixtures
Finally, you need to consider the cost of adding finishes and fixtures to a new home (for example, flooring, paint, trim, cabinets, sinks, toilets, bathtubs, showers, doors, windows, and lighting). These costs can vary depending on the quality of the finishes and fixtures, in addition to the size of the home.
When you add up these costs, you can expect to spend anywhere from $500,000 to $900,000 for an averaged-size home of around 2,000 square feet in Los Angeles. You might pay around $250 per square foot for a basic build. For a mid-range build, you might pay around $400 per square foot. For luxury or larger homes, the price tag starts at around $500 or more per square foot.
The Average Cost To Buy an Existing House
The cost of buying an existing home is more straightforward, but that doesn’t necessarily mean that it’s less expensive.
When listed, the median price in Los Angeles was $950,000 in January of 2022, with an average price per square foot of $629. This translates into paying around $1.25 million purchase price for a 2,000 square foot house compared to $900,000 for a high-end custom-built home of the same size.
How To Choose the Best Option
Now that you know all about the pros, cons, and costs of both building and buying, take these three factors into consideration to make the right choice for you:
1. Local Real Estate Market
The market for new homes and existing homes varies by location. In some markets, it’s easier and cheaper to build a new home. In other markets, it might make more sense for you to buy an existing home. In hot Southern California real estate markets, for example, building can be better and cheaper than buying.
2. Time Frame
Your moving time frame should also play a role in whether you should build or buy. If you need to move sooner rather than later, you may not have time to wait for a new build to be completed since this process can take several months.
Note that some builders offer pre-built homes that are move-in ready with designs, features, and finishes chosen by the builder rather than the buyer.
Finally, you need to consider the different degrees of customization between building and buying a house. If you’re really set on having specific features in a house, then you may want to consider building.
When you build a house, you can choose everything from your floor plan to your flooring, wall color, appliances, cabinets, countertops, backsplashes, and more. This approach ensures that you get everything you need and want in your new home.
How To Minimize House Building Expenses
While building a home can be more affordable than buying an existing one, that’s not always the case. So if you’re looking to save money by minimizing your home-building expenses, here are three tips to keep in mind:
1. Build an ADU — Accessory Dwelling Unit
With the cost of a full new house build being potentially so high, one of the best ways to save money on a new build is to build a smaller home.
Smaller living spaces like ADUs and tiny homes are more popular than ever. They come with all the features you’re looking for in a smaller footprint that’s typically less than 1,000 square feet. These smaller spaces don’t just have a lower price tag; they also come with more affordable utility and maintenance costs in the short and long run.
2. Choose an Existing Floor Plan
To avoid costly architecture and design fees for your new build, consider choosing an existing blueprint. Check out these efficient ADU floor plans from Cottage:
The Nelson has one bedroom, one bathroom, and 450 square feet starting at $215k
The Ashbury has two bedrooms, one bathroom, and 750 square feet starting at $295k
The Haskell has three bedrooms, two bathrooms, and 1,176 square feet starting at $435k
Cottage also offers custom-built ADUs if you’re looking for specific features and finishes in your space or a different floor plan that suits your specific site and needs.
3. Work With an Experienced Builder
For an affordable build and a smoother experience with the experts in the ADU space, you should work with an experienced builder like Cottage. Cottage is well-versed in the intricate building rules and regulations in various Southern California locations, including Los Angeles and the San Francisco Bay Area. Cottage has a whole team of in-house architects and designers in addition to an extensive network of licensed, insured, and vetted contractors.
In today’s crazy housing market, the choice between buying and building isn’t an easy one. One way to completely bypass bidding wars, cash offers, and contingency waivers is to build an ADU with Cottage on your property or a property you are looking to buy. Contact Cottage today for a free consultation and estimate today!