Wednesday, July 29, 2009

To Buy or to Build? The truth about the REAL cost of a home

For years I worked in Architecture firms designing things for other people. Eventually you become numb to the fact that a $1.19 duplex receptacle will cost you about $250 to install in the world of commercial construction. If that same receptacle is installed as the result of a change, then you are probably looking at about $500 instead of $250. It seems pretty crazy, right? Well, that's how business is done in the world of construction and Architecture. Now obviously, you are not paying $500 for an outlet. You are paying about $10 for the outlet and about $490 for Construction Supervisors, Administrators, Insurance, Overhead, and Profit. And the bigger the project, the more Overhead and Expenses get built into the costs.

So if you buy a home, then what are you really paying for? Are you paying for the cumulative cost of goods and services in the house, or are you paying for an arbitrary price based on intangible factors? To put it another way, if you buy a house that was built in 1969 at an original cost of $14,000, then where is the justification for a price tag of $450,000? Some would say that the appreciation is based on the price adjusted for current inflation. Some would say that you are paying for the dirt and the locational factors. I say that if you are buying a house that someone else has built, then you are likely OVERPAYING (obviously this would not apply to Foreclosures). If you don't believe me, take a look at your home owner's insurance policy and look at the listed 'replacement cost' for your house. Chances are that the replacement cost is well below what you would sell your house for. Which brings me to my point. If you pay a premium to buy a house that someone else has built, then why not build your own house?

Let's examine this question a little more closely. When you purchase an existing home, you are not paying for the sum of the parts. You are paying to purchase the completed item which is usually greater than the sum of the parts. This is because there is alot of time and labor that have gone into the construction and maintenance (and maybe even renovation) and the Owner wants to be compensated for that beyond the cost of the materials. You should know that location doesn't factor into this comparison because the dirt is the dirt whether you buy or build. The land costs should be the same regardless.

Now let's talk about building your own home. You find a nice lot in a neighborhood that you like and you find an eager young Architect to help you out. Let's just say for argument's sake that you find an Architect who is keen on designing you a great place for about $20,000. Younger Architects will likely take on challenging commissions like this if the project presents a good design opportunity because they can usually lead to bigger and better commissions if they do their job well. So your Architect works with you on the Design and finds some creative ways to save you some money (Architects are very good at this; trust me) . After a few months, the Architect helps you get some bids from some contractors and you examine the costs.

In this scenario, you are shown the value of each trade line by line, like a menu. You can see where each dollar is going and you can choose how much or how little you want to allocate to each area. For example, if those solid maple kitchen cabinets are too much, then you can go to particle board bases with solid wood fronts. The bottom line is that you have more control over the costs and you are only paying for the actual goods and services required for the construction of your house. Also, if you are obsessed with value, you can also oversee all of the work yourself (get rid of those GC fees) and even perform some of the work if you are handy (things like painting and tiling are always pretty straight forward). At the end of the day, you will end up with a house that is probably more valuable than what you paid and will also have something unique as opposed to a cookie cutter builder's house.

So if you have the time (and the stomach) for a unique experience I suggest building your own place. Not only will you be able to say that you helped in creating your own home, you will have invested your money in something that can only appreciate. And that's just good business.

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